Software Selloff Continues as AI-Impact Worries Grow

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.

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1:12Bloomberg 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. Wall Street is shedding stocks it thinks are on the wrong side of the AI revolution. Plus, Twilio founder Jeff Lawson has a new company, Nuclear Fusion Startup Inertia. We'll discuss how the surging demand for electricity is powering big energy bets. And shares of Lyft plunging after the company's latest earnings results. We'll be joined by CEO David Risher to unpack it all. But first, we turn our attention to these public markets that are actually being whipsawed on the day.

1:50We get the big jobs data that signals their strength. people start to backtrack maybe on when or where we could see some sort of Fed rate cut and it impacts treasuries. But stocks actually manage to, having been in the red, now shake it off. We're up a tenth of a percent on the Nasdaq 100, managing to climb back after yesterday's lows. Bitcoin, though, I'm afraid no respite from the selling there. We're up by 3%, 66 ,000. Ed, what are you looking at underneath the hood? I'm going to run through the earnings that we're going to get through throughout the hour. Lyft is down or on track to be down the most since August of 2024.

2:21Its profit outlook has the street a little bit worried because they don't have the answers on why that outlook is weaker than consensus. T-Mobile actually missed on wireless subscribers in the quarter gone, was lower and is now higher 3 % in the session. And then Shopify beat estimates. But there seems to be this concern out there with the stock on track for its biggest drop since April last year that AI is coming for it. That is a common theme we've heard for a little while now, Cara. It is. I'm looking at the software index. It's once again down by 3.3%. So clearly having a torrid time as those rising fears just about AI are pummeling shares of companies at risk, being caught on the wrong side of the new technology, from small software makers to big wealth management firms.

3:03Just yesterday, a tax strategy tool, Ed, it rolled out by a little known startup called Altruist. Setsha's are Charles Schwab, Raymond James, LPL Financial, as you'll see, absolutely tumbling. Let's get more on Bloomberg's tech equity reporter, Carmen Reinecke. You've been all over the implications. And I've thought it's one thing. To have these smaller LLM or AI offerings start to rule markets, that's quite something. Yeah, I think what it really shows here is that kind of everyone's at risk, right? Investors have been so quick to punish the shares of companies that might be in the crosshairs here of any new innovation or disruption from AI.

3:40And it really marks kind of a shift or sort of two truths that are happening in the market right now. One, this fear of an AI bubble and sort of overspending and that the technology won't live up to the hype. And then on the flip side, that the technology, it's here and it's really good and it's going to disrupt, you know, entire parts of the market. So we're seeing these little pockets sell off on these new things that are coming out and investors are really just trying to see what's next. We were talking about your story as a team, come and is really one of the most read on the terminal and on dot com, there are names in there that are familiar, like some of the wealth managers, for example.

4:15And then there are names that really, like even we haven't heard of, go through those impacted specifically. Yeah. So some of the ones that were most impacted yesterday, you know, Charles Schwab was one, Raymond James, LPL Financial. But then we've also seen, you know, some stocks across Europe also get hit. Not, you know, super high profile, I think, for some of us here in the US. But, you know, last week it was things, you know, Intuit saw a little bit of a sell-off, also tax, you know, programming, just really all over sort of across the board. Insurers, you know, had a little bit of a sell-off as well.

4:49So it's a very broad range of stocks that we're seeing here get hit. And there is not there's not an easy way to really think about what could be next. Carmen Reineke, she's going to be writing what's next. We so appreciate it. For more on the software sell-off, but still the demand for hardware, we're joined by Encore Crawford, EVP, Portfolio Manager over at Aljo. You recently updated your 2023 paper, AI and the declining cost to create. Your thesis is now playing out in real time. You've been writing, when AI can write software, the cost to create software plummets. I believe the market is starting to question the terminal value of these businesses.

5:26I will be more challenging. It will be more challenging for companies who are not AI native. So how much longer could this pressure build for? You know, I think, again, when the terminal value is changing and you don't really know what the end point is, it's difficult to put a multiple on these stocks. Now, I would say that we're getting a little bit of a phenomenon of the babies getting thrown out with bathwater in that all stocks are going down regardless because there is such a fear factor right now. when not all of the software stocks are created equal, right? And there are going to be some beneficiaries, but one thing is for sure, the entire industry needs to rethink.

6:11And, you know, something that the Shopify CFO said this morning that I thought was really interesting is he wrote, he said the rules of what is possible are being rewritten real time. Yeah. And I think that's what you're seeing is when you can create bespoke software on the fly, And that's today. What happens five years from now when these LLMs and these, you know, self-coding mechanisms are actually even more powerful by orders of magnitude? So anything digital, any digital asset, you must call to question as to what is its future. But this knee jerk of sell first, ask questions later, what questions are you now asking to decide where you can bottom pick, which ones aren't going to be disrupted?

6:56So I think it becomes, again, very much a stock picker's market because you have to understand the architecture of how some of the software is actually being built. I would say things like point solutions that are in the small to mid-cap space, very difficult to own because that kind of end market that they're addressing can easily get usurped by companies that are bigger or adjacent businesses. You know, so it's very difficult to own some of those. I think companies that are larger cap, more platform-like companies, parts of those businesses are at risk. Not the entire thing. We'll still have SaaS.

7:39It will just exist at a different margin structure, different growth rates than we are used to. So how do you pick? I think you have to understand the differences between all the software. security is not the same as enterprise software, not the same as mid and small cap point solutions. So you have to be almost very deliberate in what you're looking at and not just by the group. We've been zeroed in on this software story for so many days in a row now and earnings, of course, but we should discuss the stronger than expected US jobs report, payrolls in January rising by the most in more than a year, unemployment falling unexpectedly.

8:22What does that signal for the tech sector? What do our audience need to understand about that? So, look, I think we're living in two separate regimes right now in that, you know, the tech sector is going through its own hiccups with understanding what AI will do to it. On the other hand, you have the hardware sector inside of tech, which is faring much better than software because they are the net beneficiaries of all of this AI and the infrastructure spending. So how would I read the unemployment report and attach it to AI? I think today or over the next few weeks, they're kind of not connected to one another.

9:08And I wouldn't read anything into it for the tech sector. That would suggest that we are still zeroed in on the capital expenditures numbers that will come from the hyperscalers and others, and that that will be the yardstick by which we judge continued growth, right, for the balance of this year. How important a data set is that going to be for you this year, Anka? I think very much. I think besides the hyperscaler CapEx numbers, I think we have to look at demand. Token growth in the month of January was 25 % growth month over month from December. If you annualize that, that means token growth for the year is going to be 14-fold what we saw last year.

9:5414-fold token growth, and that is just a measure of the amount of intelligence that we are asking the system or AI to do for us. That is an incredible amount of demand that is being put into the system. And we will need an incredible amount of CapEx to support it. And I will remind everyone, we are in the very early innings of adoption of artificial intelligence. And, you know, so that CapEx number actually is necessary and it doesn't really scare me. because as we move forward two, three, four, and five years, I do believe that our world is changing in such a dramatic way that we are going to need this CapEx.

10:42Uncle Crawford of Alda, great to have you back on the program. Thank you very much. Now, coming up, time to launch. SpaceX meets XAI. Why AI may be key for the company's next launch. Bloomberg Intelligence just initiated coverage, and we have it next. This is Bloomberg Tech.

11:09SpaceX's acquisition of XAI has many wondering what the company's next chapter will look like. The profitable rocket maker is set to merge with the AI startup, which is what he calls burning billions as it races to compete with other AI players. All of this comes as SpaceX, that you're looking at now, is expected to IPO later this year. Today, Rumeig Intelligence has launched coverage of the combined entity and says the merger, along with the planned IPO, could help fund investment in larger launch vehicles and space-based data centers. As new reports suggest, the IPO could value the company as much as$1.5 trillion.

11:41For more, I want to bring in a dream team. Rumeig Intelligence Roundtable. George Ferguson, Senior Aerospace and Defense Analyst, and Manit Singh, Global Head of Tech Research, has been thinking about the Tesla implications. George, we start with you on SpaceX. How much is it a burden or a help to be now aligned with XAI? Because it's certainly cash burning. Meanwhile, you think revenues are what, up to the tune of 10 billion for certain parts of SpaceX or if not more? Yeah, so we think launch is worth probably, or is revenue generating probably at least 10 billion. And we think that the satellite constellation Starlink is probably 8-ish, 9-ish billion.

12:17My colleague John Butler did the work on that. So we're up actually probably closer to 20 billion. Look, I think the combining with XAI is all about sort of strategy and funding AI. I mean, Mandeep will, of course, talk to it deeper. But I think that AI business needs a lot more investment. I think Musk wants to push it up in its competitiveness. And so I think he put it inside this broader offering for SpaceX in order to help move some money that way. Mandeep, the combination, you know, long term, it's about compute in space, right? Satellite space, form factor, data center of XAI. In your research, you're continuing to look at what we reported as being a potential tie up between Tesla, XAI and SpaceX.

13:07Give me your thesis. Well, so the way XAI has been looking to monetize is through consumer subscription so far. And when I stack them against, let's say, an open AI, they are nowhere close to the scale that open AI is or Gemini is in terms of consumer subscriptions. On the enterprise side, yes, they have that big defense contract, but that's where the XAI revenue run rate is close to$1 billion and compare that to Enthropic and the others. they're not growing at the same pace. So because all these large-anglehold models are converging and growing really fast, you have to ask yourself, how are they going to fund the next training run?

13:49And you need that sort of funding to really keep up in terms of how these models are developing. So I think the merger is really an attempt to make sure that they don't lack the funding because all these companies are tapping, you know, the private market, the debt market, And, you know, as a combined entity, they've already sort of come up with the 1.25 trillion. Once they go public, probably 1.5 trillion could be achievable. But it's a very high valuation multiple that they already have. Mandeep, what's interesting in your research is you really compare and contrast how many individual users are going to a standalone Grok AI.

14:27Yeah. Not many. But there are plenty of us Tesla users out there who could be using it. How much should they need to lean in to ensure that adoption is brought to bear in that respect? Yeah, and you make a great point. The digital assistant use case within a Tesla makes perfect sense. I mean, why would they not deploy Grok inside a Tesla as a digital assistant? And you already have, you know, 10 million cars on the road where you could potentially deploy that. So from that perspective, the feedback loop can be very fast in terms of, you know, them deploying the product, the feedback in terms of how well it's doing and constantly improving that.

15:03But you need that consumer adoption because that's what all these LLMs, you're competing against Google Gemini. With more guardrails as well, I might add. Yeah, and that's where Grok so far has been kind of, I feel like they haven't really caught up in terms of implementing the right guardrails and people feel skeptical about implementing them on the enterprise side. So there is work to be done on that front. This is a big moment where Bloomberg Intelligence is initiating coverage, deep research of a big private entity that we think will go public, right, George? The data in the deck is so valuable.

15:40You're tracking the size of the Star Lake constellation. You're tracking launch cadence and then our forecasted financials. Which of those are going to be most important now that SpaceX has hard pivoted to the moon from Mars? George, very quick. Well, so I guess where I see the money really being generated from is the constellation, the satellite constellation around the around the Earth. And that's going to bring broadband revenue and it's going to bring direct to sell revenue. The pivot to the moon and Mars, I think, is a little more about sort of marketing than it is about revenue generation.

16:14I'm all about revenue and profit generation. George Ferguson, Mandeep Singh, Bloomberg Intelligence coverage of SpaceX and XAI. I appreciate it a lot. There's a lot going on in the world of Elon, Inc. Jimmy Barr, Tony Wu, co-founders of XAI, have announced they're leaving the company after less than three years. By my count, Caro, that means that half of the about dozen initial founders, which includes Elon Musk, have now gone. And maybe that's to be expected when you see such a difference in the architecture of the business. Now it's subsumed into SpaceX. What does that mean in terms of the founding principles of this business?

16:51But is there any read through? Look, we're looking at their statements, their resignation posts that they actually put on X, of course. What do you make of it, Ed, as someone who's so deeply within the Elon Musk space? We just don't know. When I read the merger documents, you know, it was pretty clear and we reported this, right, that XAI would operate as a standalone subsidiary. Because remember, SpaceX is subject to ITAR rules, the use of technology and defense applications. Is that it? Is it about the reports that Musk has been frustrated about the pace of Grok's deployment? But these are notable people who are leaders in field and talents everything in this game.

17:30And boy, is the competition hot at the moment with Anthropic, with OpenAI, with XAI. We continue to track it. Meanwhile, coming up, Google, another AI player that we keep your eye on, but it's also adding a way to shop within its AI search. We'll discuss with the company's general manager of ads and commerce. Stick with us. This is Bloomberg Tech.

18:00Google is adding shopping features to its AI search and Gemini chatbot. The move comes as tech companies more broadly look for ways beyond subscriptions to make money from their AI tools. Let's discuss with Vidya Srinivasan, Google's vice president and general manager of ads and commerce. There's always been a relationship, at least for me personally as well, between Google searching and then getting to a product. But in AI mode, that's what we're talking about here, AI mode, there's just a more direct interaction to a transaction, right, where you can go ahead and buy something. That's right.

18:36How big a moment is that for Google? It is a massive moment for us. We see this as not just a big moment for Google, just sort of stepping back. In the last year, what we see is shoppers have really changed their behaviors. They are now, typically shoppers had to pick between shopping fast or shopping smart. And with AI, that trade-off is kind of disappearing. And therefore, businesses now need a new playbook. And a lot of what we're doing now is all about how to empower them. And in AI mode, what we're seeing is people's search behavior is completely evolving from keyword search to conversational search.

19:09They upload pictures. There's so much multimodal input that comes in. And that's just a moment for us to rethink how we do the whole thing. Vijay, anyone that watched the Super Bowl will know that the inclusion of ads within a generative AI tool is, let's not say controversial, but people are deciding if it's what the consumer wants. If you're interacting with an AI, do you want an ad to pop up? And you've been testing different ad formats as part of this. What do you think the consumer wants? Yeah, obviously we spend a lot of time figuring out what consumers want. We've had a 25-year history in satisfying human curiosity with search.

19:50In all of these experiences, ads have been a big part of that. And they work because they're helpful and assistive to the person in the moment. Now with what's happening with AI mode, what we see is the conversational modality is changing. It is a moment for us to reimagine what ads are possible and what will actually work. And there's a lot of experimentation that we're doing. In fact, we have a couple of announcements on that. But the foundations of what makes this work continue from what we've learned all these years. And that's really based on a foundation of trust and safety. Trust, safety.

20:25Then tell us about how you become entrepreneurial in your thinking, how you become creative in your thinking. That these don't feel unnerving to the purchaser. They feel natural, organic, and useful. Let me actually give you an example. So let's say you're in AI mode and you want to purchase a lamp for your bedroom. And you talk to the, you tell AI mode about your, you know, the decor you like. It's a modern decor. You want a certain kind of lamp. This is the color. And you get to a point where you know the product that you want. You see the product that you want. The feature that we just launched today lets you purchase it right there in that moment.

21:04Now, you're still very much in control of the purchase. However, a lot of the grunt work of getting from what I want to when I have it is removed in this process. So this feels assistive, this feels natural, and it's based on the same principles that we've done a lot of things before. Direct offers, who can I buy from? When I found the perfect lamp, is it just Etsy and Wayfair? You've got partnerships there. How is this expanding across the entire remit of partners that you have? Yeah, so DirectOffers is an opportunity for retailers to provide us a very specialized discount that our AI actually matches with people during their shopping journeys and gives them this very personalized discount.

21:46And it allows retailers to just close the sale in that moment because they motivate people to do this. And the way it's going to scale is we're currently running a pilot with a lot of retailers. There will be more that can come on board. And they just have to participate in this as a new ad format. The technology needs to work. For me, it's still a technology story. So you want whatever appears in AI mode to be relevant to the query. You know, that has been a criticism of other generative AI tools. What's come up in front of me has nothing to do with what I'm talking about. How's Google solving for that?

22:23There are many aspects to that. I think it goes back to the foundation, core foundations of search in general. We are in the constant quest to make the results more relevant. One of the things that can help in this space is also understanding the context of the user better. And AI mode is good in that sense because we do have the opportunity to go back and forth with the user. So the questions we have as a follow on, all of these things help us learn a little bit more about the person. So we have the best shot at producing results that are more relevant for them. Very briefly, you talked about safety and privacy.

22:57It's a criticism, particularly of Elizabeth Warren, for example, worrying that you're pushing people into making, well, purchases that they otherwise wouldn't. Their privacy, how do you tackle that? The way we tackle the foundations is people today have choice to go purchase something or not. There are many, many opportunities that you have to click on that buy button in many places, in many different products. those same principles of control and choice continue to exist in in this domain as well and it's still on the person to choose to click on that button and make that purchase vidya it's been great having you google's vidya sreenivasan we thank you coming up twilio founder jeff lawson it's got a new company it's a nuclear company he joins us to discuss the energy startup 450 million dollar series a that's next this is bloomberg tech

24:00welcome back to bloomberg tech checking in on these markets which have been whipsawed by macro data by of course jobs coming in stronger than expected what does that mean for an overall policy from the federal reserve in terms of rate cuts coming maybe july rather than june but i'm looking individual stocks are on the move, check out the earnings story coming from Lyft. A surprise revenue miss on their fiscal fourth quarter. Look, bookings are good. People are wanting to ride with Lyft. But what about the profitability they're in? What about the revenue drivers? What about the expansion outside the US?

24:29We're going to have that conversation with the CEO a little bit later. As you can see, a painful day off by 15%. Move on to some of the other just key indexes. Look, this is the push and the pull in the market. Software. We have more anxiety about the latest AI formats, LLM developments, latest ways in which business models are getting disrupted, whether it's in your financial services, whether it's in your legal services, but also whether more broadly, it's about what software is going to do for you in the longer term and how much you can charge for it. Software under pressure again, down 3.6%.