AI spending, Big Tech earnings and defense outlook 10/22/26

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1:17Good Thursday morning. Let's get a check on U.S. stock futures. Those are back in the red after a strong bounce back on Wednesday. We're losing steam all morning here. We're at session lows pre-market. S &P is poised to open down 85 points. The Dow down 383 points and the Nasdaq down. Look at that number on the screen. 592 points. Now more than 2 percent, give or take, right now. Let's get a check on the bond market and what we're seeing with Treasury yields, too, here. You can see those are a bit lower across the curve this morning. U.S. 10-year Treasury yielding 5.08 percent and Fed-sensitive two-year Treasury 4.78 percent and the 30-year Treasury 5.38 percent.

1:54Perhaps a little bit of safe haven buying here. Keep in mind, though, what we're seeing in the energy market is part of the bigger, broader picture and perhaps why U.S. equity futures are a bit lower this morning. Energy prices surging amid new Mideast tensions. We've got more on that in just a moment. It's been a steady drumbeat of reports about the possibility of renewed escalation by the U.S. and Israel. You can see WTI is up almost 3 percent right now, trading just about 100 bucks a barrel. Brent crude is up about 3.5 percent as well. $112.50 a barrel. And you can see Arbob gasoline, diesel futures also higher.

2:30We've got a big day for big earnings. Shares of Meta reversing earlier gains. The company beating on the top and bottom lines, posting its highest quarterly revenue in company history and a better than expected Q4 outlook, too. The company's also boosting the bottom end of its capital spending to between 135 and 145 billion dollars in 2026. That was from an earlier 130 to 145 billion dollar forecast. One thing really boosting shares this morning is news around Muse. More than 10 million people in the U.S. and Canada have set up Muse personal agents. Growth continues to be strong and we have been number one in the app store almost every day.

3:13Engagement and retention are also off to a strong start. About 25 % of people who have set up Muse use it on any given day. For our earliest adopters, the longer that they use Muse, the better that retention seems to get. Well, Mark Zuckerberg adding that while Muse is expensive to run, at least right now, it will be profitable once its revenue lines are at scale. And if compute efficiency continues to improve, Muse will be highly profitable. And they put out some pretty aggressive numbers in terms of how much they're going to bring those compute costs associated with Muse down here over the coming months and coming years.

3:49Nonetheless, after being higher, Meta shares are now down 2 percent pre-market, not stopping there. Meta is also announcing plans for a new class of non-voting stock C shares, which are expected to begin trading in January. Well, let's also get to check on shares of Tesla because those are also lower, despite reporting better than expected third quarter results. even as automotive revenue dropped 3 % from a year ago. You can see shares are down about 5 % right now. The real story here is also about spending. That actually fell short, again, of street estimates, as CEO Elon Musk looks to transform the company from vehicle maker into AI and robotics giant.

4:23Tesla says CapEx for the third quarter was just north of$4.7 billion. That was short of street expectations. The company also cutting its full-year spending target by$5 billion to just$20 billion. On SpaceX merger talks, Musk had this to say on the call. With regard to a potential merger with SpaceX, I think I said everything that should be said yesterday. Tap dancing through a minefield there. Nonetheless, Tesla shares are down about 14 percent this year, underperforming the rest of mega cap tech. Very bullish commentary, though. and growth numbers put out on the call regarding full self-driving and all the robo-taxi fleet plans and how that's ramping and just how quickly.

5:07More on all that in just a moment. Shares of IBM, meantime, are moving lower despite reporting better than expected third quarter numbers. Company says sales grew 5 % from a year ago. It's raising its free cash flow growth forecast by more than a billion dollars for the year. And IBM highlighting strength in its software segment, where revenue rose 8 % to near$8 billion. That topped street expectations. Software was really the standout for IBM. And again, in a landscape of free cash flow going negative with all the heavy spending, IBM boosting that to above a billion bucks was notable. Nonetheless, shares down 4.5%.

5:47As big tech moves lower, watching energy prices, I just mentioned this, but those are moving higher on fast moving developments, possible tension escalation in the Middle East. Our Dan Murphy is live in Abu Dhabi with the latest. And Dan, we really saw it. It started yesterday morning, but after the bell last night, a steady drumbeat of reports and articles and sources familiar being cited talking about the possibility that we're going to see renewed escalatory strikes by the U.S. and possibly Israel sometime within this election cycle perhaps after. What's happening? That's exactly right, Morgan.

6:24And all of that also being reflected in the price of oil this morning as well. Morgan, it's not just that. We're also seeing Saudi Arabia now facing a fresh wave of attacks on both civilian and energy sites as well. Saudi authorities today saying their air defenses intercepted a drone targeting the Shaba oil field. That intercepts sadly killing two people and injuring several more. And then And separately, reports also say an attack on King Fard International Airport in Dhamam killed one person and injured eight. These attacks, of course, coming just days after the kingdom called off its flagship FII investor conference this week, given the Houthi attacks on several Saudi targets, including that deadly attack on Riyadh airport earlier in the month.

7:09The U.S. also now ordering some diplomats and their families to leave Saudi Arabia. Morgan, certainly a sign of rising concern about the risk to U.S. personnel in the region. And of course, the U.S. also ordering those non-emergency government staff and their families to basically get out of Saudi Arabia as these Houthi attacks on the kingdom intensify. intensify. The move also coming as the New York Times, citing unnamed U.S. officials, reports that the U.S. and Israel are drawing up these plans for renewed strikes on Iran, possibly after the midterms. Now, as I mentioned, the market reaction here has been pretty sharp all through the course of the Asia session.

7:50We've seen Brent trading above 110 U.S. dollars a barrel right now. And the concern here is, of course, that more strikes could potentially disrupt production or transport, given tragically just how accurate some of this Houthi activity has been. And of course, that tension also really being framed by this new piece in the Financial Times as well. Pretty head scratching piece here. In fact, Iran's foreign minister, Abbas Arakshi, weighing in. He now says Tehran is open to diplomacy if that country sees evidence the United States wants a genuine and lasting settlement. But he also warned in this piece, Morgan, Iran is prepared to defend itself if military action resumes.

8:34The president, of course, overnight saying the United States is not talking to Iran. Morgan. Dan, I have two questions for you here. The first is just a couple of hours ago, the Wall Street Journal reporting that Iran's fleet of shadow tankers has actually run out of oil. We knew that was going to come. Any confirmation in terms of whether that's true or not? because I think from an economic pressure campaign standpoint, at least from the U.S. side, that seemed to have been a moment that was being waited for. And then also the fact that we have not just U.S. midterms, but we have Israel elections next week.

9:08What does that mean about potential timelines here for any strikes as well? Exactly. So first to the oil point, Morgan, no independent confirmation of that reporting. But what I can tell you is that the Kepler data, the tanker trackers here, are saying that oil flows are now back to pre-war levels. So not only is the U.S. blockade effective, it would also seem that right now, of course, what we're seeing is Iran really being crippled as a result of that U.S. action. And the economic pressure campaign that's been waged on Iran over the last few months is showing signs of working. As for the next risk in the region, Morgan, I think you're exactly right.

9:49Of course, the Israeli election coming up next week. What we do know is that this reporting suggests that the United States and Israel could potentially go back to strikes post the midterms. And, of course, post that Israeli election as well, where Prime Minister Benjamin Netanyahu certainly faces an uphill battle, a tough test to stay in power. So all eyes on those two markers to see exactly which way this conflict goes next. All right, Dan Murphy, thank you. Well, energy price risks and big tech spending concerns are hitting equity markets around the world, including China, where one of its main indexes just fell into bear market territory.

10:27Our Eunice Yun joins us now live from Beijing. Eunice. Thanks, Morgan. Well, China's benchmark CSI 300 is down 20 percent since June. The index, which tracks about 300 stocks in Shanghai and Shenzhen, And Stankan worries about the spending and the profits of China's AI infrastructure companies, as well as the country's moribund demand. The big electric battery maker, CATL, saw its shares down for a second day after a quite disappointing Q3 earnings. Those earnings showed a slower-than-expected growth, as well as eroding margins due to increased competition. Industrial profits overall are at their weakest so far this year.

11:15Now, the investors were also unnerved by Beijing summoning several e-commerce companies, Alibaba, JD, as well as PDD, telling them they need to tighten their product quality standards. The authorities have also been enforcing, as of today, a new tax payment deadline for Chinese with investments in offshore trusts. So because of that, Morgan, there's been more pressure for a lot of these investors to sell some of their other assets, such as equities, in order to pay off that tax. Eunice, we've been talking so much about what's going on with the IPO market and what's happening with, you know, AI being able to raise capital, what that's going to mean.

12:00What are we seeing in China where I know that pipeline has been on fire this year as well? It has been on fire. There have been reports that DeepSeek has been able to raise another $15 billion in order to try to kind of move things along so that their IPO would be in good shape. But at the same time, there is concern about companies maybe IPO-ing at a time when right now there's a lot of jitters among investors. All right. Eunice Yoon, it's great to have you on, as always. We've got red arrows across Europe as well, our Karen Cho, with the trade, the early trade from London. Karen, great to see you.

12:45Morgan, good morning to you. Well, European stocks are sliding today with chip stocks under pressure. We've got a redux of the same issues, a combination of higher oil prices, elevated bond yields and fears over that AI spending spree causing risk off. Investors have also seen a deluge in key earnings out in Europe here this morning. One name in particular, Hermes, has reported slightly weaker than expected 4.3 % rise in third quarter revenue, with ready-to-wear sales at the luxury brand turning negative for the first time in years. The maker of the famous Birkenbag said it's seeing particularly challenging conditions in its key Chinese market.

13:20And Inesle, which reported a better than expected 4 % rise in organic sales in the third quarter, flagging strong growth in emerging markets and improving momentum in developed markets. The food conglomerate maintaining its full year guidance, expecting organic growth to be in the range of three to four percent. And Morgan, Dua Lipa's star power is being deployed to make Nespresso more appealing to young coffee drinkers, doing something that George Clooney did for many years, but taking the brand appeal to the lower age of drinkers. All right. Yeah, I don't think I needed any encouragement for more espresso from Dua Lipa, but I can see how this is going to be one to watch.

13:58Karen Cho, thank you. A very busy hour. Not that Duolipa's music's not great. It's great. But I've already had two cups of coffee this morning. I don't know about you. All right. Well, still ahead, we've got such a big hour for you. A can't-miss interview with NVIDIA CEO Jensen Wong. That is live from the company's GTC conference in Berlin, Germany. That is coming up just moments from now with our Argent Carpal+. We've got much more on the chip trade with a company positioning itself as a critical part of the supply chain, supporting battery and semiconductor, defense and aerospace manufacturing.

14:28the CEO Forge Nano ahead of that company's first trades on the Nasdaq later today. And same story, different airline as Southwest becomes the latest to flag higher fuel price. Weighing on earnings, we're going to discuss when Morning Call returns. Hey, what's up, guys? It's Haley Bailey. OK, I need to tell you about something. I just got YouTube Premium. It's got tons of awesome features like offline downloads, so I can download my favorite videos before I travel and watch them whenever I don't have Wi-Fi. Because we all know airplane Wi-Fi is the worst. I get ad-free, I get backroom play, and there's like a ton more in there.

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16:13Get more Mary for your money at Old Navy this holiday season. Let's get welcome back. Let's get a check on your morning's earnings movers, including Texas Instruments, facing some pressure after initially rising on the back of Q3's results, topping on beating on both the top and bottom lines. The company also giving strong revenue forecasts for the current quarter, boosted by demand from automotive, industrial customers, also data centers. Shares are down 1%. Lamb Research also under pressure. This despite Q1 results that beat the street. Guidance for the current quarter also topping expectations.

16:48Some possible factors in the pullback, the wide range of guidance setting up some potential disappointment. Stock was also up over 50 percent ahead of the report. So potentially some profit taking here as well. Stocks down about seven and a half percent. They had a very strong quarter, too. But if we stick with this chip trade, Denver, Colorado based Forge Nano set to go public today via a SPAC merger. the company backed by the Department of Defense, Department of Energy, General Motors, Samsung, LG, Volkswagen, and more. It's positioning itself as a critical part of the supply chain, supporting battery, semiconductor, defense, and aerospace manufacturing through its advanced ultra-thin coatings, what it calls atomic armor.

17:25That's a fun phrase. Joining me now on a first on CNBC interview is Forge Nano CEO Paul Lichty. It's great to have you on. Welcome to you. Let's start right there. We kind of teed it up. But in general, where does Forge fit into the semiconductor supply chain? So we make equipment that allows the industry to build their products smaller and smaller, all the way down to that single atom level of precision. Why do we need smaller and smaller? Because of humanoid robots and everything else that's coming? Yeah, if you want to pack more compute, better energy density into a smaller footprint, you need to shrink it down.

17:59And eventually you hit that barrier of single atom level of precision. And that's what we do. That's the tools we build, the capabilities we unlock. and we do it within the semiconductor industry, but we've also taken that out to other markets. So we're unlocking new products from better lithium-ion batteries, better vaccines and pharmaceuticals. Just really across the board, it's advancing manufacturing technology. Yeah, we just talked about some of the different industries that you are selling into. Where are you seeing the greatest demand and how quickly can you grow? So we primarily have focused on semiconductor and lithium ion battery.

18:37So we're building and growing equipment, getting it into some of the large fabs internationally, just allowing a new capability of precision that can make those chips for AI and data centers smaller, more energy efficient. But we're also building a lithium ion battery facility in North Carolina, here in the U.S. It's a three gigawatt hour facility that unlocks that atomic armor, makes a much better lithium ion battery, but allows it really focused on defense and enabling our warfighters, soldiers to have best-in-class products, but also have a secure supply chain and manufacturing base in the U.S.

19:15Why go public now? You know, we wanted to bring this technology, bring this company to the public markets, get access to the capital we need to build the next phase of the company. And when you're manufacturing, that's capital intensive. It requires equipment. And so that's part of our whole reasoning to go public right now. Yeah, I know you're going public via SPAC merger as well. In general, there's been a lot of focus on market volatility in the environment for companies to begin publicly trading. Has that factored in in any way into your timing and how you're thinking about this, both near-term and short-term?

19:52From our perspective, we've got our mission. We've got the capital required to do it, building out this increased capacity. So we always enjoy the market going up and I mean, who doesn't are hoping it continues in that way. But really, we've got everything we need. We're heads down just achieving the mission of getting production up and helping the U.S. kind of rebuild manufacturing, but do it where we're leaning in on advanced technologies like what we bring to the table. Yeah, it's interesting. I found myself having conversations, even one just before the show started off camera about, yes, there's jitters.

20:29There's volatility. There's concerns about, you know, the broader AI infrastructure build out and all the investment in the public markets right now. But fundamentally, in real time on the front lines, the demand picture hasn't changed. If anything, it continues to turbocharge. Is that your sense of it? Yeah, I think in the U.S. we've we've recognized we've got to continue to build out manufacturing. It's not a segment that we can ignore, especially when you tie that to defense and we need secure supply chains. We need the best products. Nothing about that has changed. And it's kind of been indifferent, regardless of administration, regardless of market conditions.

21:07We still have to make the best products. We have to make them here in the U.S. And that's what we've been focused on and seeing that continue to be really fruitful for us. Finally, secular growth story in defense. Is that how you see it? Should investors be seeing it that way? I think so. Yeah. All right. Paul Lichty of Forge Nano. It's great to have you on. Thanks for having me. All right. We'll be tracking the first trades on the NASDAQ later today. We're excited about it. Well, straight ahead, big morning movers from rails to chips to software. Plus, NVIDIA CEO Jensen Wong going to be live with our Argent Car Call from the company's GTC conference in Berlin.

21:44That is coming up in just moments. You don't want to miss it. Morning call. We'll be right back. With the Discover Cashback card, it's payback time when you earn cash back on everyday purchases. Activate and earn 5 % cash back at different categories each quarter on up to$1 ,500 in purchases. That's 5 % cash back at different places each quarter, like grocery stores, on gas, and at restaurants. It pays to discover. Terms apply. See discover.com slash 5 for details. Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much. Don't make more work out of work.

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23:37And Barbara Duran is CIO and BD8 Capital Partners. It's great to have you all here. Dan, I'm going to kick this off with you. I mean, we saw some pretty solid reports last night, And yet a sea of red this morning. Thoughts? I mean, those are robust numbers. I mean, if you think about meta, what they're seeing in terms of the monetization that will ultimately be in terms of news, that's the game changer. And the CapEx spend combined with what we saw with SpaceX. I think markets ultimately getting this wrong. I mean, I think this is a validation moment for big tech, not just meta, but what we're seeing, what we're going to see from the hyperscalers.

24:11And I think this just shows third inning AI revolution, this sell-off I view as golden buying opportunity. How do you see it? So I think what Dan is saying makes sense. I think we're going through this transition where we spent so much of the last six months focused on bottlenecks up and down a semi-supply chain. But at this moment in time, all roads are leading back to the hyperscalers with capital as the key constraint. And they're really exploiting their cost of capital advantage relative to neoclouds, relative to subscale players. And while the market this morning might be digesting it, it really does feel like the hyperscaler leadership can continue through year end.

24:49Yeah. Barbara, I want to get your thoughts on all of this as well, especially because that has been the commentary so far. This earnings season has been the fact that growth is not even stronger at some of these companies, whether it's SpaceX, whether it's Meta, etc. et cetera, is basically because they need more compute online more quickly. The meta news about Class C shares, for example, I think is very, very telling about how creative everyone's getting in terms of being able to access more capital. Morgan, I think that is the worry in terms of increasing capital, because if you look at meta, I mean, their peak free cash flow, I'm 45 billion in 24.

25:27And that's it's actually going negative. But people forget in these kind of companies, they generate huge cash flow. They're not going into permanent debt. They already have thriving businesses. And Meta, for instance, Vue is a big deal. It just rolled out September 8th, but that has actually changed their business model because it's not going to be relying on advertising. It will also, within a couple of years, and I think they will do it, it'll be extremely profitable and it will not be based on advertising, the transaction, percentage of transactions. So I think what you're seeing across this will continue to be He worries about return on capital, how long it's going to take.

26:01But I think there's no question the demand continues to build. And that really is the key. So the money being spent, I think, will really pay off in a big way. And, of course, we're going to hear more, I would imagine, about all of this from Jensen Wong from NVIDIA in just a moment. But while we await the start of that conversation, let's focus in on some other earnings and some other industries and sectors of the market that we are tracking as well. Lockheed Martin reporting third quarter results before the open stay just a little bit later this morning. They're going to follow numbers from three other aerospace and defense giants this week.

26:32GE Aerospace, Northrop Grumman, RTX. They all beat estimates, raised their outlooks as demand soars for critical missiles, immunitions, drones, other military technology. Plus, the commercial aerospace story continues to be a strong one, despite all of the fuel-related headwinds for the airlines. So joining us now is Sheila Kayalu. aerospace and defense and airline analyst at Jeffries. Sheila was just named a first team analyst for aerospace and defense electronics in the annual Extel All-America Research Survey. Sheila, congratulations on that. Your research is always top notch. So congrats. And it's great to have you on the show.

27:13There's a lot to talk about here with you. And actually, before I get into aerospace and defense, I want to talk to you about the airlines because we got more results after the bell last night. We're going to hear from some CEOs on Squawk Box this morning, too. And it would seem that so far the takeaway has been that demand is largely still strong, even as prices go up and fuel costs are outpacing the rise we are seeing in profitability. Your thoughts? Exactly. We saw Q3 pricing up 15 percent and we're seeing an acceleration into Q4. So the customer and the consumer remain strong in the U.S. and globally, quite frankly, despite where oil is and where the bigger prices are for the airlines.

27:51So we're seeing positive results. That's when we saw United pop yesterday. Southwest reported an accelerated asthma. We'll see what American has. Yeah, it was interesting. There was some of the data, some of the metrics we saw on Southwest results last night, though, suggest that maybe you are starting to see some cracks in consumer demand. And I just wonder whether that's a canary in the coal mine here in terms of how much airlines can push prices out. You know, I think we prefer Delta and United, given they do focus on the premium customer. With Southwest, I think you are serving a lower end of the market, and that's where you could start seeing cracks, given pricing is accelerating so much.

28:32So, you know, our preferred way to play the airline team is United and Delta, just given how much of their customer base is premium and how much they're rolling out new products. whether it's Berlin for United or continuous new Delta One terminals, and Delta, so China continues to be up the game. And that's how you could get burner high prices. All right. Barbara, I want to go to you. Our call crew is still here with us. And I want to get your thoughts on what we have seen from earnings, whether it's on the airline side or aerospace and defense so far. Well, I think what you're seeing is in the earnings, with anything that's oil price related, excuse me, is going to be under pressure.

29:09And you saw that with the airlines. The real problem is their rising costs. And this actually could be anyone. Your view is on the resolution of the Iran war. This could be could be a factor. The same thing with aerospace defense right now. Demand is strong. But again, if there's any resolution to the Iranian war, I think you can see a big difference. And you could see the peak in aerospace defense stocks. Conversely, you could see the bottom in the airline stocks. So I would just be careful and I'd be cautious there that the strength on these stocks or the weakness may be short lived. defense.

29:39All right. Sheil, let's talk a little bit about aerospace and defense. We're going to get Lockheed later this morning. We're going to get Boeing and L3 Harris and a number of others next week, whether it's on the commercial side or whether it's on the defense side. What are you watching and how does it set us up for next year? Yeah, I think on the commercial aerospace side, GE had such great results, but it's hard to prove a false negative. With oil where it is, it's really hard for the commercial aero names to work, but I like to like what everyone else So I'm still a fan of GE, although I will say GE and helmet remain relatively expensive.

30:11So my preferred way to play commercial after my favorite now would be a trans time. And then now turning to the defense market, those markets are also very strong. And for the first time in a long time, I'm bullish defense. You know, results out of B &B, I'm very strong. That's my preferred way to play it, just given they have the highest missiles exposure at about 40 % of the portfolio. Interesting. Dan, I want to get your thoughts on all of this, because I always think of you as a tech guy, but you've also become, for better or worse, something of a space analyst here, because you're covering SpaceX.

30:43Yes, I know. I realize it's an AI company. But in general, you're seeing all these technologies, all these capabilities converge. And, oh, by the way, you were one of the first bulls on Wall Street. You called it right at the time regarding Palantir, too. I think it's a convergence that we're seeing. I mean, obviously, it started with Palantir. We see what's happened with SpaceX and ultimately I think Tesla, which will be part of it as emerges. But I think you're going to see, as Sheila was talking about, from Lockheed to what we're going to see across the space ecosystem. This is a convergence.

31:13You're going to see more and more M &A. And I think it just speaks to the second, third, fourth derivatives of AI. It's not just about tech. It's going to space. It's going to ultimately industrials. And I think that's a positive in terms of what we see for the AI complex. All right. Sheila, great to have you here with us. And congrats again. Thank you for having me. All right. We're going to watch for those earnings a little bit later. In the meantime, we are going to take a commercial break here as we await Jensen Huang of NVIDIA. Stay with us. I'm Morgan Brennan. Welcome back to Morning Call.

31:43Let's get a check on U.S. stock futures because those are in the red this morning after a strong bounce yesterday. We've lost all steam this morning. We're basically sitting around session lows. S &P is down or poised to open down about 84 points. The Dow down 378 points. So Nasdaq is the big loser again this morning, poised to open down 565 points or down about almost 2 percent. Let's get a check on Nasdaq 100's biggest laggards this morning. You can see right there, it's a lot of the names we've been talking about. It's semiconductor stocks. It's neoclouds. It's some of the some of the high flying momentum names.

32:16Lamb Research is actually down almost 8 percent right now, despite much stronger than expected earnings and guidance. Strategy is down right now. BTC, I believe, is down, too, perhaps tied to that. CoreWeave, Marvell, a number of others showing big losses on the screen pre-market overseas. Markets are also under pressure. Asia closing lower. And you see some of the Chinese averages actually ending overnight in bear market territory as well. Let's take a look at the early trade in Europe, too. You can see on your screen the DAX is down more than 1 percent right now. Now, the FTSE in the U.K. is also down about seven-tenths of 1 percent.

32:52And a lot of this is also tied to what we're seeing not only in the bond market but in the energy market. So, first, let's get a check on treasuries. You see treasury yields are actually a bit lower across the curve here, maybe a little bit of a flight to safety move. U.S. 10-year treasury, 5.07 percent right now. That's the yield. Fed-sensitive two-year treasury yielding 4.76 percent. And the third year, 5.37 percent. But as I mentioned, energy prices are contributing to the broader sell-off globally that we're seeing right now amid new Mideast tensions, more tankers on fire or reports of them, the possibility of renewed escalatory strikes by the U .S.

33:31and Israel in coming days or coming weeks. We had a number of reports overnight along those lines. WTI is up 2.5 percent right now, trading just below$100 a barrel. Brent is up more than 3 percent, is trading right around$112 a barrel. But back with us is our morning call crew. Dan Ives, Kevin Rippey, and Barbara Duran. As we await a big conversation out of Berlin with NVIDIA's Jensen Huang, let's talk a little bit about what we have heard and what we have seen given the market environment. Kevin, I'm going to kick this off with you. I want to get your thoughts on Tesla and some of the other earnings we've gotten in the past, I don't know, what is it, 12 hours, 13 hours here, including some of the semi-names that are selling off despite what's been a pretty strong print for most of them.

34:14Yeah, so maybe we'll start with LAM, which I think is very telling about overall semi-sentiment. So they talk about$200 billion in wafer equipment spending next year. You know, it's very early for them to say that number, you know, at least part of the calendar goes. And when we have, you know, our surveys with investors, they think that number goes to$300 billion in 2028. So you're effectively doubling and then growing 50%. But the challenge is, the question is, then what? And by way of that, so long as that uncertainty exists, the multiples just continue to compress across semis. And when you think about where semi-cap equipment trades relative to memory, there's still a huge multiple dispersion, and the compression that you can feel in semi-cap equipment is something that just feels almost inescapable right now.

35:00So while you might be bullish on the demand outlook, the reality is the market's just not going to capitalize earnings beats in the way that it had six months ago, a year ago. Yeah, Dan, I want to get your thoughts on what we're seeing with Tesla under pressure. I mean, I can't work it out. Is more spending good or is more spending bad here if they're pulling back on CapEx right now? I mean, they did put up some interesting numbers and stats about just how aggressively they're growing on the full self-driving side and the robo-taxi side as they unveil that service in parts of Texas and elsewhere.

35:35I thought it was a huge step forward. I mean, optimist production that actually starts. You look at the autonomous roadmap in terms of cyber cabs and what we're going to see going to 27. They're transitioning from an EV player to what I view as one of the biggest AI players in the market. But then it comes down to, in my view, a 90 % chance that they ultimately merge with SpaceX. And I think that that price point has to be between$500 and$550. So I just view where the stock's trading here as just a table pounder relative to what I see, not just fundamentally, but on the SpaceX side as well. Barbara, are we seeing the relationship between equity markets and bond markets and perhaps even crude here begin to shift?

36:19When I see Treasury yields lower despite crude prices moving higher this morning, I mean, is there is there a change in dynamics afoot? I think you said it earlier that it's, I think, a flight to safety right here, because if anything, the probability of interest rate hikes, you know, would go up the longer the Iranian situation goes on. Because if you look at the correlation with how where oil prices were, when the sport started and where yields were, you know, it's definitely had an impact. And even though there's some underlying inflation. So I think that that's the correlation there. there.

36:51And I think as long as we have the Iranian uncertainty, that means interest rates and, of course, growth stocks are long duration assets. And so they are sensitive to the prospect of higher rates. I think that is still in addition to everything else. All right. Well, with that being said, let's get over to Berlin and our Arjun Karpal with a very special guest. Arjun. Good morning, Morgan. I am at NVIDIA's GTC conference here in Berlin, and I have none other Jensen Huang, the CEO of NVIDIA. Jensen, thank you so much for making the time. You've had a busy morning. We're here in Europe. You've been traveling around London, Paris, all of these different cities around Europe.

37:28You've announced around$10 billion worth of investments across the continent into around 14 startups. What are the thematics behind those investments? What's getting you excited? Well, we're trying to create, kickstart the AI economy in Europe. Of course, Europe has a tremendous amount of technology, tremendous amount of industrial know-how, incredible science and technology, and it's ready to engage and build the AI economy here. In order to build the AI economy, you need to invest in all five layers of that industry, energy, chips, infrastructure, the models, and of course, all of the AI applications.

38:09Each one of the industries, every single company here in Europe is going to become an AI company someday. I'm thinking that in five years' time, whether you're MediaMark here in Germany, Mercedes or Siemens or Merck, all of these companies are all going to HSBC, they're all going to HSBC, they're all going to become AI companies. And so we're just accelerating that journey, a journey that we started a couple of years ago, and it's really picking up. Even Europe, like many other places in the world, has several challenges, whether it's access to capital, whether it's energy prices, there's often this discussion around who is strong in AI, the US or China.

38:48And there's this view that Europe kind of gets sidelined in that discussion. Does Europe have what it takes, given some of those challenges, to compete with what we're seeing out of China, what we're seeing out of the US in terms of AI capability, companies? Absolutely. The most important thing about leadership in AI is actually the application of the technology in your industry. And so whoever has whatever region, whatever country, diffuses AI most and quickly will ultimately win. And the reason for that is because you want to lift the entire industry, every single industry with AI, not just create a new industry of a few companies.

39:27And so you want every part of your economy to be accelerated by AI. The market always loves to hear what you have to say about the state of play of the industry across the board. At the moment, there feels to be a bit of nervousness in the market, particularly around neoclouds. We've seen N-Scale looking at investors selling it to reduce its valuation, firmness pulling its IPO, concerns over the debt levels of some of these neoclouds. Is there a problem right now with the neocloud business model, or are these just teething issues? If you look at the fundamentals, the demand for the neoclouds is off the charts.

40:03Their capabilities are extraordinary. And so what is missing in the middle is the working capital to fuel that growth, to fund that growth. And because there's just so much demand across so many sectors of AI, there's a scarcity of capital. The demand of the capital is much greater than the availability of the capital. That's going to get solved. And that's going to get solved because fundamentally the most important things are the values that these guys are providing, these companies are providing. The demand for it is so strong. Just given the number of players in this space, there's dozens of companies kind of described as neoclows.

40:41Do you expect any kind of consolidation and M &A to take place in this particular sector of the industry? Ultimately, they need scale. They need regional excellence. Like, for example, here in Europe, the energy is scarce. it's scarce everywhere but you want to allocate the energy to your own companies and in the case of the UK they want to allocate their energy to n-scale in the case of France they want to allocate their energy to Mistral around the rest of Europe allocate your energy to Nebius there's a fundamental reason why you want to make sure that your natural resources are dedicated allocated to your own companies first.

41:24If the neoclouds in Europe are able to establish an infrastructure here, then you can build the AI ecosystem, the AI economy on top of them. And then the flywheel of the AI economy will start in Europe, it will terminate in Europe, you can bring investments into Europe, but you have to start with having your own infrastructure. Do you think that scale comes from some form of consolidation to grow those big blades? Right now you have so much demand. I think you have more than several companies you could start up. Of course, each one of the countries probably don't need more than a couple. But across all of Europe, you're going to need a lot more neoclouds.

42:08The working capital part of the equation is an interesting one, Jensen, because obviously earlier this year you, along with a number of financial players, announced this sort of$500 billion financing mechanism. What is the demand at the moment for that? Is that something that can be tapped as these NeoClouds look to scale? Well, that's ultimately what we need. One of the things that we're trying to do is to establish NVIDIA's compute as a financeable asset. The residual value of our compute, because it's fungible, it's so productive, it's so fungible, and it's so durable, it is now becoming an asset class.

42:44the more the more that the institutions recognize this the more that the lenders recognize this the more the capital become available to the neoclouds and so we're working to establish that nvidia compute is really a fungible productive durable financeable asset and i think that's going to be a game changer and jensen what's your take on on the current health of the frontier labs at this point. There was a lot made about Anthropics Q3 numbers, 45 % growth. A lot of people saying, well, this is a significant slowdown from what we've seen at the same time. Both OpenAI and Anthropics are aiming for these very highly valued IPOs.

43:24Just wanted to get your take on whether you're worried about any kind of slowdown at the Frontier Labs and are they going to be able to justify those valuations in the end? We're looking at two of the most consequential technology companies in history, incredible management team, incredible technical skills, incredible technical capability. They're also the two fastest growing technology companies, or any company in human history. And so we could nitpick around the corners. I don't think it's, I don't think, I think it's maybe interesting, but it doesn't change the fundamentals. We're talking about AI, which is the most consequential technology in history, two of the most consequential technology companies in history, incredibly well built, and also the fastest growing ever.

44:11And so I think that's all that matters. Jensen, I know you've been talking a lot about safety and around social and societal impact of this technology. One of the most interesting discussions has been around how do AI companies do good for society? And Anthropic came out and said, hey, we're going to commit 5 % of our shares to a new public benefit fund, something that Elon Musk backed and said we're going to give kids in America some SpaceX shares. Have you considered any kind of initiative like this at NVIDIA? We do all kinds of things for social good, and everybody has their own way of doing it.

44:45The most important thing, you talked about AI safety. The most important thing that we need to do as an industry is to create an optimistic future, but do it responsibly. This technology has the potential to do incredible good. Whatever industry you choose, whatever economy you choose, whatever country you choose, there is an extraordinarily optimistic and exciting future. But we have to build this technology responsibly. One of the most important things that we've done is created this technology called OpenShell. Anthropic is a very early adopter of it, very enthusiastic collaborator, really appreciate their collaboration.

45:25We all want to see this technology advance in the safest possible way. And we have the technology and the responsibility to do so. Yeah, I want to talk about it in a second, Jensen. But just in terms of this kind of broader discussion about how to give back, do you think this sort of direct equity method is a good path to go down? The best way for those companies to give back is to contribute in the way that they fundamentally contribute. you. Elon's best way to give back is to inspire a whole generation to build things, heavy industries, launching rockets to space. What could be more consequential and inspirational than that way of giving back?

46:08Anthropics' way of giving back, number one, is to advance this technology, invent this technology, and bring it to the world safely. The way NVIDIA gives back is all of the things that we're doing here, supporting the global economy, helping every industry thrive, new companies to be created, invest in inspirational entrepreneurship. That's our way of giving back. The best way to give back is to help the economies grow. The best way to give back is to create new economies. Jensen, your view on the safety issue really is that if a company believes that a model is dangerous, they should just not release it, right?

46:44There doesn't need to be some kind of new broad regulation etc how can the general public trust the leaders of these companies to make that right decision

46:57because they're incentivized to do so regulations take a while to come if there are concerns that exist today it is your responsibility to take response to take accountability and do something about it now instead of waiting for laws and regulations to happen, which takes time as you know. And so the reason why I trust them to do so is one, I believe in the leadership. Two, I believe that the companies are incentivized to do the right things because there's no such thing as a good product that's not safe. And so it is absolutely in their perfectly aligned incentives for their company to advance the technology as responsibly as necessary.

47:42And part of the solution you have is OpenShell, right? Is being able to monitor to these models because... To contain and monitor. Yeah, because one of the issues we've seen is these models doing things, they're not supposed to. And so how do you control that? To contain it and to monitor it. And just continuously look, here's what it's doing, here's what it's accessing. It's exactly the same way you think about a baby and a playpen. You contain the baby and you monitor it. Now, the technology of course is very sophisticated and there's active monitoring and active controls that are part of this containment system.

48:15It's as if it's like a super smart force field around AI. And then you have multiple layers of it. And so it's not as if one layer is the end of the story. Open shell is the first layer, and then there's sentry, the second layer, and then you're going to have multiple layers of defense. And so open shell is really critical. And you're confident this is going to stop some of the issues we've seen, such as these unintended hacks and accesses to websites We're confident that it would have handled the incidents we've seen. And we don't know what we don't know about the future, but the technology was built on great first principles.

48:52We also have the advantage of over a hundred companies around the world, including Anthropic and OpenAI and SpaceX and Meta and Google and Microsoft and IBM and Red Hat and CrowdStrike and Palito Networks. The world's leading operating system companies, cybersecurity companies, and Frontier Lab companies are all part of this open-shell initiative, contributing to it. And so we've got the best minds in the world working on this one concept, one issue, one initiative. And I can't imagine a more powerful coalition of bright minds around the world who want the same thing. James, we've got a few minutes left, so I just want to get your take also on another big topic, which of course is China.

49:35A lot of focus on some of the innovation coming out of that market. For Nvidia specifically, do you believe now this market is effectively closed for your chips? Well, no market is closed forever. And China wants foreign companies to invest in China, just as Germany wants foreign companies and countries to invest in Germany. And so the market has to be open and has to be welcoming. There's no reason to believe that that market is going to be closed to the best competitors in the world. And NVIDIA is surely the best in the world doing what we do. And we have a lot to offer and we're going to go compete in China and around the world.

50:16And so to the extent that that market could be open to us, we'd really appreciate it. Otherwise we're going to continue to be here and we'll keep looking for opportunities. There's been some really interesting strides made in the semiconductor industry in China in all different facets. CXMT, the memory company, is reportedly developing HBM3E now. Is there a world in which you could partner with CXMT, use their HBM3E and some of your older products to regain access to the market in a bigger way? Is that something you've considered? Of course, we're open-minded. We work with Chinese companies. Just about the whole world works with Chinese companies in the supply chain somewhere.

50:51And whether it's in power generation or cooling technology or solar technology or battery technology, China is incredible at the fundamental infrastructure, fundamental infrastructure technology. And no country collectively is better at manufacturing than China. And so we have to take their capabilities very seriously. And just in terms of the strides the Chinese semiconductor industry has made, how would you assess those given what we're seeing out of companies like Huawei? Well, we definitely accelerated because of all the regulations. we've accelerated their internal capabilities probably 10 years and made it five.

51:30And so we've definitely accelerated China's initiatives, its nationalization of, if you will, semiconductor manufacturing capabilities and all of the industrial support that has been put into that sector. And so there's no question we've accelerated that. But nonetheless, NVIDIA's American technology companies are mighty in this area. We're ready for competition from all over the place. And we can take on competition from anybody. Just as you look at your supply chain, memory, of course, is one of the key bottlenecks, as there are looked bottlenecks across the supply chain. Well, one of the most challenging bottlenecks is substrates.

52:13Yeah. Yeah, this week we announced that we're expanding our substrate capacity as large as it already is by two and a half times more in the next three years. And so we're expanding our substrate capacity as one of our most challenging limiters today. We're going to increase that by two and a half times. Ibidin, UMTC, Semco, great partners of ours. and we're also expanding our co-host packaging technology and our work there with Amcor is going to increase our capacity tremendously. And so we've, this week, announced precisable expansion of our supply chain. And just on that memory story as well, Jensen, there was a columnist in South Korea who said, well, there could be an oversupply of memory in 2029.

53:00Are you seeing any signs of that? I don't think so. So, you know, one of the things that's really great about memory is that you could always use more of it. And, of course, through architecture ideas, and NVIDIA owns the architecture of our systems, through architecture ideas, we could shift around the resources as necessary. But HBM memory will be used for years to come. And LPDDR, we're the first company in the world to put LPDDR memory, what goes into your cell phones, into the world's data centers. And it's enabled us to deliver performance that is twice as energy efficient as anything in the world today.

53:40And so we're going to continue to use abundant amounts of that as well. Thank you. Jansen, it's been a pleasure speaking to you. Thank you so much for taking the time to speak to me. What a great event. What's going on in Germany? And if I could just have a second more. This week we announced the expansion of our supply chain. We announced DGX Pod, which accelerates the build-out of the AI factories. We also announced OpenShell. I appreciate you giving me the chance to talk about AI safety. And then we announced all of our initiatives here, particularly in Germany, around physical AI, so robotics and cars and telecommunications.

54:17Great, Jensen. Thank you for all of your insights. It's been a pleasure to speak to you. You've had a crazy schedule here. That was Jensen Huang, the CEO of NVIDIA. Real talent is defined by what people can do, not where they learn to do it. So by stopping at the education section of a resume, you might throw away the perfect hire. Skills First Hiring helps you see talent others miss, like more than 70 million stars, skilled through alternative routes. Let their story unfold and gain a competitive advantage, because hiring managers who start with skills are 60 % more likely to find a successful hire.

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