Musk Empire Merger Possibility, Memory Costs Weigh on Apple

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.

1:11Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Ludlow in San Francisco. This is Bloomberg Tech coming up. President Trump picks Kevin Walsh to be the next chair of the Federal Reserve. We discuss how tech markets are reacting. Plus, Apple delivers record quarterly sales, but the looming threat of rising memory prices, it was worrying investors. And SpaceX is considering a merger with Tesla or with XAI. We'll discuss what we know so far. Some extraordinary reporting from you and the team. Ed, let's dig into what the macro picture is today, because it is a macro story that dictates these moves.

1:53The next Fed, Chair. Is he going to be hawkish? That's the way the market currently thinks. a little bit more. We're seeing the NASDAQ 100 up by 6%. Look, we're up on the month. And in fact, we're having the best month since October for the NASDAQ 100 and the S &P 500. But on the day, we temper some of our risk on sentiment. We're certainly seeing Bitcoin still not feeling any love. We're now at just 82 ,000 level at the moment, Ed. We're up by 1.9%. We are down for four straight months, the longest losing streak for this asset class since 2019. And gold and silver today, well, you've seen the volatility.

2:25And it is all about the macro picture. Yeah, a little underperformance in tech. Let's get to it with Bloomberg International Economics and Policy Editor, Mike McKee. What is the Kevin Walsh School of Monetary Policy and Economics that the world of technology needs to know about? Well, Walsh is going to be someone who upsets the apple cart, which is perhaps a little bit of his training out in Silicon Valley. He graduated from Stanford and is still a visiting lecturer there and a fellow at the Hoover Institution. institution. He believes that inflation is the Fed's only job, and that's why he gets this hawkish reputation.

3:06And he also is concerned with some of what happened with Silicon Valley Bank and the way the Fed regulates banks. So look for some changes there. The big question, though, is how low should interest rates go? And the president obviously wants very low rates. How do you get there. AI is what Kevin says. He says that AI, along with the big heavy tech investments we've seen and the president's deregulatory agenda, will move things forward. AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness. Productivity improvements should drive significant increases in real take-home wages.

3:46A 1 % point increase in annual productivity growth would double standards of living within a single generation. So he's putting a lot of his forecast on what Silicon Valley can accomplish in terms of AI and the tech world. What's interesting is what he thinks about labor and how that will be impacted. We heard Fed Chair Powell, the current Fed Chair, just speak on Wednesday about how they see AI making significant impact on labor and indeed more broadly the economy as well. Mike McKee, I wish I could ask more questions. We so appreciate you being here. But let's talk about how tech is currently underperforming, the dollar pushing higher.

4:27Here to discuss how Trump's Fed pick Kevin Walsh could impact the tech markets. Margie Patel, Allspring Global Investment Senior Portfolio Manager and Head of Capital Allocation. Margie, how do you think the market should interpret this announcement? Well, I think the market maybe is focusing too much on his interest rate policy and not enough of the other positive aspects that he's indicated. For example, better regulation of the banks. And also, you can see in the past, one of the things that the Fed did, which I don't think he'll do, was be extremely activist and pro-cyclical, really causing a lot the up and downs in the economy and the financial markets.

5:07Silicon Valley is a great bank, is a great example of the Fed tightening so quickly that the bank simply didn't have time to adjust its investments to get in line with those much harder short rates. So I think that less activist Fed looking at better regulation will actually be very positive for the market and for the economy. Do you align yourself with the deflationary impact of AI in that respect? Do you agree with Kevin Walsh in that perspective? I think the jury is out on how much deflation we're seeing, because really, when you look around in the real world, it really looks as if we are on a track for inflation being higher for longer.

5:47Your last segment was about the price of antique cars skyrocketing, gold and silver skyrocketing, even industrial metals, real estate, fine art. All those things look more what you would think if we were an inflationary backdrop. So that's really what I think we are. I think interest rates at three and a half, three quarters on the funds rate is really quite easy when you look at the financial markets and these other tangible asset markets. Margie, it's good to see you. It's Ed here in SF. Later in the program, we're going to hear from an interview that I did with the PG &E CEO, Paddy Poppy, California's largest utility.

6:25And like Mr. Walsh, she argues that all the data centers that are being built will drive down electricity prices, right? And therefore inflation, just like Mr. Walsh has kind of just been the argument outlined by Mike McKee. I don't understand that. I don't have a degree in economics. But as someone in the markets, would you just give me your interpretation of how that would work? I don't really follow that line of reasoning either. Clearly, we have a demand for baseload electric generation capacity, and that suggests to me that the price of electricity will gradually go up, even notwithstanding the data centers.

7:05So if the data centers carve out arrangements with their providers so that it doesn't feed over into the retail market, the industrial market, I think that would be a neutral. But really, I think the real price of electricity is going to go up simply because the cost of building, strengthening the grid, the cost of even building new gas-fired plants is really going to be on the upswing. So it's pretty hard for me to see how the price of electricity could come down. And I don't think it's closely related to the data centers, which are a big source, you know, 10, 15 percent increase in demand over the next few years is really going to be a deflationary factor when you're dealing with real assets like a generator.

7:48I don't know, Margie, you seem to have a pretty good command of it and the data. I appreciate the response. We should probably get to earnings, right? You know, in the context of Apple, which we're going to discuss with an analyst in a moment, the consideration there is tight supply of memory chips. but just so far in aggregate from the mag seven and other companies have reported what is your main takeaway please well i think that's a trend that's going to continue for a while we think of memory chips as being commodity chips that when demand is good they overbuild and the prices come down and this time it's been very different because the demand for memory chips is so extremely high and there are only a handful of producers of memory chips and even they are being very, very slow, cautious to add capacity.

8:33So I think it's just going to be a feature that the price of memory chips is going to be higher than we're used to. And we are going to see that extreme cyclical up and down in that sector that we've seen. Margaret Patel of Allspring Global Investments, back on Bloomberg Tech. Thank you very much. We've talked about earnings. We've got to talk about Apple. Shares down a percentage point. Look, they've been higher in after hours after the print and during the call. They kind Kind of chopped around one point in today's session were higher, now lower. The company delivered record quarterly sales and a better than anticipated forecast.

9:07But the looming threat of rising memory prices is worrying. Investor CEO Tim Cook saying he expects, quote, more of an impact to gross margins and continues to see memory prices rising significantly, particularly in this current period fiscal second quarter. Richard Kramer, a Reddit research founder and senior analyst joins us. Now, you still have a buy and a$305 price target on this name. You know, we've said throughout my career, at least, Apple is the master of managing the bottom line. But in this environment with tight supply and pricing of memory chips such as it is, there's a limit, it seems, to what Apple can do.

9:44What was your interpretation of that? So I think this fixation on memory costs is the wrong question for Apple because it just go back to your basic economics, you know, theory of comparative advantage. Apple has had the best supply chain in the world for four years. They have two hundred billion dollars of product cogs. This quarter, gross margins went up year on year and sequentially, and they're guiding to an excellent product gross margin and implied product gross margin next quarter. Now, when we get later into the year, if they face significant increases in memory cost, they have one lever that they can pull, which is they can raise prices on the devices, or they can raise prices when you get the higher memory spec variant of the product and offset some of those higher supply chain prices.

10:38One other thing that I think people should pay attention to is the way that Apple has vendor non-trade receivables. They funded production equipment at their suppliers so that they have that superior supply chain. And I think that puts them in a comparatively much better position than everyone else in the tech hardware space. Let's go to the product. iPhone sales were about$4 billion above consensus, 9 % beyond consensus. Even the top end of the range that I saw was about$81 billion. This iPhone 17 generation has been a success, has it not? Yeah. Well, I think there's two things about that you need to appreciate.

11:19One is the company is saying they are still considerably supply constrained. And the day that that supply-demand balance kicks in, they can rebuild channel inventories. And four weeks of channel inventory is another$15 billion of iPhone sales just to get back to normal distribution and to have warehouses full. So they have a long runway to realize what is now, obviously, this last quarter, 23 % growth in iPhones implied in the guidance. We were at 14 percent. The street was at eight. Their 13 to 16 implies another 20 percent growth quarter for iPhone. And they're telling you there's still supply constraint.

12:01So that, to me, tells you that you have, again, a much longer runway with this product cycle than otherwise. And obviously, demand is off the charts. And really, it's a concern for everyone else in the smartphone space just how much market share Apple is poised to take. Richard, demand was off the charts in China. 38 % growth. What happened? Well, I mean, some of that, if you look back, was a relatively easy comp. But equally, if you go back to last April or May, you know, we had to buy on the stock and we had to battle all the people saying, oh, Apple is going to get kicked out of China. They're dead there.

12:43They'll never sell any more phones. You've got Huawei and Honor and Xiaomi and Oppo Vivo. And there was this huge negativity about their China position, largely because of geopolitical elements as well. But Apple has showed that they have a huge installed base there. When they come out with a highly attractive product portfolio, consumers flop to it. And they're also seeing good growth in some of the other products there, Macs, iPads, wearables. And those tend to be to first-time Apple customers. Now, they under-index in the China market in services because there's some services that aren't available there.

13:21But, you know, clearly those who were writing Apple's obituary in China was a little bit premature. And look, Apple intelligence isn't available there. I mean, for what it's worth, no one's really raved about it, of course, Richard. But what does this actually tell us about the need for a consumer to buy generative AI products? Apple has still owned this particular season, even though Android, the Google phones, Samsung phones were far ahead in terms of the generative AI offerings. Absolutely. And look, people are not going to rush out and say, I want the new device because it has Gen AI capabilities.

13:57They're going to say, I'm locked into the Apple ecosystem for the last 10 years. All of my other products are Apple and I'm going to keep buying Apple. The question I asked on the call, which I think is the key one, is why has Apple been a fast follower in AI? because they knew it would take time for people to get used to the services. And right now, they only have about 450 or 500 million of their 1.3 billion installed base of iPhones with AI-capable devices, so the 15 Pro or later. And Apple is now reaching that point where half or more of their base can be the addressable market for a new Siri or AI services.

14:34And I think over time, they'll monetize it by getting people to buy better devices, but also adding five bucks to the Apple One bundle for some advanced Siri features. Richard Kramer, fascinating. Thanks for being with us today. I read research. Let's talk about JP Morgan. It's among the banks that have begun selling down a highly anticipated $20 billion debt financing backing the acquisition of Electronic Arts. Now, the biggest leverage buyer on record, remember, sources are saying Middle Eastern, Asian, smaller European banks are piling into a term loan A of as much as$3 billion for the video game maker.

15:06Ned. Okay, coming up, SpaceX is considering a merger with Tesla or with XAI. We have the Bloomberg reporting next. This is Bloomberg Tech.

15:23SpaceX is considering a potential merger with Tesla or an alternative combination with AI firm XAI. That's all according to sources. Bloomberg's Lauren Grush, who covers space. Kyle Porter, who's on the transportation beat. And both of you involved in the breaking this story last night. Join us now. Kyle, I'm going to come to you. What we know, two distinct proposed ideas, scenarios, transactions. My understanding from sources is that SpaceX investors are particularly pushing this idea of a combination with Tesla. Either way, highly unusual because we thought that SpaceX was on track for an IPO mid-year.

16:05What do we need to know? Well, they still may IPO this year. There seems to be a lot of ideas kicking around at the corporate table. It's certainly faster to do a combination between an existing public company than it is to an IPO. It's cheaper. You don't have to have a bank come in and underwrite. You don't have to do a roadshow. But you also have real drawbacks to this. You know, you don't get to roll the pitch. You could have a sudden share sell-off where people don't like what they see. You're building a conglomerate, which historically people have not enjoyed investing in. People don't feel that they can get enough visibility on the existing businesses.

16:42So there's a real debate to be had, even within the companies, on whether this is a good idea or not. Lauren, talk to why, for example, it might be a good idea for SpaceX and Tesla to grow closer in their interaction. Because they already have a relationship, a strong one. Yes, there's plenty of cross-pollination that already happens between SpaceX and Tesla and, you know, all of Elon Musk's empire. And if you've noticed, you know, he's talked a lot lately about ways in which that cross-pollination could, you know, become more intense, right? He's spoken about Starship taking Optimus to the moon and Mars and things of that nature.

17:20There's also the option of using energy storage capabilities for these data centers and space that SpaceX or that Elon's been talking about. So there is some sense to be made in combining the companies as they already work so closely together already. What we know is, again, two distinct scenarios are being discussed. discussed. And that's the new bit, right? They're being discussed because you have people like Chamath Palihapitiya, Bill Ackman, who have hypothesized about this anyway, Kyle. We know that Tesla has confirmed an investment in XAI just this week,$2 billion, and that SpaceX participated in an earlier round in XAI as well.

18:03Elon Inc. and a conglomerate is a bit of a regulatory headache, is it not? Oh, it could be a massive regulatory headache. If you're looking at two companies of this size, three companies of this size, presuming everyone keeps their valuations, you're looking at trillions of dollars. That kind of market capitalization is going to attract the scrutiny of government and regulators. It can't not. OK. Regulatory hurdles abound. And actually, just to remind viewers, and as you all have written in the story at length, things can change. None of this is set in stone. This is still work in progress. But, Lauren, what's also work in progress is everyone talking about wanting to put these data centers into space.

18:41And you just mentioned why there might be some sense to Tesla and SpaceX combining. But what are the hurdles to even that hypothesis, that view? Right. So obviously, a lot of this is being driven by Elon's latest grand vision of putting AI data centers into space. There's obviously a lot of pros that have been talked about in terms of doing so. Depending on where you put them, there's constant access to solar energy because of where you put them in orbit. There's also a lot of space in space and these data centers do take up quite a lot of real estate here on Earth and that can also come with a regulatory burden in order to get the right permits and things to do so.

19:24So there's a lot of benefits to moving to space, but there's also massive engineering challenges in order to make it work. For instance, that solar power we're talking about, we're going to need massive solar panels in order to run the kinds of data center sizes that Elon's been talking about. So that is going to be a challenge that they're going to have to work through. You're going to have to put radiators on these vehicles in order to cool them down. A lot of the infrastructure around data centers here on Earth, they need massive cooling requirements. And that doesn't change for space because you're in a vacuum and you have to use those radiators.

19:59So there's a lot of work to be done. And it all relies on Starship, which is SpaceX's next generation vehicle. And that vehicle isn't quite ready for primetime yet either. So there's a lot to keep an eye on in order for this grand vision to play out. And obviously, we won't be keeping an eye on it ourselves. Kara, just one last thing. You know, I wrote to Elon Musk. I wrote to the board. We haven't heard back from any of the parties involved. But when Lauren broke the story about SpaceX's tender being settled and the internal comms about why SpaceX was going to pursue an IPO, the CFO also said this is about dramatically ramping up capacity on those existing business lines.

20:38But our reporting was that they would need tens of billions of dollars to buy the GPUs to put into space-based data center. Team, awesome. Carrie? Big scoop with some very big numbers and hypotheses. It was brilliant to have you all on. Lauren Grush, Cal Porter. Thank you, Ed. As always, Scoop Machine, what have you got coming up? Yeah, Amazon could be making a massive new bet on AI. With talks underway to deepen ties with open AI, we have the Bloomberg Report next. This is Bloomberg Tech.

21:13NVIDIA provided technical support that helped DeepSeek improve its breakthrough AI model. That's according to the Republican head of the House China Committee, who says NVIDIA's technical support allowed DeepSeek to achieve cutting-edge performance with its R1 model using NVIDIA's H800 processors, undermining the goal of U.S. export controls that were designed to restrict access to higher-end American chips. Caro. Let's talk about Amazon now, because it's reportedly in talk said to invest up to$50 billion in open AI. Now, a person familiar with the matter says the potential deal would build on an existing relationship with Amazon already, of course, supplying computing power to the chat tube BT maker.

21:52For more, let's bring in Bloomberg's Matt Day. You cover Amazon. There have been reports back in December that they might be up for about$10 billion, but this just seems to be scaling at the same point as the funding need is scaling. Yeah, absolutely. I mean, it seems like Amazon's going to have to pay a lot to get a seat at the table. They've already got some open AI business, but I think it's clear they'd like some more. Definitely their commitments so far trail what their rivals like Oracle and Microsoft are getting from open AI. Maybe this is a way to get them more business. So, you know, Amazon was super aligned with Anthropic.

22:22Anthropic has looked elsewhere beyond Amazon. Something's happening here, Matt. Could you kind of unpick the web a little bit? Yeah, so if you roll the clock way back to when OpenAI launches hand-in-hand with partner Microsoft, you know, models were kind of exclusive things, at least the cutting-edge ones, some of them. For a long time, Anthropics, you know, first and best place was on Amazon servers. I think a lot of folks expect that to fall down, and it has broken down over time. Models can be run from other companies in some cases. You know, this exclusivity that we saw early in the AI age, you know, a lot of folks think that's just going to fall by the wayside as, you know, more people want more ways to access these models, and some of the business or instruments change.

23:00It's almost the inevitable commoditization. Briefly, Matt, when do you think we'll start to hear more significant data points as the amount that they commit? You know, I'm not sure. We were told that this OpenAI fundraising is a nice to have, not an immediate need to have. So it could be some time yet before this stuff all gets signed and sealed. Bloomberg's Matt Day with the reporting on Amazon looking at investing in OpenAI. Thank you. Now, coming up, rising memory prices are fueling investor concerns, particularly for Apple, down 7.10%, 8.10%. Even after strong sales and, yeah, a significant earnings beat.

23:34We're going to go back to that story. Halftime, this is Bloomberg Tech.

23:47Welcome back to Bloomberg Tech. This Friday, the Markets Digest. President Trump's Fed chair nomination of Kevin Walsh. Bloomberg TV markets correspondent Nora Melinda joins us with the breakdown. You talk tech, but you also talk what other RISC assets are up to today. Absolutely. So we really are seeing a reaction in the market today, Caroline, especially as people are really trying to digest what's going on after we are seeing that Kevin Walsh will potentially be the Fed chair. Of course, Trump talking about this on Truth Social. So we are seeing a reaction across the markets. I'm looking at the S &P 500 down for its third straight day.

24:18We see it currently sliding by about 0.5%. But what's also interesting is that I'm seeing consumer staples and consumer discretionary as some of the best performing areas in the S &P 500. But what's on the downside right now is materials and information technology. So as we continue to keep our eyes on this tech space, we are seeing them taking a bit of a beating today, of course, for various reasons that are also outside of that. That's what I'm hearing from my sources. But of course, we're really keeping our eye on to our Treasury yields, Carolina. I've got my eyes on the policy sense of two year.