Musk’s xAI Expands Fundraise to $20 Billion

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1:19Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Ludlow in San Francisco.

1:30This is Bloomberg Tech coming up. Elon Musk's XAI taps big name investors, including NVIDIA, in a curious piece of financing for GPUs. Bloomberg breaks the story wide open. Plus, Tesla unveils cheaper versions of its top selling EV models. Will it help with falling sales numbers? We'll discuss. We sit down with the UK Minister for AI to discuss increased investment between the UK and US on tech innovation and a whole lot more. First, let's check in on these markets that rally once again, if you're looking in the Nasdaq 100. Ed, it is your key players. It is the NVIDIA's AMD's. We're talking so much about the relentless intertwining of generative AI players at the moment in the market.

2:11But what's notable is we still are thinking about fundamentals. We are still thinking about how far we've come from the lows of April. But what are you looking at underneath the hood? Let's get to our top story. Overnight, Bloomberg broke details of a financing mechanism that XAI is using for the GPUs that are going in Colossus 2. Our understanding from sources is that an SPV or special purpose vehicle is formed. They use debt and equity to get the capital by the GPUs. XAI rents or leases those GPUs from the investors and pays them that fee over time. NVIDIA is involved. It's getting involved in the equity piece.

2:49This morning, NVIDIA CEO Jensen Wang confirmed a whole chunk of our reporting, Caro. This is very complicated. Let's get into the specifics. Let's do exactly that, sticking with the two key players of NVIDIA and XAI. Bloomberg's Carmen Arroyo is with us. You helped break this story with Ed. And I just want to get to grips of how creative this financing actually is. How often do we see SPVs being set up to buy GPUs and use them as underlying assets? Hi, thank you for having me. We've seen SPDs in the past before used for other type of assets. It's quite common in Wall Street to basically use assets as collateral instead of putting corporate debt.

3:29But it's becoming much more interesting, much more common to see tech giants basically do this type of deals because they don't want to put a lot of debt on the corporate balance sheet. So I think we're going to see more of these in the future. Carmen, it's been a busy couple of days chasing this one, right? So the structure is$20 billion. Most of it is debt. And there is some equity in there. And this morning, NVIDIA's CEO, Jensen Wang, went on another network and in an interview essentially confirmed NVIDIA's participation. Just give us the rest of the details that we put in that story. Sure.

4:08So it will be at least$20 billion of capital basically to buy the chips that XAI will use for this data center in Memphis. And there's going to be like a variety of Wall Street investors in the dead. We know Apollo is in a diameter. We reported as well. The equity will have a number of investors as well, including Valor, who's leading the financing. But yeah, Nvidia is invested in the equity, which is really interesting, given that they're basically using that money to buy their own chips. Where do we go from here? I mean, it's really difficult because I feel there's a lot more reporting to be done.

4:43the piece of the mechanism that I'm trying to get my head around is that there's an SPV and XAI rents and leases the chips. We think over a five year period, what do the investors get in return? Like, are they going to get a stake in XAI? Are they just being paid rent, basically? And then that covers their debt obligations. What do we know? Well, from what we know, they get the lease payments, which is how they can amortize the debt over time. So basically you get monthly, quarterly payments for the financing. So you kind of pay down the debt that way. But the idea, from what we understand, is basically at the end of it, you still have the chips that have some value right after the five years.

5:24So that stays within that SPV. I would say just very quick that we haven't heard from Elon Musk or XAI. Jensen Huang and NVIDIA haven't responded to us formally other than declining to comment. So we'll keep a track of this one. Bloomberg's Carmen Arroyo, it's great to work with you in the newsroom. Thank you. So that latest funding on NVIDIA into XAI only adds into what is now a complex web of AI deals that have been occurring. It's the topic of today's big take, looking at the circular transactions happening within the AI market. Bloomberg's AI editor, Seth Figgerman, joins us now. There is this big$1 trillion headline figure.

6:03and if you draw up a mad web with red string on a board of where everything's going, it all kind of touches NVIDIA and OpenAI. Give us the top line of the big take. Well, we did try to draw that mad web of red string in our graphic and also thank you, Ev, for the extra news peg overnight with the great scoop on NVIDIA. But yes, I think ultimately we have seen something resembling circular or interconnected deals for a lot of the AI boom, but it's getting to the point where it's harder to ignore. There are just dozens of investments and business partnerships and chip agreements. Primarily, they all lead back one or two steps removed to NVIDIA and OpenAI.

6:41And the size and scope of these has just grown exponentially, particularly as OpenAI itself has kind of gone from saying we're going to spend billions to possibly trillions on the infrastructure to support this. And also, I think, as NVIDIA has become a$4.5 trillion company that's very eager to keep the good times going by spreading the money around. Seth, talk about the good times and really whether anxiety is vindicated here. The worry on OpenAI's front is that at the moment it's loss-making. And so how does it eventually pay this back? But you have to bet on its growth and its ability to get revenue.

7:13NVIDIA has the money. And that's in many ways why Goldman, for example, is saying this is not like the dot-com era, even if we are seeing these complex web of integrations and relationships. I think both things can be true. You know, ultimately a lot of what's backstopping the AI boom as we know it are these very big tech companies with very healthy balance sheets and massive cash stockpiles, including NVIDIA. On the other hand, I think the graphic makes quite clear in the story itself that increasingly a lot of these companies are very bound up, particularly OpenAI, a firm that while it's a decade old and a household name everywhere has never turned a profit and plans to spend hundreds of billions, if not more, including through debt.

7:52debt. So, you know, I think both things can be true. Is NVIDIA about to go bust tomorrow because of this? No. But is there a heightened exposure to all these companies because they're tethering themselves to a handful of, you know, fast growing but still unprofitable AI startups? Yeah, there's a risk. Bloomberg, Seth Fiegeman, thank you for talking us through what is an amazing piece of data journalism as well. Go read it. The Big Take. Let's get more investor analysis now, though. Carol Schleif-Famore is chief market strategist at BMO Private Wealth, has$315 billion in assets under management.

8:23And, Carol, I'm interested in there's a great line in that big take coming from Stacey Ragsson over at Bernstein saying, basically, Sam Altman is either going to drive this economy lower, we're going to see the world economy tank, or he's taking us to the promised land. Which way are you seeing it going? I'm not sure it's either or. First off, thanks for having me. I'm joining you from Toronto today where we're doing a female Eurasia group, U.S.-Canada summit. So there's a lot of discussions on AI and other things like that going on here. But I'm not sure it's all good or all bad. It's someplace in between.

8:59And there are a lot of things to watch. I love the big take already. I caught it in the middle of the night and sent it out to a number of co-workers, especially the graphic in there showing that circular nature. that's very much like some of the stuff we saw go on in previous bubbles. But as your reporter commented on, you've got right now it's backed by big companies with very solid balance sheets and they're generating revenue off of that. The one thing that we keep in mind for our investors, though, is that you've also got a very concentrated stock market because of that circular nature and the interrelated deals that they're all doing.

9:38if investors start questioning one, you could get a ripple effect. But it would be a ripple effect. Perhaps you lead to some sort of pullback, which we haven't had since April. But we don't see it rippling through the economy and taking down major swaths to the economy. So it's a very nuanced answer, but it's rarely ever all black or all white. Carol, what we are trying to see, though, is actually who takes the most of the profits available from all these deals. NVIDIA clearly massively revenue generating and profit generating. But then you think of Oracle and some of the questioning about how much of a margin they make on a$300 billion contract for OpenAI.

10:20How much do you have to do the due diligence on individual names right now? Well, I think you really do. The market's not much because, I mean, you know, one of the phrases we've been using all week is the market seems to be acting like no news on economic data or anything. No news is good news. And off we go to new highs. But you have to be very discerning. But we've always been a combination of top down and bottom up in what we're looking at things. And you also have to, especially in a diversified portfolio, realize you might be overconcentrated even if you're doing individual securities. If you own a passive index fund, if you own an AI-specific or a technology-specific ETF, you've concentrated it even more.

11:02And so it's doing some of that, and it's stepping back and doing some good portfolio hygiene, looking back perhaps at where we started the year, taking some of those gains off the table and shifting them around to other sectors that are potential beneficiaries, because we have energy, we have nuclear, we have a lot of things that have to happen for those switches to go on in those data centers. Carol, you've had a decorated career in markets as a chief investment officer. I just want to run the mechanism that I reported overnight past you again. A special purpose vehicle where you have both debt and equity pulled together by a group of investors who buy GPUs.

11:42And then in this case, XAI rents those GPUs or leases them from the special purpose vehicle. I haven't heard of this structure before, but just as a structural consideration in financial markets and the debt load and where it's placed, how do you react to that? I think it'll be a really interesting earnings season because I'm sure a lot of analysts will be asking those detailed questions. Because we're starting from a place with a lot of those companies other than perhaps Oracle, as I understand it. We're starting from a place of pretty pristine balance sheets. You also have tax benefits that accrue to some where I'm not sure exactly how their accounting works in terms of who's expensing everything, who's capitalizing some.

12:32But you have to capitalize less stuff now. So if you've got the earnings to support writing it off, it's less damaging to the balance sheet. But it is indicative of the fact that Wall Street staffed up at the end of last year with an awful lot of deal making people that have had a lot of time to think really creatively about how to put this stuff together. So as an investor, it makes a job that much more difficult because to your point, you really have to figure out what's on the balance sheet, what's not on the balance sheet. Carol, there's a lot we don't know as well, like the tax consideration.

13:04I'm trying to get after it. Oracle,$100 billion of debt, swinging to negative free cash flow for the first time since 1992. I've been tracking the data. Do you? Yeah, we track some of it. And we've got a lot of analysts in our global asset management and capital markets units that get really specific about that. I don't as much anymore on a macro basis, but I listen really hard and I ask the questions. And I started a couple months ago asking some of the research teams, how are they financing these deals? How are they dealing with, you know, when does it shift to debt? Because at the time it was all coming out of cash flow.

13:43And I wanted to understand, too, what goes right through the income statement so it's never showing up on the balance sheet because an NVIDIA chip isn't going to last 20 years. And anything less than 20 years, you can technically write off against earnings in the period you do it. 20 years. Most investors I speak to say try five years. Carol Schleif, you've been brilliant. You've been brilliant. We're really grateful for your time here on Bloomberg Tech. BMO Private Wealth. Thank you. Carol Schleif. Thank you. Now, coming up on the program, we're going to take another look at Tesla's cheaper, cheaper version of its top selling EV models.

14:17And if it can help with falling sales numbers, that's next. This is Bloomberg Tech.

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15:28Tesla just unveiled new, cheaper versions of its top selling models priced at under$40 ,000 to make them more affordable in an effort to counteract the loss of US incentives for electric cars. Ramos Craig Trudell, who covers autos, joins us now for more. How much cheaper? Let's get specific on some of the price data and what you're losing for that. Yeah, you know, it's somewhere in the range of 11 or 13 percent cheaper relative to what the base Model 3 and Model Y were costing prior to this. However, when you take into account the$7 ,500 tax credit that's gone away and what it would have cost you to buy those base models, even just a week ago or so, these models are$2 ,000 more expensive and for less content.

16:17So you lose a second row screen, you lose ambient lighting, you have less battery range, slower acceleration. So will this be helpful for the incremental consumer who is maybe on the sort of line of being able to afford versus not being able to afford a Tesla? I think it does help Tesla's business in that regard. But it's also a case of not necessarily a slam dunk if you're a consumer because you're giving up a lot for a lower price. And there is a real sort of value equation here to do. We reported about 24 hours ahead of time that there would be a standard Model Y. We did not report that there would also be a three and there was.

17:06But I think if you could recap some of the reporting we did on where they engineered out cost, because the reaction on social media at least has been like, hold on. So if you engineered out 70 percent of whatever, why is it only 13 percent cheaper? Yeah, it's a really good question. And I think, you know, I go back even to April of last year, Ed, when you were reporting on the sort of idea that a$25 ,000 Tesla was sort of falling by the wayside. You know, Tesla sort of came right out and sort of responded to those reports by saying that they were going to introduce more affordable models. And they sort of alluded to this idea of taking some elements of this next generation vehicle that they were going to sort of incorporate into their existing lineup.

17:54I don't get a whole I don't really get much of a sense that they've actually done that here. It feels more like they've just decontented these vehicles. And so, you know, to the extent that I have questions for Musk and the management team, it's how much are you actually sort of innovating your vehicles versus just taking things out and then, you know, charging consumers less because you've taken costs off of your own cost of goods sold. And, you know, that's pretty unclear at this juncture, whether they've actually, you know, done things with the batteries, with the motors, or have they just taken away content?

18:31Yeah. Yeah. I mean, the engineering side, that's what we had heard. Bluebirds, Craig Trudeau, our global autos editor. Thank you so much. Let's continue the conversation with Steve Wesley, founder and managing partner of the Wesley Group, a venture firm with 700 million dollars of assets under management. But we go to Steve because at one time Steve sat on Tesla's board and chaired their audit committee. He's also been involved at state level finance at a high level for a long time. You heard all of the reporting. I'm sure you've been on Tesla's website and looked at the vehicles. The story here is the impact that a seventy five hundred dollar federal tax credit was having on the EV market in America.

19:12Is it not? Well, it's going to have a big impact. And look, the big question here is this is a step in the right direction. Tesla's bringing prices down. But at 37K for the Model 3, is that low enough to attract a new class of buyers? And step back a bit. 37K, it's less than the average U.S. internal combustion engine vehicle, which today stands at 48K. But can Tesla's new model compete with the EV from Volkswagen and Hyundai and the U.S. at 27 ,000? And how are they going to compete with those$20 ,000 Chinese EVs that BYD is bringing into Europe? So I think there's a chance the new slimmed down Model Y, it's going to bring in some new buyers for sure.

19:56But how much is it going to cut into the premium market? And are they going to end up ahead at the end of the day? Looking forward, battery prices are going to continue to drop. Now, this may be a stopgap measure, but Tesla, I believe, still needs that$25 ,000 Model 2 to get into new developing markets and attract first-time entering buyers in the U.S. You know, Tesla considers itself a technology company and the leader in global engineering, right? When you were at Tesla, it was about Model S principally, and that was value for money because it was so performant and had all of these bells and whistles with it.

20:38I guess my question is, why would they release this vehicle? To many people, it doesn't live up to that engineering or technology value that Tesla's given historically. I think you put your finger on the problem. Look, Tesla's a premium vehicle. They charge a premium and people expect to have the latest and greatest. And I don't think they're really seeing that. You see these other brands like BYD with 12 models and Volkswagen and eight, I think, and General Motors with 10. Gee whiz, Tesla's only had five models in its history. And the Cybertruck barely counts because that was a flop. People want to see new technology, new products coming into market.

21:23I really think they need that$25 ,000 car. But they've got to do both. They not only need to bring new models and lower-cost cars to market, at the same time they have to deliver on this promise of getting full self-driving out there, staying competitive with Waymo. They've got some things to prove. Steve, that is the technology that they're now betting on. The innovation cycle moves towards robotics and moves to automation. How integral is the cash cow of car sales to you? Well, again, they've got to do both. When you have a company that's trading at a 250 price to earnings ratio, that's nosebleedy high.

22:04I mean, gosh, NVIDIA is only at 50 to 1. So they've got to show that they can not only bring new products to market, stay in the ballpark price wise. I'm not sure a 4K reduction really gets them there. and get licensing in new cities so they show that their full self-driving is going national and hopefully international, and that they're going to be able to deliver on this humanoid robots. They've got a tough road ahead to show that they can stand up to the valuation they currently have. Now, hard to argue with$1. trillion market cap, but I'm not sure investors will buy that for long. I mean, briefly, you just mentioned the valuation difference between NVIDIA and Tesla, But we know that Jensen Wang is saying, I wish I put more money into XAI, for example, in the SPV because he wants to back anything Elon does.

22:53Steve, what would it take for you to be interested in buying back into Tesla as a shareholder? Well, what you'd want to see is real progress, full self-driving. You know, just as the world's going all electric, it's going autonomous faster than people realize. You're going to see that in the next year with Waymo's growth. The question is, is Tesla going to be right in there as a major competitor or not? At the same time, you're absolutely right. We're heading into this new world of autonomy in everything from the factory floor to vehicles. And people are going to want to see this new humanoid robot.

23:26Can Tesla be cutting edge at new areas? Now, who wants to bet against Elon Musk for all he's developed at SpaceX, Starlink? And frankly, you've got to give him credit for reinventing the auto industry. But the last three years have been lean. And you look at three years of flat revenues. People need to hear that new story. And I think they need to hear it soon. Steve Wesley of the Wesley Group. Always great catching up with you. Thank you. Now, coming up, SoftBank gets in on robotics, talking of it in a new deal. Furthering Masayoshi Sun's growing bets on the emerging tech and AI. This will be their tech.

24:08Time now for talking tech. And first up, SoftBank agrees to buy ABB's robotics unit, which supplies industrial arms and robots for manufacturers in a$5.4 billion deal. This is as SoftBank CEO Masayoshi Sun aims to build data centers across the U.S. in partnership with OpenAI and Oracle. Plus, Alibaba has set up an in-house robotics team, part of its effort to develop physical AI. The team sits within the unit responsible for the company's main AI foundation models. Unit's leader, Justin Lin, says the focus will be motor model models, which he predicted would become foundational agents. Ed. Okay, coming up, we're going to speak with Kristen Smith, Solana Policy Institute president, as signs of some Bitcoin support begin to fade a little.

24:51A big crypto segment coming up next. From San Francisco and Los Angeles, this is Bloomberg Tech.