TSMC Beats Expectations, Raises Revenue Outlook

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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. TSMC reports third quarter results beating expectations and giving a positive outlook buoyed by strong AI demand. Last as trade tensions re-escalate between China and the US, could President Xi's rare earth hardball spot a global pushback? And yet another exec departure from Apple, with its head of the chat GPT-like AI search efforts going to Meta. But first, Ed, we dig into the markets that are shaking off that trade anxiety and refocusing on the AI trade, of course.

1:54You just asked TSMC, we'll dig into it. NASDAQ up three quarters percent, we're trading higher for two straight days. People focus on that and indeed potential talks between President Putin and indeed the United States president. But what are we looking at underneath the hood? Yeah, TSMC, the world's biggest and most important contract manufacturer of semiconductors. The news is that it is hiked its sales growth outlook for 2025 for the second time this year. Then we look at the chart. We open up 2%. We've given off some of those gains. If you read on the Bloomberg Terminal, some of the market stories, the early part of the morning was TSMC driving us up positivity.

2:32But the trade story is overtaking a little bit. AI demand intact, Caro. It is. Let's just talk about that being an impact. Bloomberg's Peter Elstrom, who leads that tech coverage from the US, Europe and Asia. And Peter, look, TSMC did almost what ASML did. They said, look, AI, the mega trend is still there, even if China pulls away in terms of demand. Yeah, it's a little bit more than that. CC Way, the CEO, had this conference call after the earnings results. And as Ed was talking about, they hiked their forecast for 2025 for the second time. Just three months ago, they hiked their forecast. And now what CC Way is saying is that this AI megatrend is actually getting stronger.

3:11They, of course, are making the chips for NVIDIA and for many others, too. And what they're seeing is that the demand for those chips is getting stronger at this point. They are watching the capital spending from some of the big customers out there, including OpenAI. They realize that NVIDIA is going to have to supply those customers, and the trends are going up from here. So we're starting to get a fuller picture of what's going on in the chips business. We got preliminary results from Samsung earlier this week, and we got ASML, the chip equipment maker, after that. And now we have TSMC, the biggest contract chip manufacturer, which is giving us a very strong forecast, too.

3:48That's kind of the demand side, right, Peter? But on the supply side, there was lots of interesting information. The two headlines that jump out at me are they're massively supply constrained. Capacity is tight, but they're moving really quick to expand manufacturing capacity here in the United States. That's right. Yeah. Well, it takes a while to build these chip plants. They've begun construction in the U.S. a few years ago, and they've now said that they want to build on top of that. They want to expand even more than they have in the past. But they're trying to add capacity in the U.S. while they also build up their capacity in Taiwan right now.

4:24So it's taken a while for them to bring those fabs online and then meet this very strong demand that they're getting from customers like NVIDIA, also from Apple. They're supplying a number. They also make the chips for AMD, too, as AMD tries to compete with NVIDIA. So they're really the big beneficiary. They're kind of the picks and shovels that are helping with this AI boom. Look, we are looking at the ADRs a little lower, Peter. So they're at a record high in trading over in Asia. Is there perhaps just a lot already priced in? Yeah, that may be it. As Ed was talking about, there are a lot of factors going on in the market right now.

4:57The primary trading forum for TSMC shares is in Taiwan. So we'll see how they do tomorrow as they open up there. But the ADRs are getting buffeted a bit. Probably there are some high expectations going into this. I think investors did anticipate that there was going to be some pretty strong numbers from TSMC. But on top of that, there are a lot of trade factors. that are playing into this. The U.S.-China tensions certainly kind of overlay a lot of what we are seeing in the market right now. Bloomberg's Peter Elstrom, thank you very much. Our next story is trade tensions between China and the U.S.

5:29Listen to what Treasury Secretary Scott Besant had to say about how negotiations are going, and in particular, about one top Chinese trade official. We've had four rounds of talks, Geneva, London, Stockholm, and Madrid, and both sides approached him with great respect. And this individual did not. He showed up uninvited and said, quote, China will cause global chaos if the port shipping fees go through. So I don't believe that China wants to be an agent of chaos. And maybe they used to have the wolf warrior diplomats. So maybe he thinks he's a wolf warrior. We don't know. This is happening as China's decision to unveil export controls on the rare earth supply chain is now sparking a global pushback.

6:25Bloomberg senior tech editor Mike Shepard joins us to break it all down. Based on what the Treasury Secretary was talking about and recent reporting, China sees its hand with rare earths as being leveraged. In a negotiation, there are two sides. And the question, Mike, is whether China is or is not overplaying that hand. Well, that is a big question right now in the market. And certainly here in Washington, where we're seeing the IMF and World Bank meetings being held and so many global officials in town to watch these trade negotiations unfold in real time between the U.S. and China with so much at stake.

7:04And the question is how much of an impact there will be on other economies. And the U.S. is banking on other nations, other trading partners and other allies also feeling that pain and joining the U.S. and trying to counter whatever China may try to do in restricting the shipment and export of rare earth materials from China to buyers outside China. And that is something that will affect the European Union and other nations and Japan. And we have seen a push led by the U.S. to try to get the Group of Seven to somehow counter and respond to China's intention here. And look, what we're seeing is even as China is trying to exert some leverage, the U.S.

7:43is also expressing a little bit of skepticism about whether this will actually go through. Jameson Greer, the U.S. trade representative, said yesterday he doesn't think China will actually take this step owing to the geopolitical implications and the fallout it would have on the global economy. And we can see a sign of that skepticism in the counteroffer that the U.S. made. Ed, the U.S. was really only stepping forward with a longer pause in tariffs. And that's not nearly enough for what Beijing had been hoping for. They had been really angling to get a relaxation of years of export controls as a result of that leverage.

8:18There did seem to be real anger coming from Treasury Secretary Scott Besson there, Mike. And I'm interested as to reminding us how important the hand is that China has. when it comes to technology, the fact that they mine an awful lot of the rare earths, but the main point is they also produce and refine most of the rare earths. Well, they do. They really hold more than half of the world's reserves, and they dominate the refining and production of these elements, which are critical across the economy in consumer electronics, in automobiles, and in military equipment. Think of night vision goggles.

8:53You can't run those without some rare earths. And so the importance of this is something that hits a nerve with trade officials around the world, but especially with the U.S., because American officials had thought the rare earths issue had been settled during the last round of trade talks. And here China goes, in their view, reopening it and trying to use it as a last minute bit of leverage heading into this all important meeting between President Donald Trump and his counterpart, Xi Jinping, at the end of the month. And rather than seeing a narrowing list of trade issues to be resolved heading into that meeting, we're actually seeing a growing list.

9:29And you heard the Treasury Secretary talk about the sensitivity around shipping. And there is also the question, Carol, of the U.S. move to expand coverage of sanctioned firms to include subsidiaries. And that's something that hits some of the Chinese champions like Huawei and SMIC. And that is something that Beijing also has objected to. And we've seen this all play out just in the last few weeks. And it raises questions, Carol, about whether the two leaders can actually sort all of this at the end of the month, if and when they sit down. If is a big if right now. Mike Shepard, thank you very much indeed from D.C.

10:05Look, amid this geopolitical tension, you are still seeing the markets relatively calm. I'm looking at the tech markets up 7 tenths percent on the NASDAQ 100. We've been whipsawed a little bit about the concerns on resurgence, trade frictions more broadly. but the AI real feel factor is still there. Angelo Kakafos is with us, Senior Global Investment Strategist at Edward Jones. Today, is AI winning out? It is a good day for technology. The TSMC results and guidance provide some confidence in the durability of the AI theme. There's no AI-related slowdown, at least not yet. And AI is going to remain a key driver for markets.

10:48Angelo, one of the most read stories today on the Bloomberg Terminal and on the website is Ken Griffin, the founder of hedge fund in Citadel, saying that Gen.ai is not helping hedge funds beat the market with astonishing returns. We're going to pull up what it is that he said. But as somebody that is in the markets, as a strategist, your reaction to that news story and also what? Gen.ai, better than you in strategy? I don't think we're quite there yet. We are still, in our view, in the early stages of adoption. Of course, there's a lot of spending going in now to make this technology and incorporate it.

11:30But thinking about major technology firms and really many different businesses, including in finance, they are all rewiring their operating system to incorporate AI. So it will take a little bit while to see productivity gains. but we do think that these gains are on the way. Of course, from an investment standpoint, we need to be wary of complacency or euphoria. At some point, there's going to be increased competition, some overbuilding, overcapacity. We are not quite there yet, but something to watch out for. And I think the reaction in the TSMC results in the stock today, the new reaction reflects the high expectations.

12:09So, they're two very distinct stories, right? How market participants use AI and then the impact of the AI story on markets, but you went there with TSMC. So what did that sort of outlook from them tell you about the staying power of this cycle? Yeah, I do think it provides confidence that this will continue, especially thinking about the next 6 to 12 months. Only the direction of travel for spending is higher, and there's a lot of push for many different businesses and industries to incorporate AI. So I think that the mega trend of adoption remains alive and well. And yes, we can debate all day about valuations, but the results speak for themselves, especially as we enter a key earnings season.

12:55We don't have all day, but let's debate. Where would you go if valuations are high for some of the big names? So we favor a barbell approach. So, having continued to participate in this AI long-term secular theme, as I would call it, but at the same time, for especially new capital, start to complement portfolios with areas of the market that have been left behind. And that could include value-style investments, small-cap stocks that may benefit from the Federal Reserve rebooting its rate-cutting cycle. So having this balanced approach and, again, avoid chasing some of the unprofitable, more speculative parts of the market.

13:39What is the catalyst for those speculative parts of the market to actually be pop? Do you think that we can remain irrational for a little bit longer if you see it that way? You know, as they say, you can only tell a bubble kind of with a benefit of hindsight. But at the same time, there's some key differences between now and the late 90s. A lot of these companies that are doing all this heavy spending, they are financing that from their own cash from operations. So not debt financed. They are very mature, profitable businesses and they have a diversified stream of revenue. So we're not quite there yet.

14:14Valuations are not at extremes. But at the same time, markets are going to be sensitive to any news about return on investment from all this spending that is taking place. and also paying attention to signs of euphoria, which we do not see yet. In this environment, Angela, I think we should continue to talk about tariffs. The idea when the president took office in January was that consumers would take on the burden of tariffs, right? Because companies would raise prices across all sorts of domains. That hasn't really materialized. What has been impacted is the labor market in different ways. either people are cutting back.

14:55How are you reading that play out right now? Yes. So, a couple of things here about prices. As we navigated the very period of high uncertainty, especially in April and May, companies really tried to absorb a lot of that and not pass these increased costs to the consumer. Now that we have a little more clarity, we may see a little more even distribution of this increase in costs. We have seen goods prices increase, but at the same time, the increase, the uptick in inflation remains manageable. Now, as it relates to the labor market, we remain in a low hiring and low firing mode. The labor market remains balanced.

15:39Corporate profits remain at record highs, even as we've seen a significant slowdown in hiring, which to me implies productivity gains. So, we do not expect a major uptick in unemployment. Companies have been very profitable, so they have really no pressure to continue to cut costs to protect margins because margins, again, are at all-time highs. But something to monitor. There's going to be some disruption from AI, but so far, it seems like only a small part of that slowdown in the labor market is because of AI or tariffs, for that matter. And I ask you that because that takes us nicely into earnings season that's about They hit us hard next week.

16:19Angelo Korkafas of Edward Jones. Thank you very, very much indeed. OK, coming up, Salesforce looks to re-insure investors worried the company could lose out in the AI boom. We have more on Salesforce next. This is Bloomberg Tech.

16:45Salesforce shares. As you can see, they spiked this morning after Chief Financial and Operating Officer Robin Washington had said the company expects to return to double-digit revenue growth in the coming years. For more on the company's outlook, let's bring in Bloomberg's Brody Ford, who covers enterprise software companies. It's still down a quarter so far this year in terms of its market cap. but some reassuring points to reacceleration of growth. Exactly. I mean, this is a stock that was beat up 30 % year-to-date yesterday. And so it's up 7 % today, and that's pretty cool. But it's still, investors are a little anxious whether these kind of traditional application leaders like Salesforce are going to be the ones to successfully sell AI products.

17:24We got a decent outlook from Salesforce yesterday, but, you know, it's not a resounding celebration at this point. You've been reporting on the close relationship between OpenAI and Oracle and how maybe the publicly traded and at this stage slightly bigger of the two is helping that company navigate chip export controls. What do we need to know? It's interesting. I mean, Oracle is kind of a famous lobbyist, right? They know Washington. They're pretty tight with the Trump admin right now. Yesterday, OpenAI said, when we're having trouble getting chips into UAE or Argentina, we call up Oracle. And they're the ones that have kind of been able to help us get our chips around the world.

18:09And we found that pretty interesting because Oracle is playing an increasingly large role in OpenAI's infra build-out. Bloomberg's Brady Ford across a lot of stories. Thank you very much. Another top, top story. Apple can't catch an AI break. The executive who is in charge of developing a chat GPT-like search feature within Apple is stepping down and heading to Meta. That's according to sources. For more, Bloomberg's Mark Gurman, who broke that story, joins us now. Who is this executive and how significant is it, Mark, that he's jumping to Meta? Yeah, this is Ki Yang. And to give you an idea of how significant this is, we've talked about maybe a dozen Apple AI departures over the last few months.

18:54This is probably the most significant or second most significant of that group. This person was a direct report to John Gianandrea, the senior VP who runs all of AI at Apple. This person was actually put into their role only a few weeks ago when his predecessor, Robbie Walker, left Apple. Walker had been in charge of Siri, but he was removed from being in charge of Siri in March after the major delays and the blowback against Apple intelligence. and then he started a new team called AKI, Answers Knowledge and Information. And that team is focused on AI-powered web search tools. So basically adding chat GPT, perplexity, Gemini-like functionality to Siri and other parts of the Apple operating system.

19:39And Yang, he became in charge of that program just a few weeks ago. Before that, he was running the search-related functionality. Then he was running the whole thing. And so now Apple's AI team is going through another major reorganization in light of that significant departure. And a key line in your story is several of the Apple team members think that this is going to continue to happen, more departures to come. This is going to keep happening. I mean, the core team developing the models underlying Apple intelligence, it's a team called AFM or Apple Foundation Models. They've been bleeding talent since July.

20:14The creator of that team, the person who ran that team, Roman Pang, he left for a$250 million multi-year pay package and is now a senior AI executive at Meta. Since his departure, they've lost about a dozen people. I'm told there's several other people on that team continuing to interview. Other people are going to Meta still. Other people are going to startups, OpenAI and Google. We've been reporting this out as these departures have been happening and these new companies have been hiring these folks. And this is going to continue given the pay packages that these competitors are offering and given the embarrassment that Apple's AI efforts have become for some of these people actually working on them.

20:55Mark, you've come on Bloomberg Tech and you've broken all these stories about people departing Apple. A reasonable question, and we just have 60 seconds, is there actually anyone left at Apple of notes working on AI? Oh, Apple has tons of folks. They're working on acquisitions to try to refuel the ranks there. John Gianandrea, despite there being rumors and discussions about him stepping down, are being pushed out of the company for several months now. He remains in charge. He may not be there for long, as I'm told that Apple has been looking for outside replacements for him, but for now he's there.

21:35Craig Federighi, who runs all software engineering, has now taken an ownership role over all the AI strategy at Apple. Mike Rockwell, who created the Vision Pro, He's heavily involved in the AI strategy there now too. So yeah, they definitely have folks, but it's just about refueling the ranks and putting the right people in place. But certainly this is another considerable setback to Meta's gain potentially. Mark Gurman, as always, we thank you so much for joining us. Meanwhile, coming up, potentially catastrophic breach of a US-based cybersecurity firm. It's being blamed on Chinese state-backed hackers.

22:10That detail and the fallout next. This is Bloomberg Tech.

22:26And it's time now for Talking Tech. And first up, U.S. cybersecurity provider F5 disclosed that nation-state hackers from China breached its networks and gained long-term persistent access to certain systems, including source code. Now, the breach prompted warnings from U.S. and U.K. authorities describing the attack as a significant cyber threat. that could be used to exploit vulnerabilities. Plus, Uber is giving some drivers in the US the option to earn money by completing tasks related to the company's new data labeling business. This is an area where the ride-share giant sees an opportunity to shine in the AI boom.

23:00And Microsoft is pushing Windows users to talk to their computers. But the company is rolling out a new AI voice feature activated by saying, hey, Copilot, it's part of a broader effort to rebuild Windows around AI, including expanding use of tool, including Copilot Vision, which lets software see what's on a user's screen. Ed. Okay, coming up, we've got a riddle for you. How do stocks get weaker and more valuable? More on how the AI boom's impacting equity dilution next. Also, quick look at markets, right? The story has been split between the early part of the day where TSMC's outlook was really boosting us, but TSMC's US-listed shares at least have fallen away.

23:41The market is modestly higher. There was some sort of nervousness and now calm about what is happening in trade talks between the US and China. We'll continue to track those stories throughout the range of the show. This is Bloomberg Tech.

24:03Welcome back to Bloomberg Tech. Our top story is TSMC, the world's biggest, most important contract manufacturer of semiconductors. Its US listed shares are now down a percent. They had opened up 2 % and quickly fell away. The story is that they have, for the second time this year, hiked their sales growth outlook to the mid-30 % range for 2025. And the writing on the Bloomberg terminal is really clear. That's given the market at large a lot of optimism about the outlook for AI and demand. Remember, TSMC is the contract manufacturer of NVIDIA chips, as an example. Not doing much for their own US-listed shares, though.