Latest / Bloomberg Intelligence / Union Pacific Nears Norfolk Deal to Create $200 Billion Railroad

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Union Pacific Nears Norfolk Deal to Create $200 Billion Railroad · Bloomberg Intelligence

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  Speaker 2: All right, I've been following the railroad stocks, folks. That's
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  Speaker 2: where I started my career, covering the railroad stocks. Here's
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  Speaker 2: a headline I never thought i'd see, and that's like
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  Speaker 2: nineteen eighty six Union Pacific Northern Southern.
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  Speaker 3: In advanced talks. I never thought i'd see that.
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  Speaker 2: Lee Klascow, Senior transport analyst for Bloomberg Intelligence.
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  Speaker 3: Lee putting a.
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  Speaker 2: West western railroad Union Pacific together with a eastern railroad
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  Speaker 2: at Norfolk Southern, creating a east to west true railroad.
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  Speaker 3: Can that happen? Will the regulators allow that to happen?
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  Speaker 4: I mean it's possible, given where the surface transport to
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  Speaker 4: rules are now as it relates to large acquisitions, you know,
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  Speaker 4: we give it a relatively low probability, maybe twenty five
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  Speaker 4: thirty five percent chance of happening. The STV is actually
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  Speaker 4: in August reviewing some of its rules to streamline some
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  Speaker 4: of the processes that it deals with.
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  Speaker 5: But you know, it's not impossible.
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  Speaker 4: But again, you know, we think that the probability is
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  Speaker 4: below fifty percent. If it were to happen, it would
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  Speaker 4: create the first transcon railroad, and that.
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  Speaker 5: Could be good.
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  Speaker 4: It could be good because a railcar would be touched
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  Speaker 4: less because it would wouldn't have to maybe be interchanged
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  Speaker 4: with other railroads, and that does you know, the more
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  Speaker 4: time a railcar is touched, the more times something could
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  Speaker 4: go wrong, and so that would would would probably reduce
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  Speaker 4: I would have to say it probably could reduce some accidents.
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  Speaker 4: It could also reduce car for the railroads in general.
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  Speaker 5: So it could be a good thing.
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  Speaker 4: You know, shippers might have an issue with it because
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  Speaker 4: they might be afraid, you know, even though that Norfolk,
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  Speaker 4: Southern Union, Pacific don't necessarily compete, you know, against each
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  Speaker 4: other directly, you know, they might be concerned that, you know,
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  Speaker 4: losing one of the large Class one rails would result
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  Speaker 4: in less competition. And the railroads for the STB hurdle
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  Speaker 4: have to prove that this deal is in the public interest.
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  Speaker 4: So you know, you're going to have a lot of
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  Speaker 4: constituency and stakeholders voice their opinions both for the deal
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  Speaker 4: and against the deal. And again that's all assuming that
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  Speaker 4: these two parties can come to an agreement. You know,
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  Speaker 4: we put out a note last week where we thought,
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  Speaker 4: you know, the enterprise value for that transaction could be
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  Speaker 4: in the high eighty eighty billion, So we'll see, you know,
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  Speaker 4: what kind of deal the two can hammer out.
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  Speaker 6: All right, But you're kind of going along the track
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  Speaker 6: that I was. I was thinking of LA track.
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  Speaker 3: I get it.
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  Speaker 5: I got.
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  Speaker 3: Little railroad humor, railroad humor.
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  Speaker 6: Can you go more into the regulations because you started
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  Speaker 6: talking about that, But what are some more of those
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  Speaker 6: sticking points that could cause this maybe not to go through?
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  Speaker 4: Well, you know, we've seen a couple large mergers. The
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  Speaker 4: last large one was Canadian Pacific and Kansas City Southern.
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  Speaker 4: Kansas City Southern was the smallest Class one railroad and
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  Speaker 4: they were exempt from these new rules that went to
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  Speaker 4: an effect in two thousand and one. And the rules
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  Speaker 4: kind of came about because Burlington Northern and Canadian National
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  Speaker 4: were looking to merge, and so even though they had
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  Speaker 4: a lower bar, it took quite some time for the
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  Speaker 4: deal to close.
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  Speaker 5: I think it was about eighteen months.
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  Speaker 4: You know, we suspect that under the current rules, a
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  Speaker 4: deal between Union Pacific and Norfolk Southern could take about
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  Speaker 4: two years to get STP approval, So it's going to
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  Speaker 4: be a long process.
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  Speaker 5: So even if the.
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  Speaker 4: Two come out tomorrow and say hey, we're in a
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  Speaker 4: deal and the shareholders approve it, you know, this could
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  Speaker 4: be two years until we see an actual trans con railroad.
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  Speaker 2: So Lee, I'm going to go get my floppy disc
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  Speaker 2: out circle nineteen eighty eight. I got my Union Pacific
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  Speaker 2: and my Norfolk Southern earnings models there. I'm going to
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  Speaker 2: put them together like they're merging. What cost do I
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  Speaker 2: take out? What are the synergies do you think? What's
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  Speaker 2: the reason for doing this deal? So it's pretty interesting.
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  Speaker 4: So, you know, Norfolk Southern went through its own cost
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  Speaker 4: cutting process as it started to embrace precision scheduling railroading.
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  Speaker 4: For those that aren't familiar with it, it's pretty much
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  Speaker 4: six sigma for the rail industry. So it's just about
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  Speaker 4: sweating assets and they laid off people and so you know,
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  Speaker 4: it's not like there's a lot of fat there.
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  Speaker 5: But you know, what I suspect is that.
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  Speaker 4: They maybe you know, they'll maybe Lean laying off some
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  Speaker 4: people in corporate, you know, because you don't need two CEOs,
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  Speaker 4: you don't need two CFOs, you don't need necessarily as
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  Speaker 4: many salespeople and accountants. So there's the there's that aspect
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  Speaker 4: of it. And also, you know, if they are able
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  Speaker 4: to provide a lower cost service, they might be able
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  Speaker 4: to even though they can raise rates, provided at a
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  Speaker 4: lower costs to shippers. So I think that's going to
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  Speaker 4: be the big What can they do for shippers is
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  Speaker 4: can they lower the cost curve because of the fact
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  Speaker 4: that you know, again the railcar is being touched less,
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  Speaker 4: and are they able to pass that on to shippers.
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  Speaker 4: I think if they can make a case for that,
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  Speaker 4: they'll have an easier time of getting getting a deal done.
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  Speaker 6: All right, Lean the last like twenty seconds. Second quarter
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  Speaker 6: results anything stand out.
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  Speaker 4: Pacifics did really well. Their network is operating well. You know,
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  Speaker 4: they had some issues during the pandemic that seems well
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  Speaker 4: behind it. You know, their goal is to have the
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  Speaker 4: lowest operating ratio, which is an inverse to an EBIT margin,
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  Speaker 4: to lower the better, and it seems like they're going.
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  Speaker 5: To deliver on that.
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  Speaker 3: Thanks so much for joining us, really appreciate it.
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  Speaker 2: This could be a really cool time in the railroad
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  Speaker 2: industry if you can get a East West railroad for
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  Speaker 2: the first time in the United States. Lead classical senior
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  Speaker 2: transport antls for Bloomberg Intelligence again the news for US
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  Speaker 2: railroad geeks, Union, Pacific, Norfolk Southern in advanced talks.
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  Speaker 3: How did they?
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  Speaker 2: I mean, if you're in advanced talks, you must have
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  Speaker 2: some layers somewhere telling you, yeah, we can pass this thing.
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  Speaker 5: We can get this past the regulators.
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  Speaker 2: I don't know that, but two years oh yeah, oh boy,
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  Speaker 2: this is These are railroad people. They're not like the
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  Speaker 2: fastest out there.
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  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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• 6:44
  Speaker 6: You're listening to Bloomberg Intelligence. I'm Lise Matteo alongside Paul Sweeney,
• 6:48
  Speaker 6: and let's get to Tesla right. It posted one of
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  Speaker 6: its worst quarters in years, revenue falling twelve percent, and
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  Speaker 6: there could be even more tough times ahead. So let's
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  Speaker 6: find out more. Dig into this with Steve Manny's Bloomberg
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  Speaker 6: Intelligence Global Autos and Industrials Research Matter.
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  Speaker 3: See why don't you start?
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  Speaker 6: I we're telling us what the biggest portion of that
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  Speaker 6: revenue drop? Where did it come from?
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  Speaker 7: Well, the revenue drop drop was mainly from you know,
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  Speaker 7: weaker sales in Europe, you know, still the model y
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  Speaker 7: ramping up. I think on the call with I think
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  Speaker 7: the reason why the stock is down the most is
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  Speaker 7: really the outlook. You know, nothing, nothing, you know, earth
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  Speaker 7: shattering from the outlook. Uh, you know, and they also
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  Speaker 7: kind of be kind of they were kind of cautious
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  Speaker 7: about the rest of the year and maybe into the
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  Speaker 7: twenty twenty.
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  Speaker 2: Six Steve, what do we know about the the position
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  Speaker 2: of the.
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  Speaker 3: Tesla brand right now?
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  Speaker 2: And is it something that can be to the extent
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  Speaker 2: it's been harmed, say in Europe where they have seen
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  Speaker 2: some weakness, can it be repaired.
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  Speaker 3: What's the feeling.
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  Speaker 7: Uh, it's it's tough. It's gonna take time. I think
• 7:52
  Speaker 7: it's It would be really helpful if Elon must uh
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  Speaker 7: kind of walk, uh, stay away from the politics for
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  Speaker 7: the moments and really focus on the business and marketing
• 8:04
  Speaker 7: its vehicles. You know, it is a nice vehicle model.
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  Speaker 7: Why the man has picked back up after the changeover
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  Speaker 7: earlier this year. The volume is not there yet. But
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  Speaker 7: the issue here is, you know, they've just launched a
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  Speaker 7: new vehicle, but the seventy five hundred tax credit in
• 8:24
  Speaker 7: the US is going away, So the trajectory, the growth
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  Speaker 7: trajectory for that new vehicle and gross margin has been
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  Speaker 7: you know, has been derailed. And look, we're actually looking
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  Speaker 7: for twenty twenty five deliveries to be you know, about
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  Speaker 7: five percent lower than what consensus is saying at one
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  Speaker 7: point five to seven sou and we're probably going to
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  Speaker 7: see you know, the revision on consensus deliveries in twenty
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  Speaker 7: twenty six by another five percent. So it's going to
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  Speaker 7: be some tough time for the automaker. I mean, the
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  Speaker 7: one one couple of bright spot that could offset it's
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  Speaker 7: gonna be you know, the extended version of the Model
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  Speaker 7: Y in China, you know, no longer vehicles a lot
• 9:11
  Speaker 7: more space in the back seat does help sales over there.
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  Speaker 7: And there's you know, there's a new cheaper vehicle that
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  Speaker 7: they're supposed to launch in the second half, so hopefully
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  Speaker 7: that could offset. But you know, execution is key. Execution
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  Speaker 7: is key.
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  Speaker 6: Yeah, people were waiting to hear more about that affordable vehicle.
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  Speaker 6: So speaking of which is Tesla? Is it an auto business?
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  Speaker 6: Is it an AI robotics company? Is it a tech company?
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  Speaker 8: Like?
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  Speaker 6: What is Tesla? And could we possibly see it maybe
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  Speaker 6: even break up like some of these bigger companies have.
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  Speaker 7: Oh, I think as a combination. They I don't think
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  Speaker 7: they're going to break that up. You know, you know,
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  Speaker 7: Elon Musk and Tesla is very focused on physical AI,
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  Speaker 7: you know, very different than the ll ms that you
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  Speaker 7: hear from Google. You know, they're actually you know, building robots,
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  Speaker 7: robots on wheels and humanoid robots with optimists. So it's
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  Speaker 7: it's quite different.
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  Speaker 1: Uh.
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  Speaker 7: You know, for them to actually build out physical AI,
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  Speaker 7: they knew they do need the hardware they need to
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  Speaker 7: continue to build cars, right, and cars is a critical
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  Speaker 7: component of their success, especially even in early days of autonomy.
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  Speaker 7: You know, there's still it's still a cash generator for them,
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  Speaker 7: you know, even though you know, free cash flow has dropped,
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  Speaker 7: but it's still an important business for them to generate
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  Speaker 7: cash invest in in physical AI. So I don't see
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  Speaker 7: that breaking apart. It's you know, it's a critical component
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  Speaker 7: of their entire business.
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  Speaker 2: I don't know, Steve, I'm putting on my banker hat
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  Speaker 2: I said, I spin out that car company.
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  Speaker 5: Who cares.
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  Speaker 2: Let's focus on all the other stuff that he seems
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  Speaker 2: to be all fired up about.
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  Speaker 3: But Steve talked to us about tariffs.
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  Speaker 5: Here.
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  Speaker 2: Looks like one of the key aspects of the Japan deal,
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  Speaker 2: as we know, is maybe the autos coming in from
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  Speaker 2: Japan will have only a fifteen percent tariff on that.
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  Speaker 2: What did the US automakers think about that?
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  Speaker 7: Well, I think it's good news. You can see, you know, GM,
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  Speaker 7: when they announced their earnings it was down I think
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  Speaker 7: eight nine percent, and then it kind of recover a
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  Speaker 7: lot of that yesterday on the back of the announcement
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  Speaker 7: that US and Japan had come to terms on a
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  Speaker 7: trade deal, and what it means is fifteen percent at
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  Speaker 7: least fifteen percent tariff. And look, GM has a lot
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  Speaker 7: of you know, some of the most popular vehicles coming
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  Speaker 7: from Korea, and the hopes is that, you know, Korea
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  Speaker 7: and US can can make the same deal. But look,
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  Speaker 7: it's it's far from over.
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  Speaker 9: Okay.
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  Speaker 7: What Tesla talked about yesterday and how the tariffs are
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  Speaker 7: going to impact their sales is not the impact not
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  Speaker 7: just on them, it's for the whole US auto industry.
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  Speaker 7: Don't forget right, next year the USMS, the US, Mexico
• 12:01
  Speaker 7: and Canada trade free trade Agreement comes up for renegotiation,
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  Speaker 7: UH in twenty twenty six, and uh, you know, the
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  Speaker 7: automakers here depend on that trade agreement significantly to to
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  Speaker 7: to to lower costs. So I wouldn't be surprised if
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  Speaker 7: Trump comes in and wants to kind of tear that
• 12:22
  Speaker 7: apart and UH renegratation, you renegotiate the whole thing.
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  Speaker 5: UH.
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  Speaker 9: That that that's there's.
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  Speaker 7: A lot uncertainty around that, and we don't have a
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  Speaker 7: lot of visibility. So so the whole tariff story is
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  Speaker 7: not over yet.
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  Speaker 6: So Stephen must go so voice some concerns on the
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  Speaker 6: call about the size of his stake in the company,
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  Speaker 6: suggesting it should be larger. I mean, how did investors
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  Speaker 6: take that statement?
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  Speaker 7: Well, you know, there's been a lot of back and
• 12:49
  Speaker 7: forth between uh Tesla and the courts on you know,
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  Speaker 7: Elon must pay package. Essentially, he's he's not getting paid,
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  Speaker 7: you know, for what he's doing for the company, you know,
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  Speaker 7: as much as he deserves. So I think there's a
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  Speaker 7: I mean, there's a point, there's a strong argument for
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  Speaker 7: him getting paid.
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  Speaker 9: But we'll see.
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  Speaker 7: There's a shareholder meeting coming up and I think I
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  Speaker 7: think the shareholders will revote on this issue, and uh,
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  Speaker 7: you know, hopefully he gets he gets paid for his
• 13:25
  Speaker 7: contribution for the company.
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  Speaker 3: All right, Steve, thanks so much. Appreciate that.
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  Speaker 2: Steve Man Global Autos Industrials Research Channels for Bloomberg Intelligence
• 13:33
  Speaker 2: joining us from Princeton.
• 13:36
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 1: weekdays at ten am Eastern on Applecarplay and Android Auto
• 13:44
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• 13:47
  Speaker 1: get your podcasts, or watch us live on YouTube.
• 13:50
  Speaker 2: All right, I'm looking at some airline earnings here today
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  Speaker 2: and stocks are not reacting well. I'm looking at America
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  Speaker 2: Airlines that stock is trading down, love which is Southwest
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  Speaker 2: that is also trading down. There definitely some concerns out
• 14:03
  Speaker 2: there about the consumer and flights and demand and all
• 14:05
  Speaker 2: that kind of stuff on the airline front. See Philip
• 14:08
  Speaker 2: joins his deputy team leader for Global Aviation sid What
• 14:12
  Speaker 2: are you seeing from American and south West?
• 14:14
  Speaker 3: Is their team out there?
• 14:15
  Speaker 10: The team seems to be that there isn't as much
• 14:18
  Speaker 10: bullishness about the recovery that United Airlines and Delta air
• 14:21
  Speaker 10: Lines pointed out last week, So they're sort of more
• 14:25
  Speaker 10: cautious about the outlook, and they're talking about how they're
• 14:29
  Speaker 10: still like they're still having to discount, they're still having
• 14:31
  Speaker 10: to sort of offer incentives, which is crazy in the
• 14:35
  Speaker 10: sort of the busy summer season. Summers typically when airlines
• 14:38
  Speaker 10: tend to make most of their money, they're very rarely,
• 14:40
  Speaker 10: if ever discounts on travel, and so it does so
• 14:44
  Speaker 10: seem to be pointing towards a sort of consumer recovery
• 14:49
  Speaker 10: still being in the holding pattern rather than sort of
• 14:51
  Speaker 10: out there and everyone sort of back to spending as much.
• 14:54
  Speaker 6: Can you talk about the difference with American being more
• 14:57
  Speaker 6: exposed to the domestic.
• 14:58
  Speaker 10: Market, So American typically has a lot of flights in
• 15:02
  Speaker 10: the US, I mean, they have much larger presence in
• 15:04
  Speaker 10: the US versus Delta and United, which have more international offerings.
• 15:08
  Speaker 10: And also, I mean we heard from American CEO saying
• 15:10
  Speaker 10: that business travel isn't yet backs as much as they
• 15:14
  Speaker 10: expected it to be. And that's in contrast to what
• 15:17
  Speaker 10: Ed Bastian of Delta talked about last week where he
• 15:20
  Speaker 10: said business travel is beginning to take off again. So
• 15:23
  Speaker 10: we're still we're seen contrasting images from the sort of
• 15:26
  Speaker 10: American and Southwest. I mean, Southwest is a leisure carrier,
• 15:29
  Speaker 10: and they're sort of in the midst of adding more fees.
• 15:32
  Speaker 10: They're adding more in terms of offering basic economy, they're
• 15:36
  Speaker 10: offering check they're starting discharge for check baggage, They've started
• 15:40
  Speaker 10: to sell seats, and so they're in a bit of
• 15:42
  Speaker 10: a different situation. But American Airlines, I mean, their bread
• 15:45
  Speaker 10: and butter is flying people around the Americas, and that
• 15:49
  Speaker 10: is sort of still a big question mark as to
• 15:51
  Speaker 10: where the recovery is at the moment and whether it'll
• 15:54
  Speaker 10: hold up, especially the green shoots that they've been talking about.
• 15:59
  Speaker 2: Southwest Airlines, doctor uh seeing some red here at down
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  Speaker 2: eleven percent. Here symbol is luv Love for love Field,
• 16:07
  Speaker 2: which was their main airport when they started Southwest they
• 16:11
  Speaker 2: called out a billion dollars from terror fallout.
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  Speaker 3: Where did that number come from? What's that represented?
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  Speaker 10: So they offered a one point seven billion e bit
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  Speaker 10: dug it at the start of the year. That's what
• 16:22
  Speaker 10: they expected to make in twenty twenty five. And now
• 16:25
  Speaker 10: they've sort of they reinstated a estimate for the year.
• 16:29
  Speaker 10: They expect between six hundred and eight hundred million in
• 16:31
  Speaker 10: EBIT and they're saying that the decline in that estimate
• 16:35
  Speaker 10: that they had from the start of the year to now,
• 16:37
  Speaker 10: that's the impact of the macro conditions.
• 16:40
  Speaker 3: And so because I.
• 16:41
  Speaker 2: Can I'm trying to think terraffs, I guess terrafune repair
• 16:44
  Speaker 2: parts or something like that, or is it just the
• 16:47
  Speaker 2: uncertainly created by teriffs they're describing that.
• 16:49
  Speaker 10: Exactly that they're talking about the macro environment and buying that.
• 16:53
  Speaker 9: Do you think, uh, they.
• 16:54
  Speaker 10: Are to something. I mean, there has been there has
• 16:56
  Speaker 10: been a slump in travel. I mean the immediately after
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  Speaker 10: the sort of the tariffs who announced and the whole
• 17:03
  Speaker 10: shade wars and everything else, people did started start pulling
• 17:06
  Speaker 10: back on spending. People stopped buying holidays because they sort
• 17:10
  Speaker 10: of are more concerned about their economic certainty. And that
• 17:13
  Speaker 10: seems to be the STrenD that continuing at the moment,
• 17:15
  Speaker 10: where people are still not quite sure if they're going
• 17:18
  Speaker 10: to have the money that they need to spend on holidays.
• 17:21
  Speaker 10: And that's really where Southwest Allianes is sort of seeing
• 17:24
  Speaker 10: a big hole in its finances because they need people
• 17:27
  Speaker 10: to go on holiday in order to be able to
• 17:29
  Speaker 10: actually make money.
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  Speaker 3: Yeah, no kidding.
• 17:32
  Speaker 6: So did they see I'm kind of going through the story.
• 17:34
  Speaker 6: I didn't see anything about them gaining passengers from all
• 17:38
  Speaker 6: those air traffic control issues over with United stub over
• 17:41
  Speaker 6: at Newark. Was there anything that they talked about.
• 17:44
  Speaker 9: They didn't talk about Newark.
• 17:45
  Speaker 10: And I mean, obviously United Airlines had a big impact
• 17:48
  Speaker 10: from the Newark fallout, but typically given the fact that
• 17:52
  Speaker 10: Newark's a big international hub for United Airlines and Southwest
• 17:56
  Speaker 10: Allianes typically flies within the US and within the Americas,
• 18:00
  Speaker 10: that business might have gone on to other carriers who
• 18:03
  Speaker 10: operate from Newark as well. New York Airports.
• 18:07
  Speaker 2: Yeah, I've been finding out of Newark my entire life.
• 18:09
  Speaker 2: And I'll tell you what. It was a dumblem.
• 18:12
  Speaker 3: But Terminal A that's nice. That renovation is awesome.
• 18:15
  Speaker 2: I mean, and if they can do to the other
• 18:16
  Speaker 2: terminals what they did to Terminal A, then we're then
• 18:18
  Speaker 2: we got something there. So I'll stick up for Newark
• 18:21
  Speaker 2: Airport at EWR anytime. More or less, it's been generally okay,
• 18:25
  Speaker 2: although they tend to when you land. You tended to
• 18:27
  Speaker 2: sit on the tarmac waiting for a gate. That really
• 18:30
  Speaker 2: bothers me now and I let everybody know about it,
• 18:33
  Speaker 2: all right, Sid, thanks so much for joining U, said Philip,
• 18:35
  Speaker 2: deputy team leader for a global abitation here at Bloomberg News.
• 18:39
  Speaker 2: Joining us live here in our Bloomberg Interact Approper Studio.
• 18:43
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 18:47
  Speaker 1: weekdays at ten am Eastern on Apple Coarcklay and Android
• 18:50
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• 18:53
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• 18:57
  Speaker 2: Least Teo Paul Sweeney live here in our Bloomberg Active
• 19:00
  Speaker 2: Brokeer Studio. Stream live on YouTube as well. Alphabet. I
• 19:04
  Speaker 2: think that's Google. I can't remember. They report us some
• 19:07
  Speaker 2: numbers last night after close. I thought they were really good.
• 19:09
  Speaker 2: Stocks up a couple of percent. Some people are bummed
• 19:11
  Speaker 2: because they took up their CAPEX number a lot. I
• 19:14
  Speaker 2: view that as a positive. I don't know, because I
• 19:16
  Speaker 2: think they're spending money to make money. It's one of
• 19:18
  Speaker 2: those things, Mandy saying. Joints is here. He covers all
• 19:20
  Speaker 2: the technology stuff for Bloomberg Intelligence. Mandy hope should take
• 19:24
  Speaker 2: away from the Google results.
• 19:26
  Speaker 8: I mean the fact that they are able to grow
• 19:29
  Speaker 8: their search business double digit at that kind of run
• 19:33
  Speaker 8: rate two hundred ten billion dollar plus. Like, think of
• 19:37
  Speaker 8: how many incremental dollars they added just by virtue of
• 19:41
  Speaker 8: that eleven percent growth in the two hundred ten billion
• 19:45
  Speaker 8: dollar business. And that is where you know, the real
• 19:50
  Speaker 8: strength lies with a company like alphabet They are overlaying
• 19:53
  Speaker 8: Gemini across their family apps. AI overviews is actually driving
• 20:00
  Speaker 8: ten percent more queries and aioverviews is now used by
• 20:05
  Speaker 8: two billion monthly active users. So Google Search has five
• 20:08
  Speaker 8: billion monthly active users. Imagine aioverviews being used by two
• 20:13
  Speaker 8: billion monthly active users.
• 20:15
  Speaker 9: So they got the UI part right.
• 20:18
  Speaker 8: Gemini as a standalone app has got four hundred and
• 20:21
  Speaker 8: fifty million monthly active users. Imagine if everyone started paying
• 20:25
  Speaker 8: a twenty dollars subscription like chatchipt, this could become one
• 20:28
  Speaker 8: hundred billion dollar business. In addition to search and then
• 20:33
  Speaker 8: YouTube I'm not even talking about you know.
• 20:37
  Speaker 9: All the strengthen YouTube and way more. So this is
• 20:39
  Speaker 9: a powerhouse.
• 20:40
  Speaker 8: When it comes to four hundred billion dollar run rate,
• 20:43
  Speaker 8: they will be at the end of the year.
• 20:45
  Speaker 6: So can you explain something to me, because when the
• 20:47
  Speaker 6: shares dropped because they said capex was a little bit more,
• 20:50
  Speaker 6: well ten billion dollars more than expected a little bit,
• 20:53
  Speaker 6: how is that different for an alphabet versus if metaphor
• 20:58
  Speaker 6: to say that?
• 20:58
  Speaker 9: So that's that's great.
• 21:00
  Speaker 8: So look, let's frame the capex eighty five billion dollars
• 21:04
  Speaker 8: at potentially a four hundred billion dollar revenue run rate
• 21:07
  Speaker 8: by the end of the year. That's like a twenty
• 21:09
  Speaker 8: five percent CAPEX intensity. Meta on the other hand, is
• 21:13
  Speaker 8: already at a forty percent CAPEX intensity because their CAPEX
• 21:17
  Speaker 8: will be seventy billion at a hundred of.
• 21:19
  Speaker 9: Close to two hundred billion.
• 21:20
  Speaker 8: So that just goes to show Alphabet is still far
• 21:24
  Speaker 8: lower than their peer group when it comes to the
• 21:26
  Speaker 8: capex intensity. I mean, that's just the scale of the
• 21:30
  Speaker 8: business that they are operating. And look, I do think
• 21:33
  Speaker 8: the ROI on their capex is higher because Gemini's cost
• 21:38
  Speaker 8: is much lower than all the other large ANGLID models,
• 21:41
  Speaker 8: including Microsoft, including Meta. They do inferencing at a lower cost,
• 21:47
  Speaker 8: and that's the advantage of having your own chip, having
• 21:50
  Speaker 8: your own large ANGLID model that Microsoft or Meta don't
• 21:53
  Speaker 8: have because they rely on in video chips, whereas Google
• 21:57
  Speaker 8: does most of their inferencing from the TPU chip. So
• 22:01
  Speaker 8: I think that just vertical integration they have Alphabet has
• 22:05
  Speaker 8: gives them such a big cost advantage when it comes
• 22:07
  Speaker 8: to running the AI infrastructure.
• 22:10
  Speaker 2: Where's the company on the various regulatory issues outstanding? What
• 22:14
  Speaker 2: are the one or two or three ones that we've
• 22:15
  Speaker 2: really got to focus on in what's the market telling us?
• 22:18
  Speaker 9: So that's the biggest risk with Alphabet.
• 22:21
  Speaker 8: That has been the biggest drag on their multiple and
• 22:23
  Speaker 8: it remains because we have a catalyst next month where
• 22:27
  Speaker 8: Judge Meta is going to make a decision on the
• 22:30
  Speaker 8: remedies and you know, especially that Chrome split, that's still
• 22:35
  Speaker 8: an overhang. Now the base case is there won't be
• 22:38
  Speaker 8: any Chrome divestiture, but we still need to learn about
• 22:42
  Speaker 8: what are the remedies that may come about in terms
• 22:44
  Speaker 8: of you know, proposed by the judge, And that is
• 22:47
  Speaker 8: where if they're asked to you know, share search data
• 22:50
  Speaker 8: or some other type of remedy, that's going to hurt
• 22:53
  Speaker 8: their position.
• 22:55
  Speaker 9: I think that is the big overweight.
• 22:57
  Speaker 3: This one could be this one.
• 22:59
  Speaker 2: If you have a firm view on that, you buy
• 23:02
  Speaker 2: the stock here and there there's a ton in this thing.
• 23:04
  Speaker 2: Given when I just saw last night on the Earnings,
• 23:06
  Speaker 2: Are people doing that? Are people making bets here?
• 23:08
  Speaker 8: Think?
• 23:09
  Speaker 3: I bit you they have to be.
• 23:10
  Speaker 9: I mean, the narrative is still no net so negative.
• 23:14
  Speaker 8: Everyone is fixated on oh Chat, ChiPT my Verse, Bobby
• 23:18
  Speaker 8: Action Rod on billions.
• 23:20
  Speaker 3: Would somehow figure out where this judge is going to rule,
• 23:23
  Speaker 3: make a bet one way or the other. You know,
• 23:24
  Speaker 3: there's the Bobby Action Rods of the world out.
• 23:26
  Speaker 9: I agree.
• 23:27
  Speaker 8: I think if you can figure out decisively what the
• 23:30
  Speaker 8: judge's verdict is going to be the multiple wise, you
• 23:33
  Speaker 8: could see easily a twenty five to thirty percent multiple expansion. Well,
• 23:38
  Speaker 8: and numbers will go up for sure after print last night,
• 23:41
  Speaker 8: but multiple expansion is like twenty five to thirty percent
• 23:44
  Speaker 8: just on and when is that ruling that's coming up
• 23:47
  Speaker 8: in August September time frame.
• 23:49
  Speaker 6: Yeah, to keep up with these things, I do it.
• 23:52
  Speaker 5: That's what.
• 23:54
  Speaker 2: Maggieach got like a huge team, global team behind him.
• 23:57
  Speaker 2: I mean, all he does is come on radio TV
• 23:59
  Speaker 2: and they work. He's got everything.
• 24:01
  Speaker 9: He's got everything.
• 24:02
  Speaker 6: So you mentioned YouTube before, Google Video site. How is
• 24:06
  Speaker 6: its advertising still going? It's still going strong.
• 24:09
  Speaker 8: So look, YouTube subscriptions is what it's really doing well
• 24:13
  Speaker 8: right now. So YouTube subscription growth is north of twenty percent. Imagine,
• 24:18
  Speaker 8: you know, Netflix growing sixteen seventeen percent, YouTube subscriptions actually
• 24:23
  Speaker 8: surpassing Netflix's growth. And then you layer ADS on top
• 24:26
  Speaker 8: of that, which grew at a very healthy thirteen percent.
• 24:29
  Speaker 8: So ads is a forty billion dollar business. Subscriptions is
• 24:33
  Speaker 8: now close to you know, twenty billion dollars, and that
• 24:37
  Speaker 8: is where you're seeing, you know, combined cloud plus YouTube
• 24:42
  Speaker 8: arr is.
• 24:43
  Speaker 9: Close to one hundred and fifteen billion.
• 24:45
  Speaker 8: So imagine when just these two segments growing at north
• 24:49
  Speaker 8: of twenty percent. I mean, it's it's just a phenomenal
• 24:52
  Speaker 8: business these to both cloud and YouTube, and on a
• 24:55
  Speaker 8: standalone basis, there is so much runway for growing these
• 24:59
  Speaker 8: two segments.
• 25:00
  Speaker 2: And the one thing I will like, one of the
• 25:02
  Speaker 2: initial use cases that made sense to me was advertising
• 25:06
  Speaker 2: for AI. Use case AI just making you could use
• 25:09
  Speaker 2: AI to really make an ad that much more targetable
• 25:13
  Speaker 2: and therefore it's much more valuable to the advertiser. And
• 25:17
  Speaker 2: that's what we're seeing from Meta, from Google, from you know, Amazon,
• 25:21
  Speaker 2: anybody who's selling digital advertising.
• 25:24
  Speaker 3: We're seeing in the numbers.
• 25:25
  Speaker 9: Yeah, and at pricing.
• 25:26
  Speaker 8: I mean again, it came out at eight percent growth,
• 25:29
  Speaker 8: high single digit growth on at pricing, especially when everyone
• 25:33
  Speaker 8: was concerned about Chinese advertisers pulling back in the wake
• 25:36
  Speaker 8: of tariffs. Eight percent at pricing growth is phenomenal And
• 25:39
  Speaker 8: that just goes to show these companies know how to
• 25:42
  Speaker 8: target the ads the right way, and AI is augmenting that.
• 25:45
  Speaker 6: And I always forget that Weai Moo is a part
• 25:49
  Speaker 6: of al that too. They've got their hand in everything.
• 25:51
  Speaker 6: How have vaporen new because I know they're talking about
• 25:53
  Speaker 6: different partnerships with different ride sharing apps.
• 25:55
  Speaker 8: Yeah, so look, everyone talked about Capex increase. To me,
• 26:00
  Speaker 8: the kapex dollars don't just flow to cloud, but also
• 26:03
  Speaker 8: they help Weimo expand because you have to remember with
• 26:07
  Speaker 8: alphabet everything is powered by that shared infrastructure. That is
• 26:12
  Speaker 8: what's powering search, that's what's powering cloud, YouTube and now Weimo.
• 26:17
  Speaker 8: And so with Weveimo, they obviously need more fleet. They
• 26:20
  Speaker 8: have a fleet of fifteen hundred right now, so they
• 26:23
  Speaker 8: want to expand to more cities. But the more Capex
• 26:27
  Speaker 8: you spend right now, it's a land rep and they
• 26:29
  Speaker 8: will they have the best technology when it comes to robotaxis,
• 26:32
  Speaker 8: so CAPEX makes a lot of sense.
• 26:34
  Speaker 2: All right, men, Deep, thank you so much for joinings.
• 26:36
  Speaker 2: Appreciate that as always, Mandeep saying he's a senior tech
• 26:39
  Speaker 2: industry anal from Bloomberg Intelligence joining us here in our
• 26:41
  Speaker 2: Bloomberg Interactive Brokers studio. People just got a team behind him.
• 26:46
  Speaker 2: I mean, we have tech analysts all over the world
• 26:49
  Speaker 2: covering this thing because it is a global industry. So
• 26:51
  Speaker 2: that's Mendeb's just a pretty face we put up here.
• 26:53
  Speaker 1: This is the Bloomberg Intelligence podcast, available on Apple, Spotify,
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