Tesla 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.

0:37So 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. Tesla's profits plunge despite record vehicle sales and a Musk hijack moment on his proposed trillion dollar pay package. Plus, the White House says it is weighing broad software restrictions against China as it pushes for tech self-reliance. And we sit down with T-Mobile's incoming CEO, Srinivas Gopalan, about the company's third quarter results. But first, we check in on these markets, which, despite the geopolitical tensions, despite concern about some numbers not hitting the mark in the earnings underneath the benchmark, we're still up 0.6 % on the Nasdaq 100, Ed.

1:55That feels like there's a risk-on sentiment more broadly. And that's as we eye all prices on the higher side, inflationary concerns. But we shake it off when it comes to the Nasdaq. We're looking underneath the hood. Yep. Let's go to Tesla. Down 3%, but not as down as much as it was when the stock opened. The story from earnings was really simple. Record vehicle sales or deliveries, but profits plunged. Higher costs. Tesla talked about tariffs, talked about the impact of policy and how it had expanded its products to react to that. But then, right at the end of the earnings call, the story became about Elon Musk and his proposed pay package.

2:33Listen to this. The point is that 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. Elon Musk there, ending his final moments on the conference call, making the case to shareholders for his$1 trillion pay package. Let's get more on all of the Tesla numbers. Itai McKennie is with us, senior analyst of autos and autopars at TD Cowan. And joining us, you've got a buy rating on the company, $509 price target, which is about 20 % higher than where we currently trade. Going straight to the numbers perspective before perhaps a pay package.

3:06Was there anything to shout about? So the quarter overall, and thank you again for having me, was fairly in line with our preview thoughts that the setup was fairly balanced for the stock going in. As you know, the stock had kind of rallied into the quarter. Estimates have gone up a little bit since the record kind of deliveries and the upside there. And so we did think that the setup was fairly balanced going in. The numbers themselves were fairly mixed, but overall in line on an operating basis, the numbers were about 7 % above street expectations when you exclude the restructuring item that came out as a bit of a surprise.

3:43There were some below-the-line items, such as a higher tax rate that caused EPS to miss. Free cash flow was actually very strong. So overall, some puts and takes on the numbers, but fairly in line to maybe even a bit better operationally versus consensus, including on a better gross margin overall. OK, so that gross margin and actually the cash that's still coming into the business, is that enough to really drive forward on basically the now focus of Elon Musk and Tesla more broadly, which is AI, which is robotics, which is autonomous? Yes, to your point, the gross margin actually beat nicely in the quarter, 18 percent versus consensus at 17.3 percent.

4:18OpEx was actually higher, including for SG &A. So you're seeing the company making still substantial investments in future growth, including, of course, AI. But the free cash flow, very strong. CapEx came in a bit below expectations. And the balance sheet is very strong with over$40 billion of cash and low 30s of net cash after debt. So the balance sheet's in great shape. You are seeing the company continue to make an investment. Good to see the gross margin beat as well. We're trying to tie Musk's comments about the compensation package to the earnings that were posted. And the way that I look at it is that the board has set him over 10 years both operational and financial goals.

4:5820 million vehicles over 10 years. That means he needs to average 500 ,000 a quarter. They've set him EBITDA goals. And in the earnings statement and on the call, they tried to explain with a broader portfolio of models and more affordable models how they will achieve that. Did they answer those questions? Yes. I think when we looked at the CEO compensation proposal when it came out, we were actually very encouraged. A lot of analysts have views over what Tesla should do, where they should be investing and what the future will hold. You know, we've been very bullish on autonomy, not only for the robo taxi vertical, but also for what we call the consumer AV vertical, the FSD vertical.

5:40And we thought the product goals, the four of them kind of laid out in the compensation proposal, were very aligned with our kind of long-term thesis of where Tesla should be investing in what they should do, particularly around the FSD part of it, given how disruptive that could be. It was that the company's comments last night on the call were supportive of that, including kind of making the point that as they launch these incremental FSD features, that could accrue very nicely to EV demand. It kind of addressed that issue as well. So those goals seem very aligned with our thesis. It actually turned us more bullish on the stock kind of long term when we read those proposals.

6:16It's high. This morning, the New York State Comptroller joined us on Bloomberg Surveillance. Listen to his take on why they voted no on the comp package. When you see the excessive compensation package, I mean, you know, credit to Mr. Musk, he's already one of the richest men in the world. How much more rich does one person have to be? But for Elon Musk, it wasn't about money or how rich. It was about voting control, the argument that he needs a certain level of control for Tesla to realize the vision of humanoid robotics and more broadly AI. Where do you stand on that? Sure. Yeah, absolutely.

6:56Elon kind of made that point very clear. Ultimately, the proposals are tied to market cap targets as well. They are, to your point, ambitious. They will require very, very strong execution. But once they're delivered, if they're delivered, there's a substantial amount of upside to EBITDA longer term as we see it and would give Tesla a very significant competitive positioning as well. So given the amount of execution he needs to take there, I totally kind of understand management's point around this. And again, those goals very well aligned with what we think Tesla should focus on over the next five plus years.

7:33And so, you know, we felt pretty good about, you know, the overall game plan for where to invest, where to focus on. And we felt those goals for us were positive in the scheme of where we see the company going. It's I, Michele of TD Cowan. Thank you very much. Now, coming up, the White House says it's weighing more export limits against China, this time targeting critical software. We have more on that story next. This is Bloomberg Tech.

8:13let's get over to the evident ai symposium taking place right now in new york and bringing together hundreds of banking executives and innovators to discuss ai adoption in financial services Goldman Sachs, CIO, Marco Argenti, speaking with Bloomberg's Eric Schatzka. How do you take people through this journey? And so the human factor, the human element are more important than ever. Today I say that technology is even, what technology or AI can do is ahead of what people accept that they can do with it. So there is a gap there. There is a cultural gap. There is friction, but there is also sometimes fear, right?

8:55And this period of transformation creates, for the first time, creates almost like a competitor to the human species, which we never had before, which could be, in some cases, smarter than us. And the way people face that threat is very different. And some people adopt it and embrace it, and some people are just resisting it. But back to the importance of the first topic that I talked about. Why is data so important? Sometimes when we talk with other people in the business and other CIOs, etc., or people are asking me, what's the best advice? And today the best advice is really make sure that you have a great data quality story in your firm because that will be the single most important determinant of the quality.

9:42Goldman Sachs, CIO there, Marco Argenti, talking with our own Eric Schatzke. Catch the full conversation going on at the symposium on Live Go. But now we switch gears to what the White House is saying. Well, perhaps it's weighing new export limits on China, but this time targeting critical software that could send ripples through the tech sector. Rundberg senior tech editor Mike Sheppard joins us now with more. And it's trying to understand how far reaching such limitations would be, Mike. Well, it's a great question, Karen. We still don't know the answer about how far the scope of this will go.

10:15But the Treasury Secretary said yesterday that everything is on the table. And really, this is another instance of the U.S. or China trying to escalate ahead of a key round of negotiations. And we have one coming up this weekend where the two sides will try to hash out their differences. What the U.S. is hoping to get from China this time around is a relaxation of some new export controls on rare earths that Beijing just imposed, much to the chagrin of the U.S. and many of its allies. And Treasury Secretary Besson not only says that everything is on the table, but he is also saying that the U.S.

10:48may act in concert with its allies. And some of the areas that could be targeted are critical software, including software used to design chips, but it also could be broader. Reuters reported yesterday that they may go as far as looking at anything made with U.S. origin software and trying to restrict that. And that is a measure that the U.S. took against Russia back in 2022 following Russia's invasion of Ukraine. Mike, overnight a communique from the Communist Party's Central Committee in China. The country will aim to, quote, greatly increase the capacity for self-reliance in the domains of science and technology.

11:28Timing, what do we need to know? Well, Ed, this is clearly a challenge for the U.S. because one thing we have heard from the Trump administration is an articulated desire to try to sell back into the Chinese market some of the American tech stack. And the idea, this is one that we have heard from White House AI advisor David Sachs and others, that if we can sell into China, we can compete with China in other markets globally. So this is something where we see China is perhaps pushing away from the U.S. tech stack and trying to go on its own. We also have some great reporting from our colleagues in Asia and Africa.

12:05That is an example of how important this is. We see how DeepSeek is making inroads in Africa in today's big take. It's worth reading on the terminal and elsewhere if you haven't seen it. but it shows just how China is building this model at home of lower cost AI, both the hardware and the software, and then offering it in markets where the U.S. is hoping to compete, but perhaps being beaten to the punch by Chinese innovators. Bloomberg's Mike Shepard out of D.C. Thank you very much. We have breaking news crossing the Bloomberg Terminal, reporting from the Wall Street Journal. President Trump pardoned Binance founder Changpeng Zhao on Wednesday.

12:47The markets are reacting. If you look at XBIUSD, Binance coin, it is spiked as those headlines cross the Bloomberg terminal. The team in New York getting it up on the screen. The Wall Street Journal citing sources on the pardon of Zhao by the president. Bloomberg's not matched the reporting. We've shown you the market reaction. We'll look into it. And when we have more, we'll bring it to you. Let's get back to Bloomberg Tech. Natalie Gallagher, Principal Economist and Director at Board, an AI-powered enterprise planning platform. Natalie, you provide macroeconomic analysis and strategic guidance on business investment and economic policy to global companies.

13:24You just heard Shep going through the software component on trade back and forth, and then China realizing that it has to look at itself in some domains where it relies on the United States. As you track trade right now, I'd like you to answer, does software actually play any role in any of this negotiation? Yeah, you know, I think it plays a really significant role in this negotiation, right? Because as we talk about AI and the importance of really being a leader in this space, we know that the US right now outspends China on a ratio about five to one. But of course, there's a lot of accusations around distillation.

14:00And when we zone out from an economist point of view, it becomes a lot less about what's the marginal cost to China to produce a model and more about are we doing what we can to protect U.S. innovation. And it's really key that we get this right because this is an industry that's estimated to translate into trillions of dollars in global GDP over the next decade. So when we think about the actual U.S. names that get caught up in this, analysts are pointing to Cadence Design Systems, Desso Systems, Synopsys, as well as being companies that might be limited in their ability to export to China. But more broadly, what is the biggest element that U.S.

14:39can bring to bear? It still seems to be semiconductor. It still seems to be the IP when it comes to GPU and compute. Yeah, I would absolutely agree with that. You know, our power is really an intellectual property. We've shown a lot of resiliency there, a lot of leadership there. That's our key metric for as we move forward, what we bring to the table. Absolutely. And we'll have to sort of continue to lean into that and really have these conversations around policy to continue to lead in that space. Right now, are you seeing any data, primary data or secondary data, from any economy around the world that tariffs in the technology context or export controls are damaging any industries that we're talking about here?

15:24It's actually been really incredible. Tech has shown an amazing resiliency. Our global economy has shown an amazing resiliency when we talk about the effect of tariffs, right? And where we would anticipate to see it when we talk about especially these relations with China, we would anticipate it to see in consumer electronics. Now, the story of 2025 so far, and I wouldn't just say this for the U.S., but globally, has really been this idea of delayed pass-through effects. Now, as we get into the later half of 2025 into 2026, very likely that it's going to not continue in that way. Expect inflation to be persistent, really moderately accelerate as we go into 2026.

16:05So there will be an impact. We're talking about the environment and some of it is about headwinds and risk. But actually, when I think about where your research is at, you're looking at M &A. You're looking at investment flows. Deals are getting done, at least infrastructure-wise in this country. That's all quite positive. Yes, absolutely. I mean, in many ways, the tech sector has acted as a macroeconomic stabilizer for greater economic growth. And it's been fascinating to see. What's also been fascinating is how we discern where we protect talent or not. Look, there's been a lot of focus on H-1B visas.

16:42There's been a lot of focus on trying to make the U.S. more self-sufficient with its own people. But should we be looking more broadly at who the AI talent is in some of these big tech companies and where they're coming from, from a national security and, indeed, an economic perspective, Natalie? Yeah, I mean, it is such a fair question, right? When we take a step back, we see that overall the labor market has softened meaningfully. But when we talk about the specific talent around AI and machine learning, we see a lot of labor market tightness, meaning there is so much demand. So as we talk about H-1B visas and the overall impact, it is very likely that the demand is absolutely there for AI investment to necessitate global talent in this space.

17:28Natalie, it's been great having some time with you. Natalie Gallier, Principal Economist at Board. Appreciate it.

17:39T-Mobile. It added 1 million post-paid mobile customers. It raised its outlook for the year. And look, the boost is coming at a time when we're seeing the deal that was done with US Cellular, the launch of the new iPhone 17. But interestingly, the market's kind of digesting this with perhaps looking a little bit at the revenue expectations, potentially missing there a little bit. And it's locked in a fierce battle, of course, competition, AT &T, Verizon. Who better to speak about all of this as T-Mobile's chief operating officer, but he's the incoming CEO, Srinivas Gopalan. And I know this is a special day with really being there for the first set of earnings as the incoming CEO.

18:09But the market is kind of trying to find the flies in the ointment here. Why? Why do you think that million subscriber to postpaid wasn't enough? Look, I don't spend my time trying to predict market trading on a day-to-day basis. My focus is on building a solid, robust business, which is what we've got, and a business where we're constantly expanding and widening our differentiation. That's the core of what we're focusing on. Because when you look at this quarter's results, T-Mobile's been the growth leader for 13 years. And yet this quarter, we added our highest number of new customers ever. And it's not just volume growth.

18:46That translated into value growth. I'm not sure where you got the missing revenue expectations from, because we exceeded consensus on service revenue. and we delivered 9 % service revenue growth along with 6 % EBITDA growth. And all of that translates into that all-important metric, cash, 26 % cash conversion, which is the highest in the industry. So we're feeling really, really good about where the business is. Just to go into the nuances, for example, service revenue, 18.24 billion. It was up 9%, but the estimate, according to Bloomberg consensus, was for a little bit less than that, 18.16. but the revenue of 21.96 was perhaps slightly shy of the 21.98.

19:27But as I'm saying, this flies in the ointment perspective here, but I think the average revenue per user perhaps is one to look at, how it's being pulled down a little bit because you are in this fierce competition. And I'm interested as to how much to get over all these new subscribers, you are having to go toe-to-toe with some of the more incentives out there. So let me pass that question into three bits, right? Getting new customers. Now, if you look at our cost of acquisition of new customers, and all of that flows through to the bottom line. We added a million postpaid phone customers and still delivered 6 % earnings growth.

19:59That's because a lot of the new customers are coming to us because there's only one place where you can get best network, best value, and best experience, and that's T-Mobile. So while we talk about cost of new customers and the rest, when you have differentiation, you can drive earnings growth as well as bringing in new customers. From a competition perspective, this industry has always been competitive. And let's just pull back out of the detail of promotions and the rest. You look at it at an industry level. The industry has seen a 50 % growth in free cash flow in the last three years. At the same point as delivering more value to customers.

20:39And your last piece of average revenue per user, ARPU actually went up by 1.8 % this year. In our guide, we have an inbuilt 2 % guidance increase on ARPU, which was higher than our earlier guide. And so from our perspective, some other players have a different problem, which is some of the incumbents have their existing customers paying a high price. So when they try and attract new customers, what lands up happening is dilution of ARPU. We don't have that problem. We've historically been the value leader in this market. Trini, iPhone cycles are great for attracting switchers. You and I have talked about that a lot at Apple Park.

21:20But the companies, those incumbents and you, don't make any money on those handsets. Is it fair to say you're sacrificing revenues for higher customer numbers in the event of a new product cycle like we're having in the iPhone? So two parts to that. One I agree with and one I debate. I just reject the starting point that we don't make money when we do new iPhones. Our customer lifetime value, which is the way we think about the profitability of a customer over the lifetime, are really, really strong. Look, if we didn't make money when we attracted customers, we couldn't deliver a million new postpaid customers and still grow our EBITDA at 6 % and still deliver 26 % cash conversion.

22:07So the premise of that question, in my mind, is just false. On the other hand, I think you have an excellent point on the switchers piece. Look, every time there's a new device, customers reassess the trade-offs they've made historically. And they look for what's the best place for the new iPhone. And T-Mobile is conclusively the best place for the new iPhone. Just to give you some stats which give you a sense of that, right? on the new iPhone, on the T-Mobile network, you get 90 % higher speeds than one of our competitors and 40 % than the other, right? So this is a great switching moment. It's a switching moment when our differentiation has widened.

22:46And that's why you've seen this outsized and profitable growth. Srinivas Gopalan, T-Mobile, currently the COO, soon to be the CEO. Thank you very much.

23:03Welcome back to Bloomberg Tech. Let's take a look at these markets because on the Nasdaq 100, we're shrugging off some of the anxiety that you see in the bond market and indeed in the oil market, worries about inflationary pressure coming from oil. Instead, we look at what's perhaps happening underneath the hood in terms of earnings and some semiconductors on a roll today. We're up six tenths of a percent, but I shine a light on some areas that are not doing so well. There's a surprise pre-announcement coming from Supermicro. Now, this has been a company well-loved in the AI trade as they design some of the servers that are going into a lot of these data centers.

23:32But actually, they're saying that the upgrades aren't going to be happening really until their fiscal second quarter. Five billion is what they're directing us to in terms of sales, and it's well below expectations of six and a half billion. We'll get more detail later in November when they come out with their true earnings date. We're looking at Tesla also by 1.7%, bouncing off of its lows, but we see also earnings per share, the sacrifice there. We're seeing profitability down some 30%, even though we see all record volumes of deliveries in their quarter. We see operating expenses just shooting higher, and we want to get into all of that with our auto czar, Craig Trudell, who's joining us now.