Earnings Roundup: Alphabet Beats on Cloud Sales, Tesla's Profit Disappoints

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1:26on Apple, Spotify, or anywhere you listen. Bloomberg Audio Studios. Podcasts, radio, news. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. We really want to go all in on Alphabet and Tesla. We've got a great team effort to do just that. in the house with us is our Mandeep Singh. He is, of course, Bloomberg Intelligence, excuse me, head of global technology. We've also got our Keith Naughton, Bloomberg News auto reporter. He joins us here in our Bloomberg Interactive Broker Studio, along with Mandeep. And then we've got Ed Ludlow, Bloomberg Tech host out there in our San Francisco Bureau.

2:15All right, where to start? I do want to start with you, Mandeep, only because I feel like the AI trade is so important. What do you make of it? I mean, great print. I think overall the results were great. Cloud 82 % growth. It's a$100 billion run rate business now, which is phenomenal for a company like Alphabet, which was really consumer focused. But backlog is probably very, I would say, the whisper number was higher simply because when I look at Microsoft's backlog number, it's higher than Alphabet's. And given it's growing 82 % and it has got Anthropic as one of its main customers of Google Cloud, I would have expected that to go up.

2:58I mean, Anthropic is signing deals left and right. So why is it not showing up in the Google backlog number? Gemini models now process 22 billion API tokens per minute, and the Gemini app has 950 monthly active users. Contextualize that, Mandeep, for us compared to OpenAI and to Anthropic. I mean, it's great, but look, Gemini has an attached rate because of all the other properties that Google has, the search, YouTube. So for me, until analysts, they talk about usage of Gemini really taking off relative to the last quarter, it's hard for me to extrapolate that into Gemini really taking share away from a chat GPT.

3:39And all these companies are reporting very high MAU numbers, but it's really the usage that counts. And to my mind, the$950 million is a reflection of the high attach rate that Google has because of the distribution through search and the operating system and browser. Ed, we're going to come to you in just a moment on both, but I want to bring Keith Naughton in. Tesla, it is a lot of technology in that one. So as we talk about all of this, what do you make of kind of some of the numbers that we got from Tesla? Well, that's a big miss,$0.33 versus$0.51. And I get that Tesla is no longer really a car play.

4:14It's an AI play. Is it? Well, here's the problem with that, Tim. The thing is, is that to fund that$25 billion in CapEx they have planned for this year, they need to sell a lot of cars. So they did sell well in the second quarter. Right. But yet we're coming in low. You saw the gross margin is also below expectations. So they need to make money. $16.8 versus$19.4. They went negative cash flow. We expected that. They didn't go as negative as was expected, so that's good. But they did go negative cash flow. So, you know, you've got to generate revenue and profit from the car side of the house in order to pay for the robotics and the AI and the cybercats.

4:51Yeah, Ed Ludlow, come on in on this conversation. Is Tesla, in your view, and based on the folks you talk to, is it still a car company? Yeah, the street wanted to see Tesla spend a lot of money, more money than they are spending currently based on the trajectory of capex to make some progress on robo taxis and robotics and you know the looking back at the quarter was the problem that they had is even though they had record vehicle deliveries you know they are spending on r &d that's an impact stock-based compensation is a big impact remember like talent and stock-based compensation in the valley on the software and engineering side is like a really important factor they had lower average selling prices so you have record vehicle deliveries but lower ASP has not gone well for them it's such a simple story capital expenditures came in in line with expectations but on the buy side just put your money where your mouth is Elon Musk spend more money on the AI story and it hasn't really translated but again it's just an earnings deck the real meat of it probably comes in the call all right so yeah I want to bring well Ed before we, I want to bring Mandeep back in.

5:59Your thoughts on also Alphabet here. Yeah, I was listening very carefully to everything that Mandeep said. I mean, the way that I look at it, you know, we looked at the backlog. Mandeep explained Gemini and the trajectory of the cloud business. Search is where the slight miss is. And so I guess the other way of looking at it is that there's a concern out there that the core search business gets more impacted by the behavior of using a chat bot in lieu of the search engine and so it's a slight miss right that's not evidence of that again a very high bar quarter for alphabet i just can't get over the cloud growth like mandeep like just save me a bit like cloud growth 82 it's pretty good like relative to what you and i talked about earlier in the week yeah look i i think overall uh it's hard to find any fault in the print.

6:49It's just, you know, because everyone is expecting CapEx to go up to$300 billion. I mean, look, believe it or not, this company will have negative free cash flow next year. So from that perspective, you have... That's wild. Why? Because of CapEx investment? Right now, they are probably, you know,$10 to$15 billion free cash flow for this year. Next year, if it goes to$300 billion, there's no way they're going to be positive free cash flow. So from that perspective, despite that 24 % top line growth, we're talking about a company that will have negative free cash flow at their scale. And that's where, you know, you want to see all these businesses really doing well.

7:30Right now, it's cloud that's carrying all the weight. But you want to see that to Ed's point in search and, you know, YouTube and other businesses. And you're not seeing that kind of lift. Ed, you're laughing. Why? At the amount? No, no, I take it super seriously. But like, remember when Oracle flipped to negative free cash flow for the first time since the 90s, the markets melted down. Yeah. When Amazon goes to negative free cash flow. So what? To our audio listeners, I shrugged my shoulders and made a funny face. But like, you know, the interpretation of Mandeep's analysis and the research that BI has done on this, the market's very sanguine about that.

8:10They want to see capital expenditure high. They also want to see top line growth directly evidenced as a result of the CapEx. But on the cash flow thing, everyone seems pretty calm about that. Mandeep, when's the payoff on this spend? Is it already happening? It's happening in a big way with the cloud business. I mean, when have you seen a company get to$100 billion new business line in a matter of three, four years? So they are seeing that in the cloud business. And it's a great investment. It's just, I think with Alphabet, search is always the cash cow that funds everything. And even though the top line growth, to my mind, 17 % isn't bad in terms of top line growth.

8:53It's just, I think the backlog number combined with where search would be two, three years from now, that's where you start to get a little worried. But, you know, maybe they come out in the call and say Gemini 950 million users saw engagement growth of X percent. And then suddenly everyone will be OK. But you really want to see Gemini delays not carry forward. Remember, they have seen a delay in their Gemini Pro 3.5 release. Now, all that is adding to the anxiety. Is Alphabet really falling behind when it comes to the frontier model race? Yes, they are doing very well on the cloud side. But what is it that will prevent search from really going down or, you know, the company falling behind in the frontier model race?

9:41It's interesting. You have to spend, right, to build out some of these businesses in a big time. And that is certainly a metric in terms of how you're judged. I want to go back to Tesla. Same thing, though. They want Elon to spend to kind of do what he needs to do? Yeah. I mean, he's made some very large promises, hasn't he, about AI and about the cyber cabs who are supposed to all be riding in them by now, right? And that hasn't happened. The launch is slower. Optimus is not being built yet out in Fremont, although he says that'll happen by the end of the year. But we've heard that before, right?

10:09Yeah. So until he actually delivers some, you know, deliverables, some tangible results, you know, we're still relying on the car business to deliver the mail. And, you know, this report isn't showing that that's meeting expectations. And is the case being made by investors or by at least Elon's investments at Tesla right now that SpaceX could absorb this company at some point in the near future? You know, it's still the prevailing sentiment in industry and of the existing investor base on the SpaceX side that this will happen with time. Right. The financial mechanics of that are a bit of a mystery.

10:51you know one public company backing into another um but to lots of people you just go back to why they believe that they believe that this the joint scale makes sense to very deeply vertically integrated companies that have a shared initiative on the compute side and semiconductor side where there is already a lot of cooperation on the engineering side um you know to lots of people it's just logical um i don't we just don't have an answer for that i found it you know i put it in the blog, right? I found it amazing that, you know, but is it to be expected? There's no mention really of SpaceX at all in the Tesla earnings deck.

11:25And the only thing is that they have a$1 billion unrealized gain from their prior equity investment in XAI, which rolled into SpaceX. Interesting. Yeah, I do wonder too, and I want to bring this question to both Mandeep and to Keith. I mean, Mandeep, do you, you have to think about Tesla and you have to think about SpaceX and their role in AI and kind of where this company is going, right? We've talked with you about this. I mean, you've got to kind of think about where this goes next. I mean, to my mind, why did Google have to rent compute from SpaceX at such a high price? You know, when they have their own cloud business.

12:03Why do they? Well, maybe they can monetize it better than SpaceX data centers can on their own. So from that perspective, Google cloud business is more established. they can get a lot more out of that compute than SpaceX can. But really, that's the case to be made that Google should go big in terms of CapEx increase. Because right now they're renting from SpaceX. Well, the same thing, though, to you, Keith. I mean, do you increasingly think about, OK, you know, Tesla is not just going to be this car company anymore. You really have to think about the whole Elon universe. Right. And he and he has to start showing that and not just talking about that.

12:40And he also has to make promises that he can achieve. And so far, he's over-promised and under-delivered. Yeah, just the date always moves. All it takes is two gigawatts of capacity, and suddenly that will be another, you know, $50 billion in revenue that SpaceX can add. So it's not that hard right now, at least in this environment. More gigawatt capacity is equal to$25 billion in revenue per gigawatt. Mantip, do you think it's odd that there's no mention, as Ed mentioned, really, of SpaceX in the Tesla results? I mean, right now, these are independent companies. Why would they be mixing those up?

13:19Same boss, you know, ish. Ish. Keith, I want to play this out with you a little bit and what we were talking to Ed about and the idea of Tesla being absorbed by SpaceX at some point. I know there's no historical precedent for this, but you do have, in some cases, auto manufacturers that are part of big conglomerates. You know, Tata comes to mind for me. But is the history mixed with this sort of like a huge company that also churns out cars? Tesla as a car company is not really a growth story anymore. They are contracting. I know they had a good quarter, but the previous two years they were down in car sales.

14:00And they're not even a luxury car maker anymore. They stopped making Model S. They stopped making Model X. Their most common trade in now is a Toyota, a Toyota hybrid. So meaning people come with a Toyota? People trade in their Tesla for a Toyota now. That's what's happening, Edmunds tells us today. Wow. People are getting out of Teslas and going into Toyota hybrids. So they're a mass market car maker now. That's why the margins shrink, right? You're no longer in the luxury business. The most common trade out of a Tesla previously had been a luxury car maker, a German car maker. now they're going into toyota so tesla's um growth engine is slowing on the car side of the business and that and so linking up with spacex could give them uh new ways to find revenues and to to monetize the ai side of the business which so far it has not but ed to keith's point could the cyber cab or the the you know the robo taxi come to the rescue here you know there is a they stopped the S and X in the period, right?

14:58Those were higher margin, higher price point vehicles. So like what keeps outlining is completely correct. People forget the business model. And actually what I would say, the biggest tone shift in the deck, it's just a document, is that this is Tesla, the sort of complicated compute industrial robotics company. You know, that's the kind of in aggregate takeaway from it. The RoboTaxi business plan is multifaceted. CyberCab is a vehicle that Tesla purpose produces and operates within a proprietary ride-hailing fleet itself, but also plans to sell the consumer. Makes not a lot of sense to a lot of people.

15:33But there's also like the Airbnb model where you as an existing Tesla owner submit your vehicle to the fleet. So when you're not using it, it goes out and operates in the ride-hailing fleet, like an Uber, but it's your vehicle that you own. And what's not clear is the economics of that mixed fleet. People just don't understand it. And Tesla hasn't really explained it since they first made the proposal. So that doesn't answer your question, Tim, but that's the problem with this print. The quarter gone was bad, and there's not a lot of evidence that the future is underway. All right, I want to go back to Alphabet, if I may.

16:05Tesla's still under pressure, selling off a bit after the market trade here. Alphabet's been bouncing around. So I want to go back to you, Mandeep, because I'm looking at our live blog, our markets live blog, and they're pointing out most of its biggest businesses were ahead of analyst expectations with the exception of Search, which was a touch below. What is it that you think we need to hear on the call? Is it about what's happening? What's going on with spending? Like the outlook here more? I mean, the world of AI is measured in terms of token consumption. And even though they gave a token consumption metric around API usage going to 22 billion from 16 billion last quarter.

16:46So that's a nice uptake. But really on the whole, you want to see them continue to grow that token consumption across the family of apps. And I think that's where you will see the usage of the model, how much Gemini is getting used. So token consumption, along with that CapEx guide, to me, those are the two key metrics. Do we have metrics on AI overview versus traditional Google search? They do talk about how much... Does that matter to you? I mean, I care more about the aggregate. even if there are some offsets that they are moving some of the traffic to ai overviews and ai mode at the end of the day it's the time spent on google family of apps that's what okay so that's okay ed come on back in here i don't think we've talked to you about this uh which is sort of the the little incremental updates that alphabet is making to i don't want to call it family of apps because i don't want to confuse meta but it's like you know google's gmail having this sort of like AI inbox or you being able to ask Google Maps questions that are more conversational in AI?

17:51Does that move the needle in your view? Do analysts talk about that, making this stuff more engaging? Because AI inbox is great for me. I'm not deflecting. I would go to man deep on this, but it's not the consumer that moves the needle, right? Look at what they did say. 90 % of the Fortune 100 are using the Gemini Enterprise, according to the statement. Gemini models process 22 billion API tokens per minute. You know, this is the token economy. That's how we're judging success of the utilization of different AIs that the frontier labs and the hyperscalers are developing. That's in the enterprise.

18:28You know, it has very little to me to see the needle move on the existing suite of software that Google adds, just like Microsoft's having a very hard time telling me that 365 has anything to do with their AI story and then boosting cloud sales. It just doesn't. Yeah, that's a good point. I mean, Mandeep, but if a lot of consumers are sort of interacting with Google's AI through these tools that they've used for years, then certainly that makes them more engaging. It doesn't. But like Ed said, maybe it doesn't move the needle. I mean, to my mind right now, because the LLM companies don't have a freemium models with ads, the consumer side is somewhat shielded And the battleground is really the enterprise side to Ed's point, because that's where the consumption is measured around tokens.

19:15And you are seeing that backlog really come to fruition. But the consumer side is important in the sense all the Internet platforms leverage the data to make the platforms better. That's why Google has been so successful over the years. So if you lose the engagement on the consumer side, over time, it's going to affect how good your product is. And that's where people moving their queries to ChatGPT or Claude will have an impact. Because right now, Google has that monopoly 90%. It used to have. I don't think that's the case anymore. But that's how the platform got so much better. The search box got so much better is because of the usage.

19:56So I won't underestimate the usage on the consumer side.

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