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Cisco Tumbles After Profit-Margin Squeeze Overshadows AI Gains · Bloomberg Intelligence

• 0:02
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the
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  Speaker 1: Bloomberg Intelligence Podcast. Catch us live weekdays at ten am
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• 0:24
  Speaker 2: We are still knee deep in earning season.
• 0:26
  Speaker 3: And even though I keep saying that most of big
• 0:28
  Speaker 3: tech has reported, not all of tech has reported.
• 0:31
  Speaker 2: Cisco was the latest to report. It's a hardware company.
• 0:35
  Speaker 3: They make the gear for Internet networking, and they're benefiting
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  Speaker 3: from AI. They're getting more business from AI like many
• 0:43
  Speaker 3: hardware companies, but they're also seeing a downside to that,
• 0:45
  Speaker 3: and that is higher costs. Woujin Hoo is our senior
• 0:48
  Speaker 3: hardware networking analyst here now to give us some insight
• 0:51
  Speaker 3: into Cisco. So Ujin, it sounds like the increasing cost
• 0:55
  Speaker 3: of memory chips is kind of dogging Cisco like we've
• 0:58
  Speaker 3: seen with other hardware companies. How do you think about
• 1:01
  Speaker 3: the increase in cost of memory chips? Is this kind
• 1:03
  Speaker 3: of a one time problem, one time adjustment, or is
• 1:05
  Speaker 3: this creating a new normal for hardware companies?
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  Speaker 4: Yeah?
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  Speaker 5: Hey, Scarlett, So now when we think about it. It
• 1:12
  Speaker 5: is going to create a new normal. Quite quite frankly,
• 1:16
  Speaker 5: the magnitude of the DRAM price increases was a bit
• 1:21
  Speaker 5: higher that we had anticipated, and it's going to be
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  Speaker 5: a drag on margins. At least it already hit the
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  Speaker 5: current reported quarter, and then it is going to be
• 1:30
  Speaker 5: another two hundred basis points gross margin rosion next quarter.
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  Speaker 5: The one thing that we can be assured of is
• 1:38
  Speaker 5: that there's going to be a price increases across the
• 1:39
  Speaker 5: board for a lot of Cisco's products and more importantly
• 1:43
  Speaker 5: a lot of big tech products such as Dell and
• 1:47
  Speaker 5: Hpe going forward.
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  Speaker 6: So is this more today an industry problem or a
• 1:54
  Speaker 6: Cisco problem here?
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  Speaker 5: No, it's an everybody problem, Plum quite frankly. I mean, look,
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  Speaker 5: there's a couple of things here right. The DRAM pricing
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  Speaker 5: isn't going to hurt only Cisco. But I'm scrambling to
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  Speaker 5: get new laptops from my kids before the DEVAM prices
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  Speaker 5: hit the PC market as well. And you know what
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  Speaker 5: we are going to see is that anything that's DRAM heavy,
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  Speaker 5: in particular servers, that's going to be bogged down on
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  Speaker 5: the gross of margin side. But what I'm trying to
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  Speaker 5: balance out is how much of that is going to
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  Speaker 5: how much are the companies going to eat that gross margin?
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  Speaker 5: And how much is that going to be passed through?
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  Speaker 3: Okay, so I guess the other part of it was
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  Speaker 3: that Cisco shares were kind of priced to perfection as
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  Speaker 3: a lot of people were putting it.
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  Speaker 2: So it didn't take a whole lot.
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  Speaker 3: For investors to react negatively to Cisco and the latest results.
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  Speaker 3: But ten and a half percent, you know, that's that's
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  Speaker 3: a pretty big adjustment. Are people re rating this company completely?
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  Speaker 7: Yeah?
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  Speaker 5: And you actually make a good point. Right, as I
• 2:55
  Speaker 5: was looking into the print, the PE was at roughly
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  Speaker 5: twenty one twenty two times, and the last time we
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  Speaker 5: saw the pees like that was back in twenty twenty
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  Speaker 5: three when people were pre buying a lot of networking
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  Speaker 5: gear and during the COVID cycle, right, And what you know,
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  Speaker 5: historically ps are roughly around seventeen to eighteen times for Cisco,
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  Speaker 5: and what we are seeing is that the multiples coming
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  Speaker 5: back to the seventeen to eighteen times. And I do
• 3:22
  Speaker 5: think that's kind of a bit wrong, Scarlett, primarily because
• 3:26
  Speaker 5: this AI story is actually has a lot of sales
• 3:30
  Speaker 5: behind a lot of wind behind its sales. And I
• 3:33
  Speaker 5: think a lot of investors are overlooking the AI opportunity,
• 3:38
  Speaker 5: which is going to be multi year for Cisco.
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  Speaker 6: How long will the industry have to deal with I
• 3:42
  Speaker 6: guess chip shortage going forward? Is this something that chip
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  Speaker 6: makers can just go up a switch and start making
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  Speaker 6: more chips?
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  Speaker 5: You know, I wish I had a bottle with the
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  Speaker 5: magic gen that will pop up and create new DRAMs.
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  Speaker 5: But the fact of the matter is is that every
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  Speaker 5: time you have if you want to create capacity for
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  Speaker 5: new memory chips, it takes about two to three years.
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  Speaker 5: And the memory manufacturers were struggling very bad during the
• 4:12
  Speaker 5: during the COVID period when there was over capacity, and
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  Speaker 5: they've been hasn't to build up the capacity. But this
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  Speaker 5: AI boom and the memory demand related to the AI
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  Speaker 5: boom is a lot stronger than we had anticipated in
• 4:22
  Speaker 5: you know, I think my colleague Jake Silverman has a
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  Speaker 5: good piece out on how long it'll last. It might
• 4:28
  Speaker 5: take another two three years before it gets resolved.
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  Speaker 3: So is there and I realized that this is more
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  Speaker 3: Jake's remit But is there still any kind of excess
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  Speaker 3: inventory of those memory chips or have we drawn down
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  Speaker 3: on all of that.
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  Speaker 7: Well.
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  Speaker 5: I also covered the hard discrip space Scarlett. So my guy,
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  Speaker 5: my hard dest right guys are sold out until twenty
• 4:49
  Speaker 5: twenty six and possibly the twenty twenty seven. All the
• 4:52
  Speaker 5: read throughs from s K high Neck, Samsung, Micron, and
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  Speaker 5: sand Disk, they're all sold out through twenty six and
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  Speaker 5: into twenty seven, already taking orders for twenty seven and
• 5:01
  Speaker 5: twenty eight.
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  Speaker 6: So this is a global problem. This isn't a trade
• 5:05
  Speaker 6: spat supply chain screwing everything up, trade war tariff type thing.
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  Speaker 6: This is just global supply issue.
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  Speaker 5: Yeah, this is this is That's exactly it, right. You know,
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  Speaker 5: the b I team has been writing about this for
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  Speaker 5: a couple of couple of months now, and they started
• 5:21
  Speaker 5: to exasperate into higher levels. To give you some context,
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  Speaker 5: we picked up on the higher chip memory prices back
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  Speaker 5: in November when they were rising. We're fully around fifty
• 5:34
  Speaker 5: sixty percent on a year or year basis. Over the
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  Speaker 5: past quarter dround prices have doubled to almost tripled, So
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  Speaker 5: everyone's scrambling to get chips before they rise even further.
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  Speaker 3: All right, So inevitably that means laptop prices are going
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  Speaker 3: to be higher a long with everything else.
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  Speaker 2: What about smart appliances.
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  Speaker 3: Do they use memory chips or do they use the
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  Speaker 3: analytic chips that Texas Instrument makes well.
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  Speaker 5: I mean, get to get your smart TV, get your
• 6:01
  Speaker 5: smart refrigerator, laundry matt stove as quickly as possible. I
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  Speaker 5: think the bigger issue here Scarlett is probably going to
• 6:08
  Speaker 5: be the smartphone market. You know, IDC has cut their
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  Speaker 5: smartphone forecast to be in decline, primarily because there aren't
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  Speaker 5: enough memory memory DRAM chips and as well as storage
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  Speaker 5: to help supply all the smartphones. Apples should be okay,
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  Speaker 5: but at the end of the day that there is
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  Speaker 5: going to be a supply constraint there.
• 6:30
  Speaker 2: Stay with us.
• 6:31
  Speaker 6: More from Bloomberg Intelligence coming up after this.
• 6:37
  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
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• 6:51
  Speaker 6: And again, all the hotels reporting, a lot of the
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  Speaker 6: leisure companies reporting here high it just report it and
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  Speaker 6: some decent numbers of street likes it stocks up five
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  Speaker 6: point six percent today, that's a fifty two week high
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  Speaker 6: and a stocks up eleven percent year to date. Let's
• 7:04
  Speaker 6: check in with Jody Lourie. She's a senior credit analyst
• 7:07
  Speaker 6: for Bloomberg Intelligence. Jody talk to us about Hyat. We
• 7:10
  Speaker 6: heard from Hilton. What are the folks at Hyatt saying
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  Speaker 6: about their business?
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  Speaker 4: So everything is seeming to be pretty upbeat. I mean,
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  Speaker 4: we're seeing a lot of the same narrative that we
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  Speaker 4: heard from Marriott that we heard from Hilton, and it's
• 7:22
  Speaker 4: that we're seeing the strength in the luxury market at
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  Speaker 4: the moment. And it's not so surprising for us because
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  Speaker 4: we've been talking about this. I mean, we did our
• 7:31
  Speaker 4: travel survey, we ran it in November, and we talked
• 7:34
  Speaker 4: about the k shaped economy. We anticipated that coming into
• 7:37
  Speaker 4: this year, people who have the ability to spend on
• 7:41
  Speaker 4: travel are going to continue and those who aren't might
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  Speaker 4: pull back a little bit, and so we've started to
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  Speaker 4: see that. I think what's probably more interesting maybe is
• 7:49
  Speaker 4: that both Brian Egger, my equity counterpart, and I have
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  Speaker 4: been talking about this topic and we've been comparing notes
• 7:55
  Speaker 4: and we're pretty in lined, which usually don't really see
• 7:58
  Speaker 4: equity and credit analysts line. But it's kind of hard not.
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  Speaker 3: To be in this situation, right, the fundamentals are the fundamentals,
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  Speaker 3: and these companies are able to monetize on that ca
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  Speaker 3: shaped economy, certainly by focusing their efforts on the upper end.
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  Speaker 3: What about the lower end? Marriet runs Courtyard by Marriott,
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  Speaker 3: and that's it's branding right there. Does it mean that
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  Speaker 3: it just you know, focuses less on that or devotes
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  Speaker 3: less resources to it. Is that a brand that you know,
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  Speaker 3: kind of has a ceiling.
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  Speaker 4: So I don't think it necessarily has a ceiling per se,
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  Speaker 4: But I think that, you know, and what I think
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  Speaker 4: the companies are taking a longer term outlook of Okay,
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  Speaker 4: right now, at this moment, those businesses might be a
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  Speaker 4: little bit weaker. They also actually cost a little bit
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  Speaker 4: less to run, because when you think about luxury businesses,
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  Speaker 4: you have a lot more additional costs that you have
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  Speaker 4: to contribute to give the quality of service that the
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  Speaker 4: customer expects. So I don't think they're necessarily going to
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  Speaker 4: stop creating those brands and building out that platform. In fact,
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  Speaker 4: they think they're going to continue doing that because eventually
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  Speaker 4: will run its course. What I do think is an
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  Speaker 4: interesting point that we've talked about a few times is
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  Speaker 4: if you look at a company like Choice, which is
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  Speaker 4: much more heavily embedded in that lower income consumer, embedded
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  Speaker 4: in that extended stay market that was likely more so
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  Speaker 4: affected by, for instance, the government shutdown which Marriott, which
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  Speaker 4: Hilton talked about on most recent quarters. And so I
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  Speaker 4: think that's where you're going to really see. The differentiation
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  Speaker 4: is not so much in these companies that have these global,
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  Speaker 4: massive brands that they can sort of like shift around
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  Speaker 4: resources and also anticipate that some of their brands might
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  Speaker 4: be stronger than others at different times of the cycle.
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  Speaker 4: I think it's more in the ones that are a
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  Speaker 4: little bit more concentrated that might have some issues.
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  Speaker 2: Okay, that makes a lot of sense.
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  Speaker 3: And I want to pick up on what you said
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  Speaker 3: about how luxury running those luxury brands costs more. How
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  Speaker 3: much of those costs does high at the company which
• 9:51
  Speaker 3: has an asset light business model bear versus whoever's paying
• 9:54
  Speaker 3: the licensing fee to Hiatt Sure?
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  Speaker 4: And I think that's a key question too, because us start.
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  Speaker 4: When you think about it, you know, the Hyatt is
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  Speaker 4: doing the management of it, right, so they have the brand,
• 10:05
  Speaker 4: they have the management, but you do have the company
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  Speaker 4: that owns the property. And more so, what you know,
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  Speaker 4: what they sort of reference on the call, and we've
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  Speaker 4: heard this a few times from the company, is more
• 10:16
  Speaker 4: the anticipation that some of the owners of the hotels,
• 10:20
  Speaker 4: if they have issues with financing, that these companies have
• 10:22
  Speaker 4: to sort of think about ways that they can leverage
• 10:25
  Speaker 4: their higher quality ratings to help them with financing, to
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  Speaker 4: grow up the business and to make these sort of
• 10:30
  Speaker 4: modifications on the properties themselves. Hyatt is an interesting company
• 10:36
  Speaker 4: in and of itself because you know, it generates great
• 10:38
  Speaker 4: cashloads and anticipates to generate strong cashloads this year. But
• 10:42
  Speaker 4: it's twice now done the same thing where it made
• 10:45
  Speaker 4: these relatively large scale acquisitions to expand its footprint and
• 10:49
  Speaker 4: to build out into all inclusives, into other parts of
• 10:52
  Speaker 4: the market and extend their sort of you know, vertical integration.
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  Speaker 4: And in both instances they levered up to do so,
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  Speaker 4: but they've been pretty quick to de lever and to
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  Speaker 4: your point, Scarlett, they use their pivot into asset light,
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  Speaker 4: meaning selling their properties and entering into management agreements to
• 11:11
  Speaker 4: do so, so they benefit from that fee structure instead.
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  Speaker 6: So is there debt for you to look at for
• 11:18
  Speaker 6: these hotel companies are there all this asset like stuff.
• 11:22
  Speaker 4: There is debt because the companies are still borrowing. You know,
• 11:25
  Speaker 4: they're borrowing to sort of build out their platforms, they're
• 11:28
  Speaker 4: borrowing to do tech upgrades, They're borrowing for all sorts
• 11:31
  Speaker 4: of reasons. Marriott has sort of this I don't want
• 11:35
  Speaker 4: to say it's a flywheel, because it's not. But they're
• 11:38
  Speaker 4: at the point now where they you know, they have
• 11:40
  Speaker 4: triple V ratings, they access the commercial payment market and
• 11:44
  Speaker 4: they can access it because of their short term ratings
• 11:47
  Speaker 4: at the moment, and they use it as cash gaps, right,
• 11:50
  Speaker 4: and they'll fill those cash gaps and then they refinance
• 11:52
  Speaker 4: the debt that's coming due. So I don't think we're
• 11:55
  Speaker 4: in a situation where these higher grade companies like Marriott
• 11:58
  Speaker 4: is going to necessarily increase their jet load. They're just
• 12:02
  Speaker 4: going to sort of lean on the ebdout growth. They're
• 12:05
  Speaker 4: going to lean on the fact that they have these
• 12:06
  Speaker 4: cash flows to support that. You know, they are going
• 12:09
  Speaker 4: to give back to shareholders. They're continuing to do so.
• 12:10
  Speaker 4: We're seeing Hyatt talk about that as well, and I
• 12:13
  Speaker 4: expect that that's going to be the case now in
• 12:15
  Speaker 4: Hyatt's situation. They are still talking a little bit more
• 12:18
  Speaker 4: about deleveraging just to get back to the category that
• 12:21
  Speaker 4: they need to be in. But I think that over time,
• 12:24
  Speaker 4: and it's the type of thing that we see these
• 12:25
  Speaker 4: companies issue debt, foreign acquisition, and then they do lever
• 12:29
  Speaker 4: and then they do it again.
• 12:31
  Speaker 2: Stay with us.
• 12:32
  Speaker 6: More from Bloomberg Intelligence coming up after this.
• 12:38
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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• 12:45
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• 12:49
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 12:52
  Speaker 6: Again, a busy day in the earnings from particularly for
• 12:54
  Speaker 6: some of the restaurant companies. McDonald's reported numbers that beat estimates.
• 12:59
  Speaker 6: Restaurant brand think Burger King, I think is kind of
• 13:03
  Speaker 6: it raised its dividend. So let's talk to Michael Halen.
• 13:06
  Speaker 6: He is the analyst of Bloomberg Intelligence. Well, I was
• 13:09
  Speaker 6: all the restaurant companies out there. Mike, thanks so much
• 13:12
  Speaker 6: for joining us here. Let's talk about McDonald's. Their value
• 13:16
  Speaker 6: menu was a kind of a hit with consumers.
• 13:20
  Speaker 8: Yeah, they've re established themselves as the value leader in
• 13:24
  Speaker 8: QSR which makes sense.
• 13:26
  Speaker 3: Right.
• 13:26
  Speaker 8: They have fourteen thousand stores in the US, more scale
• 13:28
  Speaker 8: than anybody, you know, and they've done a phenomenal job
• 13:32
  Speaker 8: with the marketing. I mean, I think they sold fifty
• 13:34
  Speaker 8: five million pairs of Grinch socks, right, the Grinch Happy Meal,
• 13:38
  Speaker 8: they got one of their most successful promotions ever. Right,
• 13:44
  Speaker 8: So yeah, they're firing on all cylinders. They also benefited
• 13:48
  Speaker 8: from lapping E Coli a year ago, and that's that's
• 13:52
  Speaker 8: how they ended up with such a strong comp in
• 13:54
  Speaker 8: which was a pretty tough quarter for most of the
• 13:56
  Speaker 8: industry because of the cold weather and the flu that
• 13:59
  Speaker 8: we saw in decent right.
• 14:01
  Speaker 3: And we also are hearing that McDonald's is not going
• 14:04
  Speaker 3: to rest on his laurels. It's looking to innovate. It's
• 14:07
  Speaker 3: going to introduce some new beverages under the McCafe mcafe, mcafe,
• 14:12
  Speaker 3: mcafe mcafe that's hard to say cafe French anyway, indulging
• 14:19
  Speaker 3: coffees that sounds kind of fancy? Is that to appeal
• 14:22
  Speaker 3: to the consumer who might be trading down to McDonald's.
• 14:28
  Speaker 8: Now, you know what it's it's beverages are hot, I
• 14:31
  Speaker 8: mean cosmics, you know, although that that chain isn't isn't
• 14:35
  Speaker 8: you know, has been kind of dissolved that they they've
• 14:39
  Speaker 8: learned a lot about the beverage beverage industry through that
• 14:44
  Speaker 8: through that test, right dirty sodas. You know, there's a
• 14:49
  Speaker 8: chain out west called Swig that that absolutely crushes it
• 14:52
  Speaker 8: with dirty sodas. Think you know, popa polo with added
• 14:55
  Speaker 8: syrups and whipped cream on top and things of that nature. Right,
• 15:01
  Speaker 8: It's a lot of energy drinks. These these are like
• 15:04
  Speaker 8: really a really hot segment of the QSR industry. It
• 15:07
  Speaker 8: has been for years, right as some of these bigger,
• 15:11
  Speaker 8: slower moving chains like McDonald's are starting to kind of
• 15:14
  Speaker 8: jump on this bandwagon a little bit later. But you know,
• 15:17
  Speaker 8: we think this is this could be meaningful for them
• 15:22
  Speaker 8: in the second half, you know, and it's no longer public,
• 15:25
  Speaker 8: but you know, this could take a chunk out of
• 15:28
  Speaker 8: Sonic's business, you know, because they've they've long been a
• 15:33
  Speaker 8: beneficiary of the beverage market, you know. And what's nice
• 15:37
  Speaker 8: about that business is a lot of those drinks are
• 15:39
  Speaker 8: sold and during that snack period, you know, when these
• 15:43
  Speaker 8: restaurants have a low around you know, two, three, four
• 15:45
  Speaker 8: o'clock in the afternoon.
• 15:48
  Speaker 6: Restaurant brands. They also reported some numbership remind us who
• 15:52
  Speaker 6: restaurant brands is and what they're doing these days? How
• 15:54
  Speaker 6: are their results?
• 15:56
  Speaker 8: Yeah, so you know it was kind of mixed results
• 15:59
  Speaker 8: versus what the street was looking for. You know, I
• 16:02
  Speaker 8: look at the underlying trends and I think they're still strong.
• 16:05
  Speaker 8: So the reason why it's down right now is, you know,
• 16:08
  Speaker 8: Burger King showed an acceleration in the US, which is
• 16:11
  Speaker 8: is pretty promising. You know, they showed strong results at
• 16:16
  Speaker 8: IT international and International is a pretty well oiled machine
• 16:19
  Speaker 8: for this company. But there was some deceleration in the
• 16:24
  Speaker 8: Tim Horton's numbers, which makes up sixty percent of adjusted EBITDA.
• 16:29
  Speaker 8: And you know Popeyes remains kind of weak, right, So
• 16:33
  Speaker 8: I'd say the biggest concern in this report is really
• 16:35
  Speaker 8: about the slowdown in tim Horns. But it's lapping tougher comps.
• 16:39
  Speaker 8: And when we look at you know, same store sales
• 16:42
  Speaker 8: trends going back you know a handfull of years, the
• 16:44
  Speaker 8: trends are actually accelerating even though it decelled the on
• 16:47
  Speaker 8: the one year and a two year basis, And so
• 16:50
  Speaker 8: you know, tim Horns is a monster in Canada. I
• 16:53
  Speaker 8: wouldn't be too concerned about it. Like I said, a
• 16:57
  Speaker 8: big part of this story is the internetational unit growth
• 17:01
  Speaker 8: that they're putting up, and we think they can get
• 17:05
  Speaker 8: back up to mid single digits here in another year
• 17:08
  Speaker 8: or so. You know, Popeyes and Burger King are absolutely
• 17:12
  Speaker 8: crushing it around the globe, and you know, we expect
• 17:17
  Speaker 8: pretty solid growth here and we think they can outperform
• 17:20
  Speaker 8: a lot of their quick service peers here in twenty
• 17:23
  Speaker 8: twenty six.
• 17:23
  Speaker 3: Michael, how are the McDonald's and the restaurant brands of
• 17:26
  Speaker 3: the world using AI. We've seen them embraced automation with
• 17:31
  Speaker 3: you know, you have to go order yourself at the
• 17:33
  Speaker 3: kiosk and then someone calls your number, so they've removed
• 17:37
  Speaker 3: they've made things more automated in that regard.
• 17:40
  Speaker 2: But how will AI change the whole experience?
• 17:44
  Speaker 8: Yeah, well, you know AI is going to change the experience,
• 17:49
  Speaker 8: the restaurant experience in different ways, Like different chains are
• 17:53
  Speaker 8: going to look to different solutions. Something that works for
• 17:57
  Speaker 8: one type of chain like a Chipotle, isn't going to
• 17:59
  Speaker 8: work for McDonald's and vice versus. So you know, I
• 18:02
  Speaker 8: think when you're looking at AI first and foremost, it's
• 18:05
  Speaker 8: going to be a continued progress on that one to
• 18:08
  Speaker 8: one marketing, getting people into your loyalty program and eventually
• 18:12
  Speaker 8: getting those very directed offers to them at the right times. Right,
• 18:18
  Speaker 8: this has been kind of a long time coming. AI
• 18:20
  Speaker 8: should really kind of help with that piece, and I
• 18:24
  Speaker 8: think for these quick service chains, the thing that's going
• 18:28
  Speaker 8: to be probably most useful is like an AI assistant.
• 18:31
  Speaker 8: You know, Taco Bella is rolling this out, testing it
• 18:34
  Speaker 8: and then eventually going to roll out to all its
• 18:36
  Speaker 8: stores where they have basically an AI assistant for their
• 18:39
  Speaker 8: GM tells them how much food they need to prep,
• 18:42
  Speaker 8: if they need more labor on the line, helps them
• 18:46
  Speaker 8: have more accurate sales projections, so they know how much
• 18:49
  Speaker 8: labor they're going to need on any given day, how
• 18:52
  Speaker 8: much food prep they need to do, whatever it might be.
• 18:55
  Speaker 6: Right.
• 18:55
  Speaker 8: So, I think those are going to be the two
• 18:58
  Speaker 8: most ubiquitous use cases and probably the ones that we'll
• 19:02
  Speaker 8: see most of the progress on in the near term.
• 19:07
  Speaker 6: Stay with us more from Bloomberg Intelligence coming up here.
• 19:10
  Speaker 7: For this.
• 19:13
  Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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• 19:20
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• 19:27
  Speaker 6: One of the stocks on the move to the downside
• 19:31
  Speaker 6: is tech company app Lovin. I'm just looking at the
• 19:34
  Speaker 6: stock here, really taking it on the chin here. Today
• 19:36
  Speaker 6: they had some earnings and some guidance, a little bit
• 19:40
  Speaker 6: of a challenge that stocks down nineteen percent today and
• 19:44
  Speaker 6: forty five percent year to date. This is a big
• 19:46
  Speaker 6: company that a lot of people, including myself, don't know
• 19:49
  Speaker 6: a lot about. We're going to change that right now.
• 19:51
  Speaker 6: It's got to mark a cap of one hundred and
• 19:52
  Speaker 6: twenty five billion dollars. Nathan nade Joints is Bloomberg Intelligence
• 19:56
  Speaker 6: technology research analysts. Nathan, do me a solid here and
• 19:59
  Speaker 6: just tell me what app love and does. Number one
• 20:02
  Speaker 6: and number two why should it start getting hammered today?
• 20:07
  Speaker 7: So thanks for the questions. First question, app Lovin essentially
• 20:11
  Speaker 7: controls and auction, which is a marketplace where ad space
• 20:16
  Speaker 7: inside of mobile apps are bought and soul.
• 20:18
  Speaker 2: It has a.
• 20:19
  Speaker 7: Commanding influence on this sort of real time auctions for
• 20:22
  Speaker 7: in app ad space and that is helping. You know.
• 20:26
  Speaker 7: The reason it runs an auction houses because it essentially
• 20:30
  Speaker 7: connects advertisers which one to advertise inside of mobile gaming apps,
• 20:36
  Speaker 7: and also mobile gaming app publishers that want to sell
• 20:38
  Speaker 7: ad space to make dollars. You know, because a lot
• 20:41
  Speaker 7: of these states these days, a lot of mobile apps,
• 20:44
  Speaker 7: games or otherwise I actually offer for free. So how
• 20:47
  Speaker 7: else are they going to make money if not selling
• 20:49
  Speaker 7: the ad space inside of the apps and Applevin is
• 20:52
  Speaker 7: essentially the mediator connecting brands which one to advertise and
• 20:57
  Speaker 7: apps which want to sell the ad space. And on
• 21:00
  Speaker 7: the share price reaction we saw today, I think, you know,
• 21:04
  Speaker 7: I think to some extent that's used to this sort
• 21:06
  Speaker 7: of AI disruption risk or so called AI fears. And
• 21:10
  Speaker 7: obviously Eplevin is not alone in facing disruption for any
• 21:13
  Speaker 7: sort of AI companies. And there's been a lot of
• 21:16
  Speaker 7: headlines where the Google genie in the last week that
• 21:19
  Speaker 7: can create an interactive video with simple text prompts. It
• 21:22
  Speaker 7: means people like you and I can create games you know,
• 21:24
  Speaker 7: any and you know sometime soon. And also more closer
• 21:27
  Speaker 7: to home for Ablevin, there's a startup called cloud Acts,
• 21:30
  Speaker 7: which is in the space that Eplevin is in. It's
• 21:34
  Speaker 7: Ablevin's brand by the business, which is mobile ad monetization,
• 21:38
  Speaker 7: and there's still uncertainty around how much disruption the extent
• 21:43
  Speaker 7: of disruption to Eplevin because Eblevin's mode, which is a
• 21:47
  Speaker 7: word that gets thrown around a lot, but it's essentially
• 21:49
  Speaker 7: its competitive advantages are relatively stronger than other rivals in
• 21:54
  Speaker 7: the space. Yeah, I think I'll leave it then to
• 21:57
  Speaker 7: see if there's any follow up.
• 21:59
  Speaker 3: Okay, thank you for that introduction. So it sounds like
• 22:02
  Speaker 3: to a large extent, because it's tied to the advertising industry,
• 22:07
  Speaker 3: that it is cyclical, that it's going to move in
• 22:09
  Speaker 3: line with how people feel about the economy. So where
• 22:13
  Speaker 3: does that leave this company when it comes to disruption
• 22:18
  Speaker 3: or resilience to.
• 22:19
  Speaker 2: The AI narrative.
• 22:20
  Speaker 3: I mean, even if it doesn't happen right away, there's
• 22:23
  Speaker 3: that idea that it could down the road.
• 22:27
  Speaker 7: Yeah, you certainly right, like that it could happen down
• 22:31
  Speaker 7: the road. But I guess going back to the extent
• 22:34
  Speaker 7: of disruption and this so called mode which is competitive advantage,
• 22:37
  Speaker 7: and I think av Levin has some tricks of it
• 22:40
  Speaker 7: leadst For example, it has these AI or machine learning
• 22:43
  Speaker 7: models that took more than five years to build, and
• 22:46
  Speaker 7: it's trained with data from in app transactions back when
• 22:50
  Speaker 7: it was still publishing games. And obviously how sharp a
• 22:54
  Speaker 7: model is at targeting ads depends on the quality of
• 22:58
  Speaker 7: the data and the and the amount of data. And
• 23:02
  Speaker 7: I believe because Ablevin's model, at least in helping advertisers
• 23:07
  Speaker 7: target ads instead of mobile giving apps, that model is
• 23:11
  Speaker 7: mature in the sense it would take some time before
• 23:15
  Speaker 7: any sort of upstarts can catch up to that level
• 23:17
  Speaker 7: of sophistication in the modeling. So I believe Evelurbin steps
• 23:21
  Speaker 7: in one way and like for context, right, and when
• 23:26
  Speaker 7: an ad it's shown to a mobile gamer, seven or
• 23:29
  Speaker 7: eight out of ten times that ads is med data
• 23:32
  Speaker 7: by Ablevin. That is how much of a commanding influence
• 23:35
  Speaker 7: Ablevin has in the in the auction of digital ad space.
• 23:38
  Speaker 7: So I believe that dominance. It's you know, it would
• 23:41
  Speaker 7: take a lot to displace that, but uh, you know,
• 23:44
  Speaker 7: obviously for smaller rivals in the space, whether it's unity
• 23:48
  Speaker 7: is vector or you know, uh leveler. You know, for
• 23:54
  Speaker 7: smaller rivals, I think, you know, the concerns for AI
• 23:58
  Speaker 7: fears might be even more pronounced.
• 24:01
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