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Nvidia Invests $2 Billion in Nebius for New Data Center Deal · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the
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  Speaker 2: All right, I listen on the Bloomberg Mobile app.
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  Speaker 3: Good right, I have the Black app, so I'm always
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  Speaker 3: listening to Bloomberg Radio on that. When you do, you'll
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  Speaker 3: hear stories about Nvidia, undoubtedly every single day, as it's
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  Speaker 3: the largest company in the world. It's investing, to today's story,
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  Speaker 3: two billion dollars in Nebious. It's a new data center deal.
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  Speaker 3: Nebbius obviously is one of those neo cloud companies. And
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  Speaker 3: we've got Man Deep sing here from Bloomberg Intelligence. He
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  Speaker 3: runs our technology coverage for BI to talk a little
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  Speaker 3: bit about this in Nvidia deal, as well as what's
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  Speaker 3: going on with Uber and Zooks, though I guess that's
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  Speaker 3: far less important. And indeed, what do you make of
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  Speaker 3: the I mean, it seems relatively small, right compared to
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  Speaker 3: a four trillion dollar market cap company throwing a easily
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  Speaker 3: two billion dollars at Nebus.
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  Speaker 4: But what does it get them.
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  Speaker 5: I mean things are changing in terms of the ecosystem
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  Speaker 5: and the partnerships that these companies had. Remember in Vidio
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  Speaker 5: plan to spend almost one hundred billion dollars with open
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  Speaker 5: Ai at one point, so they scale that back to
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  Speaker 5: thirty billion in their latest funding round.
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  Speaker 2: Oh guess what.
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  Speaker 5: They are investing a lot more in neoclouds, whether it's
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  Speaker 5: cor Viv or Nebus. Now, basically from an Invidia standpoint,
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  Speaker 5: they want more fragmentation. They don't want that cloud world
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  Speaker 5: to be limited to three hyperscalers. They want as much
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  Speaker 5: fragmentation as they can for their chips. And really, in
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  Speaker 5: this case, in Nebus case, they want to build an
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  Speaker 5: end to end in Vidio stack that Nebus is hosting,
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  Speaker 5: and they are getting clients to use you know, Nvidia
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  Speaker 5: throughout whether it's training, inferencing, and really optimize the performance
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  Speaker 5: to the Nvidia stack because in the end, you know,
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  Speaker 5: five years down the line, will the supply demand equation
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  Speaker 5: would be very different. Right now, everyone is supply constrain,
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  Speaker 5: but they are thinking five ten years ahead when chips
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  Speaker 5: could again become a commodity. They don't want that to happen.
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  Speaker 5: They want this to be more fragmented.
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  Speaker 6: Does this deal, this two billion dollar investment, put NEBS
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  Speaker 6: on the map? I mean, is this you know, game
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  Speaker 6: changer for that neocloud company?
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  Speaker 5: Absolutely? Right now it is all about raising the funds,
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  Speaker 5: which we heard from Oracle last night. They're not going
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  Speaker 5: to the band market anymore. And that's why you saw
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  Speaker 5: a positive reaction. So the market is very sensitive about
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  Speaker 5: raising more debt to finance the infrastructure build out, and
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  Speaker 5: that's why Oracle saw such a big pushback. I'm sure
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  Speaker 5: it's the same for core Weave as well.
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  Speaker 4: And so if.
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  Speaker 5: Nebus is getting two billion dollars from in Vidia, and
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  Speaker 5: you can say it's circular financing to buy in Vidia chips,
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  Speaker 5: but it alleviates that need to go to the bard
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  Speaker 5: market to raise a two billion dollars And so from
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  Speaker 5: that perspective, it does solve that problem that you know,
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  Speaker 5: they don't have to raise money right away.
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  Speaker 3: I mean, they're only one of two neo cloud companies
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  Speaker 3: anyone's ever heard of, right, No one knows core Weave. Yeah,
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  Speaker 3: beyond core Weave and nebbyus, what is.
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  Speaker 7: There there are there are you probably know all me
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  Speaker 7: and Scarlett core Weave and then and that's number one,
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  Speaker 7: and Nebyus is the also ran right with by the way,
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  Speaker 7: way to the average cost of capital at Nebus twenty percent.
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  Speaker 4: There you go.
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  Speaker 2: So, yes, they don't want to have to go out
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  Speaker 2: and raise money.
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  Speaker 3: They'd rather have a chip maker give them money to
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  Speaker 3: buy that chip maker's chips.
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  Speaker 6: Yes, that's what they cost her to a financing. And
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  Speaker 6: that's what has some people concerned.
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  Speaker 3: I mean, why doesn't in Vidia just its own neo
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  Speaker 3: cloud company.
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  Speaker 5: They are, they do have a DGX cloud offering. But look,
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  Speaker 5: in this case, Nvidia has new architectures every twelve months.
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  Speaker 2: They have already announced their Ruben architecture.
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  Speaker 5: So what they want is these neo clouds to have
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  Speaker 5: those new chips first, as opposed to an Amazon or
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  Speaker 5: a Microsoft. And that serves them well because these new
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  Speaker 5: clouds will end up signing up customers which will be
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  Speaker 5: long term customers, and that I think it's great for
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  Speaker 5: Nvidia to have that fragmentation.
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  Speaker 3: Can I I'm gonna throw an audible here if you
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  Speaker 3: don't mind, because we were going to talk about uber zooks,
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  Speaker 3: but I mean it.
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  Speaker 6: Doesn't matter in the context of Invidia.
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  Speaker 3: I mean, they're cool looking little things, but I don't care.
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  Speaker 3: What I care more about is this chip battle.
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  Speaker 8: Right.
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  Speaker 3: We knew Nvidia completely and totally dominated, still does I'm guessing.
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  Speaker 2: Google has a chip that's like a contender.
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  Speaker 3: Amazon has Trainium, and I thought that Meta had just
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  Speaker 3: like you know, not joined the party. But now they
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  Speaker 3: just showed up, Right, that's breaking news this morning at
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  Speaker 3: ten o'clock. What's Meta deploying?
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  Speaker 5: And look, that's the big risk for an Nvidia is
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  Speaker 5: all these hyperscalers don't want to spend you know, thirty
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  Speaker 5: forty billion dollars a year on buying Nvidia chips, so
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  Speaker 5: that's where they will continuously try and develop their own chips. Now,
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  Speaker 5: Meta is way behind at Google TPU. Google TPU is
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  Speaker 5: still you know, deployed. They have seven versions of their chips.
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  Speaker 5: Meta is still in the initial stages of building. But
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  Speaker 5: with the scale that Meta has, that means down the
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  Speaker 5: line it will be less off a purchase for Invidia,
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  Speaker 5: and that's the risk that Nvidia wants to avoid.
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  Speaker 6: Here, Stay with us. More from Bloomberg Intelligence coming up
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  Speaker 6: after this.
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  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 6: Through the big gainer and the stock that everyone's paying
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  Speaker 6: attention to right now is Oracle biggest performer, biggest gainer,
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  Speaker 6: I should say in the S and P five hundred
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  Speaker 6: best performer up more than ten percent. And in fact,
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  Speaker 6: this looks like the best day for Oracle if it
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  Speaker 6: closes at these levels, biggest rally since it announced that
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  Speaker 6: three hundred billion dollar open aideal. Let's bring in on
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  Speaker 6: rag Rana. He is our go to guy in all
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  Speaker 6: things tech because he is our tech analyst here a
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  Speaker 6: Bloomberg Intelligence and Oracle did report earnings. Were the earnings
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  Speaker 6: that solid to justify this massive ten percent in advance?
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  Speaker 9: You know, I think when you go back and see
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  Speaker 9: when when Microsoft and Amazon and Google reported, they all
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  Speaker 9: talked about increasing capics and that spooked investors out. And
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  Speaker 9: I mean, I guess Oracle had the foresight to say that, Listen,
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  Speaker 9: we added a lot more backlock to our you know,
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  Speaker 9: balance sheet, but we're not raising capex. I think that's
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  Speaker 9: the big difference right now. That's what the market is less.
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  Speaker 9: I think concerned about that maybe they're going to be
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  Speaker 9: not as aggressive as the others in terms of capital expender.
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  Speaker 6: So it's relief that it did not say it's full
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  Speaker 6: your outlook.
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  Speaker 2: Yeah. Yeah.
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  Speaker 9: And the other thing you have to say is when
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  Speaker 9: you look at their press release, they talked about two things.
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  Speaker 9: One was for the customers coming in, they're going to
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  Speaker 9: ask them to prepay some of that stuff or they're
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  Speaker 9: going to ask them to bring their own GPUs because
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  Speaker 9: it just shows them being a little bit more disciplined
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  Speaker 9: on the fin out side.
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  Speaker 8: Do you bundle them into the other big guys or are
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  Speaker 8: they a separate bolt and almost to meg seven.
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  Speaker 9: It was a bolt on for the cloud providers a
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  Speaker 9: few years ago, but in the last two years, the
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  Speaker 9: orders that they're getting from open Ai has really catapulting
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  Speaker 9: them into the biggest category.
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  Speaker 8: People go to Oracle, what's their distinction versus going to
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  Speaker 8: the forty seven others.
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  Speaker 9: Well, the thing is there are only three big ones,
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  Speaker 9: the Amazon, Microsoft and Google. Frankly, the Oracle only is
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  Speaker 9: another one that has the capital to come up with
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  Speaker 9: a cloud infrastructure at par with some of the others.
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  Speaker 6: However, you look at what Oracle's results also showed, which
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  Speaker 6: is that cash flow is going to remain negative for
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  Speaker 6: the next few years. And this is a company that's
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  Speaker 6: definitely looking at its expense line. You mentioned how some
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  Speaker 6: cloud customers will pay for their own ships, so they're
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  Speaker 6: being more discerning in that regard. But they've also are
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  Speaker 6: making plans, according to our reporting, to cut thousands of
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  Speaker 6: jobs too. How much fat can they cut right now?
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  Speaker 9: That's a very good question because when you look at
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  Speaker 9: their gross margin declined quite a bit, but their operating
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  Speaker 9: margin or they adjusted operating margin, was only down one percent,
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  Speaker 9: which is basically that they cut so much in sales
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  Speaker 9: and marketing and general and administrative expenses to offset some
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  Speaker 9: of that pressure.
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  Speaker 4: But you're right, they cannot do that forever.
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  Speaker 9: They really need to get scale in and see the
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  Speaker 9: benefits of these cloud contracts in order to offset that.
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  Speaker 8: I mean, I know you don't talk to Robert Schiffman,
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  Speaker 8: you're not in speaking terms, but it just put out
• 8:56
  Speaker 8: a blistering note on Salesforce and their bond deal and
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  Speaker 8: rag Rana. On a given thirty forty billion dollar cash call,
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  Speaker 8: they make four phone calls, maybe five, They bring it
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  Speaker 8: in three four times over subscribe. Does this party just
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  Speaker 8: keep on going for the man seven.
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  Speaker 9: The question is for how long? I mean, I think
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  Speaker 9: that's the big concern. But when we talk about Oracle,
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  Speaker 9: for example, their bounty was oversubscribed, but now they have
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  Speaker 9: to go in the market and raise equity also because
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  Speaker 9: one of the things they have said is they don't
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  Speaker 9: want to get rid of their investment grade ratings. So
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  Speaker 9: I think this is where a lot of the relief
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  Speaker 9: is coming for for some of the investors, that they're
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  Speaker 9: going to have a much more balanced approach on raising to.
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  Speaker 8: Finally be adults instead of being pri Madonna's. You were
• 9:37
  Speaker 8: up at Buffalo years ago, read about these pri Ma
• 9:41
  Speaker 8: Donnas out on the West coast, and now they're finally
• 9:43
  Speaker 8: growing up right.
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  Speaker 9: Well, that's because the investors aren't behaving differently than they
• 9:47
  Speaker 9: were before. I mean, when last year we saw Microsoft
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  Speaker 9: raising capecks, everybody was liking it. But just a month
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  Speaker 9: a month and a half ago, when they talked about
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  Speaker 9: raising capecks, all the cloud providers fell down. So that's
• 9:58
  Speaker 9: a lesson for the next one. Come in and say,
• 10:00
  Speaker 9: I don't want to get that message.
• 10:01
  Speaker 5: Can I do an audible always?
• 10:03
  Speaker 8: What in God's name do you read?
• 10:05
  Speaker 4: I mean how do you keep up on this?
• 10:07
  Speaker 8: When I was a kid, the old man would say
• 10:09
  Speaker 8: in a stupid read this article in MIT Technology Review
• 10:13
  Speaker 8: because he really covered a cover.
• 10:15
  Speaker 2: What do you read to keep up?
• 10:16
  Speaker 6: Tom?
• 10:17
  Speaker 4: It's very hard nowadays.
• 10:18
  Speaker 9: I think the podcast recently where Satya is speaking, or
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  Speaker 9: you know, when when the Google CEO is speaking, those
• 10:24
  Speaker 9: are the ones you really have to follow because the
• 10:26
  Speaker 9: text speed of the innovation is just so fast that
• 10:29
  Speaker 9: you know anything.
• 10:30
  Speaker 4: From six months ago. I mean it's just antique.
• 10:33
  Speaker 6: And of course you're listening to these podcasts at double
• 10:36
  Speaker 6: or triple times the speed. I'm sure when Satya talks,
• 10:40
  Speaker 6: when the CEO Satya in Adella of Microsoft, when Satya talks.
• 10:45
  Speaker 2: How do I just love Mark busting her check?
• 10:49
  Speaker 6: How much does he really reveal or is it in
• 10:52
  Speaker 6: what he does not say that you get your your
• 10:55
  Speaker 6: most insightful thoughts on what's next?
• 10:58
  Speaker 9: I think I really look for him to figured out
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  Speaker 9: how much is he going to spend more? Because at
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  Speaker 9: the end of the day, he is not somebody who
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  Speaker 9: benefits from buying in video chips. I mean, he's the
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  Speaker 9: one who's funding a lot of this expansion with you know,
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  Speaker 9: let's say, according to our calculations, he's spending in a
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  Speaker 9: year fifty to sixty billion dollars just on in video GPUs.
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  Speaker 4: That's a very big amount.
• 11:18
  Speaker 9: So if he's doing it for the reason, I have
• 11:21
  Speaker 9: to see that there is some AUTOAI to that.
• 11:23
  Speaker 8: So I'm at Palladino's down at Grand Central Station at
• 11:26
  Speaker 8: the Bourbon Bar with Joseph. He's just like old school bartender.
• 11:29
  Speaker 8: He's like, he's not a mad manner something like. Somebody
• 11:32
  Speaker 8: comes up to me and they go, do they really
• 11:34
  Speaker 8: not let man deep sing an Anna rug run in
• 11:36
  Speaker 8: the same room? Do you guys when you're at seven
• 11:39
  Speaker 8: thirty when lexing dinner? Are you too allowed to speak
• 11:42
  Speaker 8: now that we sit next to each other? Absolutely?
• 11:44
  Speaker 5: Really?
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  Speaker 8: Yeah, Okay, I just the guy came up to me
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  Speaker 8: and I said, I really don't know. I mean, there's
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  Speaker 8: just so much you know, Scarlet, there's just so much
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  Speaker 8: voltage there.
• 11:51
  Speaker 6: There's a lot of voltage there. And we tend to
• 11:53
  Speaker 6: have them both on but at separate times because we've
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  Speaker 6: got to make sure that we sprinkle their expertise throughout
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  Speaker 6: the hours.
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  Speaker 8: Yeah. Well, also there's the security issues as well. How
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  Speaker 8: many players are there going to be in five years?
• 12:05
  Speaker 9: See on the hyperskate cloud providers. We know of the
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  Speaker 9: top three for sure, it's Amazon, Microsoft neck to neck,
• 12:12
  Speaker 9: then Google, then Oracle. Then you have the new cloud
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  Speaker 9: providers that's Core, Weave and Nevius.
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  Speaker 2: So these are the.
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  Speaker 9: Five I watched most closely right now because they have
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  Speaker 9: the capital, They are the ones with the leading chips
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  Speaker 9: right now, and they are the ones everybody is going
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  Speaker 9: through to build their applications or run their infrints or
• 12:30
  Speaker 9: training workloads.
• 12:31
  Speaker 6: Anright, you were saying that Oracle has made clear that
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  Speaker 6: it wants and maintain its investment grade credit rating, and
• 12:37
  Speaker 6: of course there were some concerns about that, and that's
• 12:39
  Speaker 6: why we saw the CDs the credit to fault swaps
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  Speaker 6: climb in recent weeks, although it's come back down a
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  Speaker 6: little bit.
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  Speaker 9: Here.
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  Speaker 6: How convinced are you that they can do that?
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  Speaker 9: Yeah, And I talk to Rob Schifman all the time
• 12:49
  Speaker 9: as well, so here I are on the same page
• 12:52
  Speaker 9: that they're very careful about that investment gate rating and
• 12:55
  Speaker 9: whenever they come up with the bond deal it gets
• 12:57
  Speaker 9: covered up very quickly.
• 12:59
  Speaker 6: How much does that to equity investors?
• 13:01
  Speaker 9: I mean it does matter because you know you don't
• 13:03
  Speaker 9: want to be financially irresponsible for a company like this
• 13:06
  Speaker 9: that houses one of the most important software products, their
• 13:09
  Speaker 9: database business, that is really the cash cow for them
• 13:12
  Speaker 9: that can allow them to expand. What we saw last
• 13:15
  Speaker 9: night was the expansion is going to be there, but
• 13:18
  Speaker 9: maybe with a little bit more more measured means rather
• 13:21
  Speaker 9: than going you know, all in.
• 13:23
  Speaker 6: Stay with us. More from Bloomberg Intelligence coming up after this.
• 13:29
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 13:33
  Speaker 1: weekdays at ten am Eastern on Apple, Coarplay and Android
• 13:36
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• 13:39
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 13:43
  Speaker 6: All right, let's go to another one of our talented analysts,
• 13:46
  Speaker 6: Herman Chan. He is our senior analyst covering US banks
• 13:49
  Speaker 6: and Herman, there's a big headline today that got everyone's attention,
• 13:53
  Speaker 6: JP Morgan marking down the value of some private credit loans,
• 13:57
  Speaker 6: mainly to software companies, in the latest sign of stress
• 14:00
  Speaker 6: in private credit. I guess it's not a surprise if
• 14:03
  Speaker 6: you recall that Jamie Diamond, the CEO, had talked about
• 14:05
  Speaker 6: the possibility of more cockroaches.
• 14:07
  Speaker 10: That's right, So we view this as a prude and
• 14:10
  Speaker 10: risk management measure by JP Morgan. Basically, by reducing the
• 14:15
  Speaker 10: value of these loans, it means like the private credit
• 14:18
  Speaker 10: companies can borrow less from JP Morgan, so it reduces
• 14:21
  Speaker 10: their exposure in the case that there's some more volatility
• 14:25
  Speaker 10: ahead for the private credit folks.
• 14:29
  Speaker 3: So to me, what was the most interesting about this
• 14:33
  Speaker 3: news was not that JP Morgan marked some of these
• 14:37
  Speaker 3: credits down or some of these assets down, rather but
• 14:40
  Speaker 3: that its competitors aren't allowed to do that. I hadn't
• 14:44
  Speaker 3: realized before I read the FT piece and then the
• 14:47
  Speaker 3: Bloomberg cover that that JP More that JP Morgan's competitors
• 14:55
  Speaker 3: and probably a lot of other lenders that lend to
• 14:58
  Speaker 3: smaller direct lenders have it in their covenants that they're
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  Speaker 3: only allowed to mark their assets during like change credit
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  Speaker 3: event or.
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  Speaker 2: Exactly like open enrollment. Right, that's insane.
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  Speaker 3: Is that a reason that we see so many of
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  Speaker 3: these private credit assets going from like ninety seven to zero.
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  Speaker 10: It just goes to show that JP Morgan is the
• 15:21
  Speaker 10: big kahoona and they can dictate credit terms, whereas others
• 15:24
  Speaker 10: may not have the same capacity. So having those advantageous
• 15:29
  Speaker 10: credit terms helps them protect themselves in the event that
• 15:32
  Speaker 10: we have potential loss We've seen headlines of and expectations
• 15:38
  Speaker 10: and predictions of fifteen percent potential losses in the credit
• 15:42
  Speaker 10: software books for these private credit companies. So I think
• 15:48
  Speaker 10: banks will continue to try to get ahead of it.
• 15:51
  Speaker 10: And then you speak to some of the credit terms
• 15:53
  Speaker 10: and conservative underwriting at JP Morgan. I think that's one
• 15:56
  Speaker 10: of the reasons why Western Alliance was dinged a little
• 15:59
  Speaker 10: bit with the Jeffries news because they thought they had
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  Speaker 10: pristine credit terms, but then Jeffries eventually just backed out
• 16:05
  Speaker 10: of paying back the loan.
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  Speaker 6: So the backstory here, if we take a step back,
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  Speaker 6: is that these Wall Street banks like a JP Morgan
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  Speaker 6: are not making a lot of private loans directly because
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  Speaker 6: they de risked following the Great Financial Crisis. Regulators were
• 16:17
  Speaker 6: breathing down their necks. But they are exposed indirectly because
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  Speaker 6: they lend to private credit funds. Do we have a sense,
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  Speaker 6: herman or is this still kind of something vague of
• 16:28
  Speaker 6: just how exposed Wall Street banks are to private credit funds.
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  Speaker 10: Yeah, we have some data that the Federal Reserve puts
• 16:34
  Speaker 10: out every quarter and we calculate it. So it's about
• 16:39
  Speaker 10: for the banks that I cover, it's about fifteen to
• 16:41
  Speaker 10: twenty percent of their total loan portfolio is to non
• 16:44
  Speaker 10: bank financial institutions, which private credit is a subset of.
• 16:48
  Speaker 10: So it's a growing piece of the banking industries pie
• 16:54
  Speaker 10: and it's really last year was the sole growth driver
• 16:59
  Speaker 10: for banks. For JP Morgan as an example, they grew
• 17:02
  Speaker 10: their non bank financials books seventy eight percent year every year.
• 17:05
  Speaker 10: So it's it's a hefty position for for banks across
• 17:12
  Speaker 10: large and regional banks. And really that's because that's where
• 17:16
  Speaker 10: the growth was because of this financial arbitrage where banks
• 17:19
  Speaker 10: are have lower risk weighted assets on these loans, so
• 17:24
  Speaker 10: it helps from a capital treatment standpoint to lend to
• 17:27
  Speaker 10: these non bank financials.
• 17:29
  Speaker 3: So you say that JP Morgan's book there grew what
• 17:35
  Speaker 3: seven or eight per seventy eight seventy eight percent, that's
• 17:38
  Speaker 3: a massive growth. Are there other banks that also grew
• 17:41
  Speaker 3: those loan portfolios massively and maybe are more reluctant to
• 17:45
  Speaker 3: mark them down.
• 17:46
  Speaker 10: It's across the board, right, so Wells Fargo was particularly
• 17:50
  Speaker 10: aggressive in the fourth quarter. The banks that have larger
• 17:54
  Speaker 10: markets businesses like a JP, like a b of A,
• 17:58
  Speaker 10: like a city have grown much faster than some of
• 18:01
  Speaker 10: the regionals, but the regionals have also participated as well.
• 18:04
  Speaker 6: Yeah, I think about the headline just last month about
• 18:07
  Speaker 6: Bank of America committing twenty five billion dollars of its
• 18:09
  Speaker 6: own cash to private credit deals. In that instance, it's
• 18:12
  Speaker 6: making those loans directly as opposed to indirectly through private
• 18:15
  Speaker 6: credit funds.
• 18:16
  Speaker 2: Right, That's right.
• 18:17
  Speaker 10: So that's there is a bit of a regulatory arbitrage,
• 18:21
  Speaker 10: as I mentioned before, where you have to hold less
• 18:25
  Speaker 10: capital when you lend to private equity or at private
• 18:27
  Speaker 10: capital versus doing the loan.
• 18:29
  Speaker 6: Does you feel like, I don't know, two thousand and seven,
• 18:32
  Speaker 6: when different firms were trying to get in on subprime
• 18:34
  Speaker 6: mortgage after the boom of the growth had already been seen,
• 18:38
  Speaker 6: and there's a little bit of FOMO driving.
• 18:39
  Speaker 2: Activity leading the witness, it does feel like, not in.
• 18:44
  Speaker 10: A quarterable we are feeling a bit of froth in
• 18:47
  Speaker 10: the markets. We're we're seeing some stress, but.
• 18:51
  Speaker 2: We have it.
• 18:52
  Speaker 10: We're not at that level where we think things are
• 18:55
  Speaker 10: seizing up at this point, and private credit as a whole,
• 18:59
  Speaker 10: the the industry is about one point seven trillion dollars,
• 19:03
  Speaker 10: so it's it could be fairly absorbed within the industry.
• 19:08
  Speaker 10: You know, you have a bank's like JP Morgan, BFA,
• 19:11
  Speaker 10: Wells Fargo City themselves, their entire balance sheets over a
• 19:14
  Speaker 10: trillion dollars, So.
• 19:15
  Speaker 6: Not two thousand and seven, but maybe, like I don't know,
• 19:17
  Speaker 6: two thousand and six.
• 19:19
  Speaker 2: Well, I mean, the question is what's the fallout?
• 19:20
  Speaker 3: Right, I know it's only one point seven trillion, and
• 19:23
  Speaker 3: frankly software is probably less than thirty percent of that,
• 19:28
  Speaker 3: so you're talking about five hundred billion, max. But the
• 19:33
  Speaker 3: question is what kind of fallout do you have because
• 19:36
  Speaker 3: a lot of these banks don't have the kind of
• 19:38
  Speaker 3: direct lending approach that Scarlet's talking about BFA. Rather, they'd
• 19:42
  Speaker 3: lend money to the BDC and then the BDC rented out.
• 19:47
  Speaker 2: And then those BDCs, when they're looking.
• 19:49
  Speaker 3: At everybody headed for the gates, sell off their best
• 19:53
  Speaker 3: assets first so that they can say we got ninety
• 19:55
  Speaker 3: seven cents on the dollar, and then they're left with
• 19:57
  Speaker 3: bad bank holdings.
• 19:58
  Speaker 11: Right.
• 19:58
  Speaker 10: Yeah, So you do have that phenomenon where where companies,
• 20:03
  Speaker 10: like you've seen it from from some BDCs and the
• 20:05
  Speaker 10: direct lenders, where they're selling the assets that they can
• 20:08
  Speaker 10: sell now. So it remains to be seeing what's still
• 20:11
  Speaker 10: remaining on the one of the books, how the credit
• 20:13
  Speaker 10: performances and you know, you have to put on your
• 20:18
  Speaker 10: credit lens of probability of default and loss given default,
• 20:22
  Speaker 10: and how that shakes out.
• 20:23
  Speaker 2: So we're still waiting.
• 20:26
  Speaker 10: This is more At this point, A and client and
• 20:31
  Speaker 10: investor are a bit more skittish on the performance going forward,
• 20:37
  Speaker 10: but we haven't really yet seen that performance sour. So
• 20:41
  Speaker 10: this is like early endings of the credit private credit
• 20:43
  Speaker 10: story in our view.
• 20:45
  Speaker 6: Stay with us. More from Bloomberg Intelligence coming up after this.
• 20:51
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 20:55
  Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
• 20:58
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• 21:02
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• 21:05
  Speaker 3: Matt Miller here at seven thirty one Lex filling in
• 21:08
  Speaker 3: for Paul Sweeney and Scarlet's rushed off to do our
• 21:11
  Speaker 3: weekly deal show Every Wednesday at noon on Bloomberg Television.
• 21:14
  Speaker 3: We have a show focused completely on M and A
• 21:17
  Speaker 3: Scarlett and Danny Berger, my co host on on Bloomberg
• 21:20
  Speaker 3: TV anchor. That show definitely one you want to tune
• 21:22
  Speaker 3: into if you care about deals, right now though, we're
• 21:25
  Speaker 3: going to drill into consumer staples and specifically the Campbell's
• 21:32
  Speaker 3: company because it cut its profit outlook to the lowest
• 21:36
  Speaker 3: level in a decade as consumers are avoiding the kind
• 21:41
  Speaker 3: of snacks that Campbell's makes. It's not just a soup's company,
• 21:44
  Speaker 3: which is why they change the name. They also make
• 21:47
  Speaker 3: Snyder's pretzels and Kettle Brown brand chips, as well as
• 21:51
  Speaker 3: Peppridge Farm cookies and goldfish.
• 21:52
  Speaker 2: So let's get over to it.
• 21:54
  Speaker 3: Bloomberg Intelligence analyst Diana Roseero painas she.
• 21:59
  Speaker 2: Covers this sector for.
• 22:01
  Speaker 3: US and Diana, what's the story at Campbell's. I guess
• 22:06
  Speaker 3: it makes sense that they're focused not as much on
• 22:08
  Speaker 3: chicken soup but more on potato chips.
• 22:11
  Speaker 11: Yes, and basically this company is suffering from what the
• 22:17
  Speaker 11: industry as a whole it has been suffering in terms of,
• 22:21
  Speaker 11: you know, volumes do not seem to be growing, pricing,
• 22:25
  Speaker 11: it's still elevated. Consumers are being very strategic with their spending.
• 22:31
  Speaker 11: They're moving to private label, they're you know, curving their
• 22:35
  Speaker 11: expenditure on things, for example, snacks and chips, which was
• 22:39
  Speaker 11: one of the biggest you know, disappointments in the quarter
• 22:43
  Speaker 11: for Campbell's.
• 22:44
  Speaker 2: By the way, private label products.
• 22:46
  Speaker 3: Not to take us on too much of a tangent here,
• 22:48
  Speaker 3: but when I was a kid, we said generic products
• 22:51
  Speaker 3: right the store brand.
• 22:53
  Speaker 2: But they've really picked up in popularity.
• 22:56
  Speaker 3: It seems like consumers feel almost more sophisticated when they,
• 23:00
  Speaker 3: you know, save twenty five thirty cents buying the private
• 23:04
  Speaker 3: label product.
• 23:05
  Speaker 11: Yes, for sure, And not only that, retailers have invested
• 23:11
  Speaker 11: in their private label portfolio. They've entered different tiers in
• 23:16
  Speaker 11: terms of private label. So you have the cheaper versions,
• 23:20
  Speaker 11: you have the medium you know price, and then the
• 23:23
  Speaker 11: high end and that actually brings people into the store
• 23:27
  Speaker 11: and definitely builds loyalty for the retail.
• 23:30
  Speaker 2: All inside private label. Right.
• 23:32
  Speaker 3: Kirkland is the one at Costco. I go to shop right,
• 23:35
  Speaker 3: they have bowl and basket and you can buy just
• 23:37
  Speaker 3: the ground level bowl and basket product, or you can
• 23:40
  Speaker 3: buy their super fancy organic bowl and basket exactly product.
• 23:43
  Speaker 3: All right, all right, back to Campbell's, the Campbell's company,
• 23:46
  Speaker 3: because I want to zero in on the pricing issue.
• 23:49
  Speaker 3: A real concern about the impact of this war has
• 23:53
  Speaker 3: been that it drives prices higher. We were already worried
• 23:55
  Speaker 3: about tariffs driving prices higher, as well as immigration policy
• 23:59
  Speaker 3: driving prices higher. And as you point out, or as
• 24:03
  Speaker 3: our reporting points out, they have, uh had elevated pricing
• 24:08
  Speaker 3: on some of their products, but that hits volume.
• 24:10
  Speaker 2: So what do they do here?
• 24:12
  Speaker 11: Yeah, that is the question that it keeps avoiding this
• 24:17
  Speaker 11: these types of companies equally with the you know, not
• 24:20
  Speaker 11: only oil prices being so high at the point spiking
• 24:25
  Speaker 11: in such a rapid pace, you also have the conflict itself,
• 24:29
  Speaker 11: you know, in the strait of harm I believe it's called,
• 24:34
  Speaker 11: and that obviously is going to affect supply chains, uh
• 24:37
  Speaker 11: for for these companies. So uh, they seem they want
• 24:41
  Speaker 11: to be a little bit more strategic in in lowering prices.
• 24:45
  Speaker 11: They don't necessarily want to do that. They want to
• 24:48
  Speaker 11: compete on the marketing side.
• 24:50
  Speaker 6: So you will probably see.
• 24:52
  Speaker 11: For the remainder of the year more hit on gross
• 24:54
  Speaker 11: margin or a bit margin, you know, for Campbell's, because
• 24:59
  Speaker 11: they're investing more on marketing rather than you know, just
• 25:03
  Speaker 11: a race to the bottom on pricing.
• 25:05
  Speaker 3: Yeah, more fertilizer, by the way, travels through the Strait
• 25:08
  Speaker 3: of horror moves on the way to international markets than hydrocarbons.
• 25:13
  Speaker 3: So it's more about moving fertilizer than oil. Obviously, oil
• 25:16
  Speaker 3: is the product we pay more closely attention to as consumers,
• 25:22
  Speaker 3: most of us by gas, fewer of us by fertilizer.
• 25:25
  Speaker 3: But one third of the global fertilizer trade passes through
• 25:28
  Speaker 3: the strait of horror moves. It's massive, and of course
• 25:34
  Speaker 3: we're coming up back again to planning season. You could
• 25:38
  Speaker 3: see real price reverberations in food stuffs from this war, right,
• 25:44
  Speaker 3: It's not just about the price of the pomp.
• 25:46
  Speaker 2: Yes exactly.
• 25:47
  Speaker 11: I mean, even if the disruption delays, you know, let's
• 25:51
  Speaker 11: say ninety days, that is probably going to have a
• 25:54
  Speaker 11: significant headwind to cogs for these companies. The problem is
• 25:59
  Speaker 11: is that usually when disruptions like this happen, you will
• 26:02
  Speaker 11: have the ability to increase prices to match that disruption,
• 26:07
  Speaker 11: and that usually will take about twelve months.
• 26:09
  Speaker 2: Now they're probably.
• 26:11
  Speaker 11: Talking about a large and longer time to get those
• 26:14
  Speaker 11: prices back because you know, already the consumer is stopped.
• 26:19
  Speaker 3: Out what Campbell's soup stock, by the way, or the
• 26:23
  Speaker 3: Campbell's Company, sorry I keep forgetting they change their name.
• 26:25
  Speaker 2: The Campbell's Company. And they're serious about that.
• 26:29
  Speaker 3: I got a note actually to the principle when I
• 26:33
  Speaker 3: said it wrong. Once Campbell's company stock down over the
• 26:38
  Speaker 3: last five years fifty two percent, They've lost half of
• 26:42
  Speaker 3: the value of their company. At what point is it
• 26:45
  Speaker 3: cheap enough for investors to go in and pick it up?
• 26:47
  Speaker 2: Well, I will say.
• 26:48
  Speaker 11: When volumes start to at least normalize, which we could
• 26:53
  Speaker 11: probably see more on the like.
• 26:55
  Speaker 2: That would be a more of a four.
• 26:56
  Speaker 11: Q story, fiscal four Q story in the beginning of
• 27:01
  Speaker 11: fiscal twenty twenty seven. So those are I think that
• 27:04
  Speaker 11: will be the main point, in the main driver of
• 27:07
  Speaker 11: any any appreciation.
• 27:09
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• 27:17
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• 27:29
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