Tesla’s Profit Tumbles as Costs Undermine Record EV Sales

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:02Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's bring in Steve Mann, Bloomberg Intelligence Global Autos and Industrials Research Analyst to recap Tesla earnings. Help us look ahead for this company. Steve, record quarter vehicle sales, which we knew, but operating profit plunged 40%. And we're now looking at a fourth straight quarters of falling earnings.

1:40And no real sign that that's going to turn around anytime soon either. Yeah, it was quite a surprise given the volume of production. You would think that the fixed cost absorption would be higher this quarter than in the past, but it didn't happen. Looks like depreciation costs increased for them. Looks like the tariff cost impact is greater than expected. And then even below the gross margin line, the R &D costs went up quite a bit. That could be viewed as a good thing because that's a sign. They're pivoting to the robo-taxi, the FSD, and the Optimus robots. And Elon Musk, I guess, towards the end of the call, made a plea for investors to approve his$1 trillion pay package.

2:31Quote, this is from Elon, there needs to be enough voting control to give a strong influence, but not so much that I can't be fired if I go insane, Mr. Musk said. How did that go over on the call here? And what's the thinking among investor community about what may be a$1 trillion pay package? Yeah, I'm not sure if money is important to them. He does have a lot already. So I do believe that it's more about the control of the company. Look, Tesla doesn't have the dual class shares like some of the tech companies have. So he does have that fear of getting pushed out. And he had that experience with OpenAI.

3:11He's one of the initial investors in OpenAI, and he got pushed out. So he does have the concern. It is his baby. Look, the other thing is the stock hasn't reacted too negatively to the weak earnings that we saw in the last quarter. There's a battle happening between the bulls and the bears, the long guys versus the near-term investors. And, you know, there are a lot of people who believe that he can achieve, you know, getting the Optimus robot up and running, you know, getting physical AI going. So there's a lot of believers out there. There's a lot of believers. And, you know, what the company actually reports, especially when it comes to his vehicle sales, almost doesn't matter based on this idea that Elon Musk will steer the company in the right direction.

4:08eventually, maybe, because, you know, the robo taxis, which are, you know, in operation, but the self-driving vehicles, the humanoid robots, those are going to take a couple of years to pan out. If that we don't have any details on it. So in the meantime, what is the growth driver for this company? Well, you know, definitely in the call, he, you know, he doesn't talk about cars a lot anymore other than robo tax and fsd he's very focused on physical ai but at the end of the day right and i think that's why the stock is still down a little bit is that you know they he needs to sell cars he needs to continue to sell cars to actually generate the cash to support his endeavors now he has launched cheaper vehicles it'll be better it would have been better if he is offering even a cheaper model, like something under$30 ,000 that we talked about in the past.

5:04He is expanding overseas, right? He had record sales in countries like Japan and South Korea. Now he's going into India, big market, big market. So, cars is still going to be important. I think the other half of an investor knows, and that's why the stock is down today. one could argue that they should produce less cars fewer cars i mean why produce something if you're not making money on it when in the end of the day this is effectively one could say just a holding company for r &d for the other businesses that's an interesting question i think you know if we step back and think about tesla it's almost when you listen to elon musk it's almost like he's resetting the company to make it look like a startup.

5:52Right. But the big difference is the big difference between now and 10 years ago is that he has a huge cash generator, which is selling cars. Right. So I think that's something in also on the bull investor investor's mind on the bull side that, hey, you know, we're investing on this company for the long term, this physical AI that nobody's really doing to the extent they are. And now the big difference is that there's a very low risk of it going bankrupt like it did when he was starting the car business. Yeah, it's far from a startup now. You mentioned how Elon Musk spent some time talking about his pay package, his$1 trillion pay package, which is over the long term and involves him meeting a lot of ambitious targets.

6:43ISS, Institutional Shareholder Services, as well as Glass Lewis, these proxy advisors, have recommended that investors reject this payout. Does that matter? I mean, are their votes binding in any way, or is this going to end up in the courts and Musk is going to get his way? It does matter because a lot of the funds out there are index funds. So it does matter what they say. And that's why he needed to address that in the call. But it's going to be tight. I mean, it's going to be up in the air tight because there are a lot of individual investors as well, retail investors as well. And those people are focused on the hope three or five years from now, he will able to kind of meet those targets, have a viable Optimus robot and a lot of robo taxis, you know, running around on its own across the country.

7:41What is Elon and the company saying about China, both as an end market and as a competitor globally? Yeah, China is a challenging market. I think a lot of the policy over there I do favor the local automakers. But look, the Tesla brand is still highly regarded over there, not just by the consumer, but their competitors, the BYDs, the Xpeng. A lot of those companies, when they're looking at autonomous vehicles, autonomous technology, they are benchmarking Tesla. And Tesla, I think, is being nimble as well. They launched the longer version of Model Y that works over there. Because if you look at the other foreign arm, like BMW, Mercedes, GM, and the likes, they have introduced extended version of their vehicles that they sell over there.

8:46And it resonates with the consumer there. So, you know, they're still kind of work in progress over there. They're watching the market. It's changing very rapidly. and they're still waiting for official approval of the FSD, which I think it will resonate well with the consumers. And it has so far from beta testers. Stay with us. More from Bloomberg Intelligence coming up after this.

9:15You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. or watch us live on YouTube. Broadband, thank you. Internet broadband company to report is T-Mobile. So we got to bring in our own John Butler, who covers telecom companies for us, to get us his analysis. John, what's the verdict here on T-Mobile? So the verdict here, Scarlett, is it was a little bit of a mixed quarter for them. If you look at what AT &T reported yesterday, the trends at T-Mobile really mirrored what we saw out of AT &T, which is subscriber growth was up.

10:02That was strong. Pardon me, but pricing was a little bit weak. And so that tells everyone it's a promotional environment right now. I think probably the iPhone 17 had something to do with it. It's actually turning out to be a pretty strong cycle for that upgrade. And of course, when you go out to buy a new phone, people always think about switching carriers. So it boosts switching activity. The carriers all promote to protect their base. And Verizon hasn't reported yet. Well, we can talk about that a little bit more, but they have a new CEO. And so the grand concern in telecom land right now is that the new CEO of Verizon, And if they lose share to AT &T and T-Mobile, they're going to get their dukes up and start to promote for the first time in a while.

10:57And that's bad overall for the industry. So what's the T-Mobile marketing positioning right now for within a very competitive wireless business, John? So good question, Paul. They are, you know, for years, they sort of leaned into this consumer friendly brand. You know, we're the guys that were the un-carrier. That is their tagline. And, you know, they've done a very good job promoting a very strong brand image. They're now a lot larger. And I think what they're doing is starting to lean a lot more on their network quality. They've done a great job over the past three to five years of really upgrading that network since they bought Sprint.

11:44They got a ton of mid-band spectrum, which is terrific for download speeds. And so they're laying in coverage with that, and they're getting, as that coverage expands, they're getting a great high-capacity footprint. And so network performance has improved a lot. And I think they're leaning heavily into that now to promote the brand. You mentioned Verizon has a new CEO. T-Mobile also has a new CEO coming up soon. CEO Mike Sievert is stepping down on November 1st. So in a week and the COO, Srini Goplin, will take over. How is he going to put his mark on this company? I'll tell you, Mike is a tough act to follow.

12:28People were all listening for any sort of a change in strategy this morning because Srini ran the call, which I think was wise. Mike Sievert was on the call as well because he's still on that seat until November 1st, as you said. But Srini ran the call and I really didn't hear anything different from him. I think they've got a winning formula going right now. And I think they're going to lean into that. But one thing, Scarlett, that you mentioned at the beginning in the intro is broadband. And I think that's an area where T-Mobile has been lacking a little bit, specifically on the fiber side. And on the call, they mentioned the potential for further M &A.

13:12And I think if they were to buy any companies going forward, it would be in the realm of fiber broadband. So if Srini does anything different, it'll be to step up M &A on the fiber front. Stay with us. More from Bloomberg Intelligence coming up after this.

13:33You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's talk about airlines, because two more airlines just reported results. American Airlines flying high and then LUV Southwest. Do you know why the ticker is LUV? No, I don't. Because they initially flew out of Love Field in Dallas. Ah, makes sense. Yes, they are based there. Well, let's bring in our own George Ferguson. He is Bloomberg Intelligence Aviation Analyst.

14:10And of course, he also covers the defense sector and the aerospace sector to give us a little more insight onto what he sees. But American is different from Delta and United in that it is much more domestically focused. So we get a better read of how much people are spending to fly inside the U.S., whether it's for leisure travel or business travel. Yeah. And so from American, you know, what we saw actually in the third quarter was pretty similar, to be honest, to what United showed us. And I'm talking about sort of yields, price paid per mile flown by their customers. Americans, a very important domestic provider of travel.

14:50So, you know, I would say that I wasn't super impressed with what I saw in 3Q. I think the flying high is all about what American is guiding to in 4Q, a sizable bump. And, you know, when we look at some of the domestic capacity trends for 4Q, we see a market that's probably going to see seat growth of around one and a half percent or so, which seems for the first time in a while, roughly in balance with where the economy is growing. So something like that should support Americans earnings in 4Q. I mean, it's still some of their guidance seems a little aggressive to me, but I guess sort of given the backdrop of supply and maybe some of the Americans' initiatives as they try to retake some of the market share that they had previously maybe seems more feasible than other guidance we've seen.

15:47How about Southwest Georgia? They're starting to charge for lots of stuff like bags and different seats and all that kind of stuff, which they had not done previously. Their core marketing strategy were kind of the bare-bones guys. What are they just seeing in their business? Yeah, you know, I just got off the Southwest call and my head hurts. So there's a lot of initiatives going on here, right? And like you said, we're, you know, we're going from an airline here that was bare bones, bags fly free, blah, blah, blah. You know, you keep, you know, there's no breakage in your, I think, you know, frequent flyer miles.

16:26And if you buy a ticket, you can't use it. There's no expiration of your credit. Now we're going to change everything, right? And so the call is full of a lot of discussion about how the initiatives in 2026 are going to add a billion here, you know, from premium seeding and 700 million there. So there's a lot of big numbers being thrown around. You know, I think the I think the marketplace is a bit challenged to get its its head around, you know, whether or not all of these really roll through the bottom line for Southwest. But what I will say is I think there's a pretty strong opportunity out Southwest given I think they have a pretty loyal brand following.

17:09And as they roll out some of the initiatives you're seeing at the full service carriers like United, American and Delta, as they roll out initiatives like branded credit cards, improving the loyalty program. They've been talking on this call a little bit about hub cities and lounges, which, you know, just kind of, again, blew my mind. There is, I think, an opportunity for them to monetize all of that as they turn into something that looks a lot more like a full service carrier. The question is on timeline. My guess is there's a there's a decent timeline as they sort of retrain their customers.

17:52But but I think, you know, in 4Q, they have some pretty aggressive bounce back inside their guidance as well. And I think the streets just kind of trying to get its head around really how much of these initiatives are going to come to fruition in 4Q. So when it comes to Southwest, the activist investors really pushed it to change its business model from this one size fits all kind of offering. There was no checked back fees, no prepaid seat assignments. Does this set of results kind of get that that pressure off its back? No. So I would say 3Q results would not. I thought 3Q, they did OK. you know their expenses came in a bit better than we expected their revenue was pretty similar I think nothing impressive 3Q is generally kind of I think blah across most of the airlines it wasn't that exciting there's a lot more sort of built into 4Q and beyond so no I don't I don't know that this necessarily gets Elliot sort of off their back right I think they've got a lot initiatives to perform on to keep to keep Elliott happy, shall we say.

19:01Stay with us. More from Bloomberg Intelligence coming up after this.

19:07You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. We'll take a look at what's happening in the cloud. We'll get some more cloud slash tech news coming. AI adoption in video games can push Microsoft, Sony, NVIDIA to kill the console. How about a headline like that? Nathan Nadeau joins us here. He is the Bloomberg Intelligence Technology Research Analyst. Talk to us about the cloud and what that means for the gaming business.

19:49i'm not gonna have to go out and buy any more gaming consoles well not not for the long term thanks for that uh uh lead paul like i feel like i owe everybody an explanation when i use word like kill because uh really in the 10 years that could actually happens like what i meant uh if i were to unpack that comment a little bit that headline consoles will decline gradually and that's what i mean and you know kind of remaining over the long term as a niche device for loyal fans the really hardcore gamers as advancement in cloud infrastructure and we see what's happening with data centers as well as a wider spread of mobile gaming playing games or mobile devices whether smartphones or tablets as that game wider spread and people become less interested you know in playing games at an unportable gaming hardware that's stuck at home or living room if they can do so and have the same experience on a mobile device.

20:45Why not, right? So where are we in kind of that evolution in terms of really putting more and more of the content of the technology of the capabilities in the cloud? How is that changing the gaming experience, the gaming business? Yeah, so the key pain point to cloud gaming is network latency, because that literally depends on the distance between the user's hardware, whether a mobile device or a console, to the nearest cell tower. And we know that 5G network coverage are improving not just in emerging markets, but also becoming better in even developed markets, including China and the US. And so as that infrastructure and also cloud improve, because the proximity to data centers also is a factor in determining the experience of cloud.

21:34So far, you know, in emerging market, there is a pain point, but we're seeing really huge uptick in coverage footprint, whether 5G or 4G LTE in markets like India and Middle East and Latin America. So that just support our conclusion that, you know, in the next 10 years, the experience, that pain point will become better. And also, let's not forget that, you know, mobile phones, mobile screens capture, you know, a lot of our attention economy. Actually, there is a study according to Harmony Healthcare IT that it captures more than five hours of our time, average every day. And about 20 % of those time actually go to gaming among Generation Alpha and Generation Z.

22:18And they are the bulk of the gamers. And also, these gamers don't really care about playing games at home anymore if they can play on mobile. because what they care about is access and also being able to do things on their mobile devices. So I feel like with this generation coming up and entering into the workforce, and they're the one who would see spending power increasing. And I feel like there's a lot less inclination to actually play games on a console if 10 years down the line, you can have the same experience playing games on a mobile device. This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

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