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US Weighs Google Breakup, Hurricane Milton · Bloomberg Intelligence

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Speaker 2: Let's get back to the other story of the morning,
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Speaker 2: and that's what's happening with Google. So joining us as man,
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Speaker 2: you've seing Bloomberg Intelligence senior tech industry analyst on a
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Speaker 2: potential Google breakup. Okay, so the DOJ considering asking a
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Speaker 2: federal judge to force Google to sell off parts of
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Speaker 2: its business. What do you think is actually going to happen?
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Speaker 3: Well, so there are three big lawsuits out there against
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Speaker 3: Google in the US, two from DOJ. One is the
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Speaker 3: monopoly lawsuit with the lost and that's where we're looking
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Speaker 3: at remedies. The other one is also from DJ against
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Speaker 3: their ad tech business, where the DOJ is looking at
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Speaker 3: their at tech stack and how you know they control
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Speaker 3: all parts of this stack. The third one is from
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Speaker 3: the you know, different state attorney journals, again targeting their
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Speaker 3: attach business. So when I look at you know, everything
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Speaker 3: that obviously regulators want to change with Google. The ad
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Speaker 3: tech piece is the one which comes up over and
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Speaker 3: over again, the fact that they control different parts of
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Speaker 3: the ads TAC. Now in the monopoly lawsuit, they're talking
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Speaker 3: about a force breakup of the Chrome business or the
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Speaker 3: play store business, Android business. I think it's very hard
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Speaker 3: to take out, you know, a single product from a
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Speaker 3: company like Google and say this is a separate entity.
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Speaker 3: It's just like it's all run or shared infrastructure. I
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Speaker 3: can't imagine you know, doing that with Google, and you know,
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Speaker 3: doing it successfully in the sense that Android can be
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Speaker 3: a separate company. Maybe YouTube, But again with YouTube, it's
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Speaker 3: run on that same infrastructure that searches run on. So
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Speaker 3: how do you split that infrastructure. It's very hard to
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Speaker 3: do it at the product level.
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Speaker 4: All right, here's some inside Bloomberg for you. You can
2:03
Speaker 4: get really smart on a new piece of information that
2:06
Speaker 4: just hit the tape about a company type in the
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Speaker 4: ticker goog L for Google. Hit equity, then hit BECO
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Speaker 4: BICO for Bloomberg Intelligence company Research, and you'll get what's
2:16
Speaker 4: called a recent event reaction. So I want to know
2:19
Speaker 4: immediately what Mandeep Singh thinks about this stuff and what
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Speaker 4: I read. I didn't expect to read we see a
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Speaker 4: breakup of Google's add tech business as the most likely
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Speaker 4: outcome for remedy in the company's monopoly case with the
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Speaker 4: US Justice Department. I thought what I would have read is,
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Speaker 4: I don't worry about it, but this has some teeth here.
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Speaker 3: This is what you're kind of well, because the loss
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Speaker 3: that first lawsuit at the dog and the second one
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Speaker 3: the ad tech as well, it's very likely that the
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Speaker 3: judge will rule against Google. So when you lose the cases,
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Speaker 3: there has to be both behavior and structural remedy. And
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Speaker 3: in the case of behavior remedy, yeah, they can't make
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Speaker 3: those payments to Apple anymore. To be the default sir,
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Speaker 3: or any other hardware maker, they will have to open
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Speaker 3: up Android to offer search screens so that you just
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Speaker 3: don't have to use Chrome or Google Search. You can
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Speaker 3: use bing search for example. So choice screens is another
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Speaker 3: behavior elder. But the structured remedy in terms of a
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Speaker 3: forced sale, I find it hard to believe that the
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Speaker 3: dot will ask them to sell a product. It has
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Speaker 3: to be more at the technology stack level.
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Speaker 2: So when we go to the ad tech stack, maybe
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Speaker 2: that just demptail with what you were saying, so what
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Speaker 2: does control the ad tech stack mean when you're talking
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Speaker 2: about Google?
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Speaker 3: So think of how an ad exchange works. You have
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Speaker 3: the supply side, you know in terms of the publisher
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Speaker 3: ad inventory, and then you have the demand side, the
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Speaker 3: advertisers who are buying those ads, and then you have
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Speaker 3: the exchange in the middle, who is matching the supply
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Speaker 3: and the demand side for ads. Google has a products
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Speaker 3: across the stack where they have a man side platform,
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Speaker 3: They have a supply side AD platform. They are an
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Speaker 3: online exchange and they've built it over the years because
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Speaker 3: they made a few acquisitions. Double Click was the most
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Speaker 3: notable one where they acquired all the capabilities to really
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Speaker 3: operate as an entity that knows everything when it comes
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Speaker 3: to digital ads being sold in the marketplace. So they
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Speaker 3: control that stack end to end. That's why when you
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Speaker 3: compare Google's ad pricing to everyone else out there, they
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Speaker 3: are far superior. One they have the best targeting. The
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Speaker 3: other is when you're operating a stack where you have
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Speaker 3: the dominant product across the different pieces, you have a
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Speaker 3: pricing advantage. And that's what you know. The regulators are
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Speaker 3: saying that this company controls pretty much everything in the
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Speaker 3: ad stack.
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Speaker 4: But the advertisers themselves they're not complaining, of course not.
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Speaker 5: I mean they're getting like, who are they protecting?
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Speaker 4: This a solution in search of a problem here in
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Speaker 4: my opinion, because I have a competition in this market,
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Speaker 4: I think I have competition. I mean Google's huge, so Facebook,
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Speaker 4: and now I've got this little company in a Seattle
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Speaker 4: called Amazon. They're monster's advertising player. So where's the problem here?
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Speaker 3: So it all comes down to how you look at
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Speaker 3: the market. If you look at the market the way
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Speaker 3: you just described, where Meta is as formidable as Google
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Speaker 3: and Amazon is a big third player, then yes there
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Speaker 3: is competition. But when you look at certain type of ads,
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Speaker 3: whether it's on the desktop or you know the third
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Speaker 3: party ads that are going through Google Ad Exchange, these
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Speaker 3: companies don't overlap. Like remember, Meta is a walled garden,
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Speaker 3: even though it's big in terms of the digital ad advertising,
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Speaker 3: it's its own world garden. Amazon is its own walled
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Speaker 3: garden Google. So these companies have their own swim lanes.
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Speaker 3: They are big in terms of the digital ad dollars,
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Speaker 3: but they have their own swim lanes. They don't overlap.
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Speaker 3: And that's the objection that I think regulators have.
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Speaker 2: Okay, so if they wound up, you know, moving around
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Speaker 2: that ad tech stack and changing stuff up, what does
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Speaker 2: that change look like and how much money could then
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Speaker 2: Google lose?
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Speaker 3: Well, so Google Search obviously is a two hundred billion
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Speaker 3: dollar rund raiate business, still the cash cow for Google.
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Speaker 3: So that's where you know the Google network piece, which
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Speaker 3: is the ads that Google shows on third party platforms.
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Speaker 3: So one is Google showing ads on YouTube and their
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Speaker 3: own search page. The other is Google showing ad on
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Speaker 3: let's say New York Times or some other publisher. Because
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Speaker 3: it's going through the Google Ad Exchange. That's the part
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Speaker 3: that can be divested where and it's a thirty two
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Speaker 3: billion dollar rund rate business within that two hundred billion,
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Speaker 3: that's the part that's not growing. But you could argue
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Speaker 3: could be split up in a way where I think
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Speaker 3: Google maybe a smaller search ad business, But at the
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Speaker 3: same time that will appease the regulators because they're not
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Speaker 3: controlling different parts of the ads stack.
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Speaker 4: We talk to institutional investors out there these days, how
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Speaker 4: do they think about the regulatory risk over big tech
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Speaker 4: these days? And how's that change over the last three.
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Speaker 6: Or four years?
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Speaker 3: I mean right now, everyone wants to know who will
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Speaker 3: be the dominant player when it comes to LLMS and
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Speaker 3: you know, generative AI, whether Google will end up losing
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Speaker 3: its dominance in search because of these LLM players. And
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Speaker 3: that's where I think again, the products that Google has,
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Speaker 3: whether it's Android or YouTube or cloud, they're critical to
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Speaker 3: maintaining Google's lead in that LLLM and generative AI space
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Speaker 3: where they do have competition from Open AI, Microsoft, And
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Speaker 3: that's what investors are most focused on. It's always about
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Speaker 3: the future five ten years down the line, and that's
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Speaker 3: where the growth is. And the companies with the best
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Speaker 3: large languid models have an advantage. And Google, because of
7:53
Speaker 3: the fact that they own these family of apps, they
7:56
Speaker 3: have a data advantage. For the large anguid models, it's
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Speaker 3: their proprietary day, so they don't want to give away
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Speaker 3: YouTube or you know, just have that separate in terms
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Speaker 3: of all, Yeah.
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Speaker 2: It needs the beast in essence, for lack of a
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Speaker 2: better word, they don't have to buy to feed the beast. Okay,
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Speaker 2: So when we wind up hearing numbers and earnings, what
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Speaker 2: kind of growth are we going to see for these
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Speaker 2: big tech companies and what's going to be considered good,
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Speaker 2: like eighteen percent growth. Is that going to be good
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Speaker 2: enough for what I mean?
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Speaker 3: Right now? We look at Microsoft growing mid teens. Obviously
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Speaker 3: the growth part of the business is Azure Cloud. In
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Speaker 3: the case of Google, Look search business may probably grow
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Speaker 3: you know, low teens, it's still is growing double digit,
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Speaker 3: which is remarkable for you know, a business of two
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Speaker 3: hundred billion dollars round rate. That just goes to show
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Speaker 3: that Google Search still dominates and that's why they get
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Speaker 3: so much regulatory scrutiny. But the growth part of the
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Speaker 3: business is the Google cloud business. I think that's where
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Speaker 3: you will see the growth thirty percent growth, and it's
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Speaker 3: driven by companies deploying their you know, large angrid model,
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Speaker 3: deploying generative AI. Where do you do that? You do
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Speaker 3: that on the cloud. And the cloud side is big
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Speaker 3: enough for you know, all three players, whether it's Microsoft,
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Speaker 3: Amazon and Google, to do well. So I think we'll
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Speaker 3: see a lot of cloud business. And YouTube I think
9:18
Speaker 3: is a great standalone business, but there is a cyclical
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Speaker 3: element to it, and that's why YouTube business growing as
9:24
Speaker 3: fast as their cloud business.
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Speaker 4: The reason we have like twenty seven techannels of Bloomberg Intelligence,
9:29
Speaker 4: I mean, they're all over the place is because I
9:31
Speaker 4: think the US just said fifty years ago, just light
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Speaker 4: touch on regulatory let these guys in Silicon Valley do
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Speaker 4: their thing, and that's what created the great technology boom
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Speaker 4: in my opinion, as opposed to Europe, which you got
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Speaker 4: nothing right. So now I'm not sure if the cat's
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Speaker 4: out of the bag for a lot of these things.
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Speaker 2: Yeah, I don't know. I don't know. It makes life
9:50
Speaker 2: more interesting though, for our intertrust to people and Mandy
9:53
Speaker 2: a job, all right, many things a lot man you've
9:55
Speaker 2: seeing joining us from Bloomberg Intelligence.
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Speaker 2: Thirty from Alex Steel alongside Paul Sweeney. This is Bloomberg
10:19
Speaker 2: Intelligence Radio. We are broadcasting to live from Interactive Broker
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Speaker 2: Studio right here in Midtown Manhattan. For the last few days,
10:25
Speaker 2: though Paul and I were in Orlando at a Commonwealth
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Speaker 2: Advisor's conference, and Orlando was getting a little bit dicey
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Speaker 2: the winds are picking up. You had rain, and it
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Speaker 2: looks like that Hurricane Milton is just barreling towards that
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Speaker 2: west coast and it's very, very dangerous, particularly for those
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Speaker 2: on that west coast. So you want to take a
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Speaker 2: little bit of a deep dive to kind of understand
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Speaker 2: what it means, say for power and utilities and the grid,
10:47
Speaker 2: because no doubt power is going to go out, but
10:49
Speaker 2: how long it stays et cetera is going to be
10:51
Speaker 2: very pivotal. Mike Sullivan is Energy and Utilities consultant at
10:54
Speaker 2: PA Consulting joining us. Now, Mike, this is a very
10:58
Speaker 2: silly question, but how do's a hurricane like this impact
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Speaker 2: the grid and utilities? Like, what's the sequence of events
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Speaker 2: of how this plays out?
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Speaker 6: Okay, oh, good morning, and thanks for having me. At first,
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Speaker 6: it goes without saying that Milton is on track. This
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Speaker 6: will probably be one of the most destructive hurricanes in
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Speaker 6: Florida history, and there will be extended power outages, both
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Speaker 6: from wins and the wave surge, so both of those
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Speaker 6: things will be in play. I think the most important
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Speaker 6: thing is for the public to remember that the local
11:37
Speaker 6: officials are first and foremost their choice for information there
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Speaker 6: These emergency management organizations, they are the glue that provide
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Speaker 6: coordination between the state organizations, federal organizations, and first responders
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Speaker 6: like utility workers. And right now there are some estimates
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Speaker 6: that's saying there were over thirty five thousand out of
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Speaker 6: state utility workers who have converged on Florida to help
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Speaker 6: in restoration. So it's it's going to be a huge effort.
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Speaker 6: It's going to take days to restore power, and it's
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Speaker 6: quite a job the utilities are up against.
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Speaker 4: So, Mike, give us a sense here of kind of
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Speaker 4: the risk to Florida here. I mean, they've been through
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Speaker 4: this so many times. Unfortunately, what can what have they done?
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Speaker 4: What can they do? What should they do to maybe
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Speaker 4: try to I don't know, safe proof their grid perhaps
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Speaker 4: a little bit more. Is there anything that can be done?
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Speaker 6: Sure, there's actually a state law in Florida that requires
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Speaker 6: that utilities file storm protection plans every three years. You know,
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Speaker 6: the basic construct or compact that utilities have is to
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Speaker 6: provide safe, reliable, and affordable power to all customers. Over
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Speaker 6: the last decade, so that has layered on top of
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Speaker 6: that has become that has come into play two other
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Speaker 6: objectives the clean energy transition and hardened and more resilient grids.
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Speaker 6: So all the utilities have filed these plans to make
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Speaker 6: their grid stronger to withstand events like this, to be
13:24
Speaker 6: able to restore power faster, and then you know, to
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Speaker 6: think about the overall survivability of the communities that they serve.
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Speaker 6: I think goes without saying that the number and the
13:38
Speaker 6: impact of the kinds of events we've been seeing in
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Speaker 6: recent years requires the greater investments be made. Those protection
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Speaker 6: plans are good starts, but these grids are expansive. They've
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Speaker 6: been built over one hundred plus years, and they need
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Speaker 6: to be hardened and also expanded to to support the
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Speaker 6: Queen Energy transition and greater electrification due to data centers
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Speaker 6: and a lot of other increasing electrical load.
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Speaker 5: Who pays for that?
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Speaker 2: Is it going to be utilities and the rate payers
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Speaker 2: or is it more of a grid operator? Is it
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Speaker 2: the government? Where does that come from?
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Speaker 6: So mostly, you know, I said part of utilities compact
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Speaker 6: is to keep rates affordable. All of these the investments
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Speaker 6: cost money. I mean, you're rebuilding major parts of the grid,
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Speaker 6: and yes, ultimately it does come down to raising rates
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Speaker 6: or rate payers, all right, So.
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Speaker 4: Mike, you think about our grid and you just look
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Speaker 4: at the wires strung on these poles, It just it
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Speaker 4: just seems like so technologically out of step with where
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Speaker 4: our economy is. Underground wires, isn't that the future? I mean,
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Speaker 4: as long stuff's above ground, it's going to be at
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Speaker 4: risk to hurricanes and it all kinds of weather.
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Speaker 2: Talk about being expensive and rapairers pan or.
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Speaker 6: Sure, sure, absolutely, And for the last thirty years or so,
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Speaker 6: all new communities are supplied with underground service, So that's
15:21
Speaker 6: been going on for some time. It's the older infrastructure.
15:24
Speaker 6: Oftentimes communities are served they were built in the thirties
15:28
Speaker 6: and forties with what we call real lot construction. That's
15:32
Speaker 6: the lines that run behind people's backyards and butt up
15:36
Speaker 6: against other backyards. And those overhead lines are the ones
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Speaker 6: that are particularly susceptible to coming down and taking an
15:48
Speaker 6: awfully long time to put back up because they serve
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Speaker 6: only a few customers.
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Speaker 2: So when you say that, okay, so a lot of
15:56
Speaker 2: investment needs to go in to help all of these things,
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Speaker 2: whether it's the energy transition or it's weather proofing, etc.
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Speaker 2: And you mentioned that rate payers eventually are going to
16:03
Speaker 2: have to pay. I mean, there's only so much tolerance
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Speaker 2: for that. Do we know an estimate of what weather
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Speaker 2: proofing this industry as well as energy transitioning this industry
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Speaker 2: is going to cost.
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Speaker 6: So part of the problem is that oftentimes regulators, state
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Speaker 6: regulators who approve these plans don't adequately consider what I
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Speaker 6: call stack value. Is you are trying to build and
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Speaker 6: upgrade your grid for more renewable resources, greater electrification. That is,
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Speaker 6: they have to have more capacity and at the same
16:42
Speaker 6: time to build build them back more resiliently. Those two things,
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Speaker 6: when you think about them as a stacked value, it
16:51
Speaker 6: becomes more understandable, more digestible. Estimates for undergrounding, it's very expensive,
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Speaker 6: and power White has a particularly extensive undergrounding program underway
17:03
Speaker 6: right now, but you know, it's a million dollars to
17:08
Speaker 6: two million dollars depending on which part of the country
17:10
Speaker 6: you're talking about to underground lines. And most of the
17:14
Speaker 6: lines that are are overhead and cause most of the
17:17
Speaker 6: problems are ones that run up and down city streets,
17:21
Speaker 6: commercial areas, that kind of thing. And even in the
17:24
Speaker 6: best case, whether they're hardened or not. You know, oftentimes
17:29
Speaker 6: in major hurricanes like this, it's not just trees toppling
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Speaker 6: on wines, but it's flying debris hitting poles and lines
17:36
Speaker 6: and things like that. So an event like Milton is
17:41
Speaker 6: particularly problematic, but increased investment can certainly help.
17:46
Speaker 4: Hey, Mike, thanks so much for joining us. Really appreciate
17:48
Speaker 4: getting your insights here. Michael Salvin, he's the energy and
17:52
Speaker 4: you Tooty's consultant for PA consultant. They're based down in Annapolis, Maryland.
17:56
Speaker 4: There so again the hurricane barreling towards the west coast
18:01
Speaker 4: of Florida. John Sucker and I read the book The Grid,
18:04
Speaker 4: so we consider our Oh you.
18:06
Speaker 2: Did, wait, we're now already all right, all right, fine,
18:10
Speaker 2: I'm under list.
18:11
Speaker 4: The technology looks like nineteen twenty oh oh yeah, and
18:14
Speaker 4: you know, like really, I mean, can't we do anything?
18:17
Speaker 4: But as Mike Sulin was saying, the new stuff gets built,
18:19
Speaker 4: it's getting built on the underground. So first, after our
18:22
Speaker 4: good friends in Florida, this is Bloomberg.
18:25
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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18:40
Speaker 2: All right, in the markets, what do you do if
18:43
Speaker 2: it's still going to be higher for longer? In that
18:45
Speaker 2: maybe we're pricing out some cuts by the Fed in
18:48
Speaker 2: twenty twenty five this year, maybe a done deal next
18:51
Speaker 2: year though the market has repriced a bit. So let's
18:53
Speaker 2: get some details with Shelby McFadden investment analyst and Motley
18:56
Speaker 2: Fool asset Management. Shelby, it's always so wonderful to speak
19:00
Speaker 2: with you. One of my big questions is if we
19:02
Speaker 2: do get a longer economic cycle and the idea is
19:05
Speaker 2: higher rates for a little bit longer, lower than they
19:07
Speaker 2: are today, but still relatively higher, can stocks continue to
19:11
Speaker 2: beat bonds? And if so, wear in stocks?
19:16
Speaker 7: Yeah, I do think that the battle starts to get
19:18
Speaker 7: a little bit closer, because really the question is when
19:22
Speaker 7: will consumers or investors rather make that switch from bonds
19:27
Speaker 7: to risky assets. Right, So, the fact that stocks have
19:29
Speaker 7: continued to beat bonds thus far has already been something
19:33
Speaker 7: that's a bit more of a phenomenon, and we know
19:35
Speaker 7: the main leaders that are driving that. So it would
19:37
Speaker 7: really have to be a matter of in my view,
19:40
Speaker 7: you know, yields coming down to such a level that
19:42
Speaker 7: they are higher than we've been used to over the
19:44
Speaker 7: last four years or so, but not quite high enough
19:47
Speaker 7: to justify completely coming out of risk assets. So I
19:50
Speaker 7: think that's the sort of fundamental part of it. I
19:53
Speaker 7: think the second part really comes from the narrative, Right,
19:56
Speaker 7: what is it that these growth companies claim to be offering.
19:59
Speaker 7: What is the secular shift that's going to propel so
20:03
Speaker 7: much of this growth? If the growth is not going
20:05
Speaker 7: to be broad, if it's going to continue to be concentrated,
20:08
Speaker 7: then I think it might be a little bit more
20:09
Speaker 7: of a tussle between the two for stocks to keep
20:11
Speaker 7: on winning.
20:13
Speaker 4: Shelby, I'm just a little uncertain about the consumer. Yes,
20:15
Speaker 4: I like rates coming down, and I think that's good
20:17
Speaker 4: for the consumer, But how do you guys think about
20:20
Speaker 4: the consumer and owning stocks that are dependent upon the
20:23
Speaker 4: consumer and retail spending?
20:26
Speaker 6: Yeah?
20:26
Speaker 5: Absolutely.
20:27
Speaker 7: I mean from what we've seen from a lot of
20:29
Speaker 7: the banks, the payment processors thus far, and of course
20:32
Speaker 7: knowing that we've got banks coming up soon, has been
20:35
Speaker 7: that consumers for the most part are doing okay. That's
20:38
Speaker 7: not to say that inflation is completely over. That's not
20:41
Speaker 7: to diminish the fact that in some locales it's a
20:43
Speaker 7: bit more significant and over certain goods and surfaces, but
20:45
Speaker 7: for the most part, people seem to have adjusted. They
20:48
Speaker 7: have definitely spent downsaving, so discretionary is a little bit lower,
20:51
Speaker 7: but they have figured out how to live on the
20:54
Speaker 7: income that they have. The job switching has slowed down
20:56
Speaker 7: a lot, so we're not as barish on the consumer
20:59
Speaker 7: as a whole some others might be. But in terms
21:01
Speaker 7: of playing the consumer, that's where the active management comes in.
21:05
Speaker 7: We take the time to pick the companies that are
21:07
Speaker 7: run well. They have great operational leverage, they can go
21:10
Speaker 7: ahead and move with the consumer as they need to.
21:13
Speaker 7: So that's why we've got companies like Costco in our
21:15
Speaker 7: Malipul one hundred in our Global Opportunities Fund. Those are
21:19
Speaker 7: names that are consumer facing, but they tend to do
21:21
Speaker 7: the best out of their peers because of how nimble
21:23
Speaker 7: they are.
21:24
Speaker 2: Which also on your list is American Express, and the
21:27
Speaker 2: idea typically is that, oh, American Express caters to higher
21:30
Speaker 2: income earners, so if you're looking at the K shape economy,
21:33
Speaker 2: that part of the K is actually going to do
21:34
Speaker 2: really well. BTIG actually cut the credit card company to
21:37
Speaker 2: sell from neutral saying that fundamentals are slowing for those
21:41
Speaker 2: super prime customers.
21:43
Speaker 5: What do you see?
21:45
Speaker 7: Yeah, so, for the one thing, we do know that
21:46
Speaker 7: they're a little bit sticky, and yes we have that
21:49
Speaker 7: slightly longer runway for higher end consumers, but they tend
21:54
Speaker 7: to have already made the big decisions to get rid
21:56
Speaker 7: of large bills, right, So if they've sort of held
21:59
Speaker 7: on to that end fee card for about two years
22:02
Speaker 7: in this tightening cycle, they tend to be in that
22:05
Speaker 7: part of that what is it, a less seity curve
22:08
Speaker 7: where it's kind of like, you know what, we're good
22:09
Speaker 7: to go here, even though we may be in a
22:12
Speaker 7: little bit of a higher for longer situation. There has
22:14
Speaker 7: been some relief, right, There has been some relief on
22:17
Speaker 7: credit conditions, and if we even get another twenty five
22:20
Speaker 7: basis point cut this year and maybe another one in
22:23
Speaker 7: Q one, that makes even better conditions for going a
22:26
Speaker 7: little bit down market. Now in looking at American Express,
22:29
Speaker 7: they're not interested in going completely down the river. That's
22:31
Speaker 7: not really their prerogative, but there is an opportunity in
22:35
Speaker 7: the high earning categories of gen Z and young millennials
22:39
Speaker 7: that they have an opportunity to go ahead and catch,
22:41
Speaker 7: but also knowing that these earners have a little bit
22:43
Speaker 7: short of a credit history, so as credit conditions soften,
22:46
Speaker 7: there is an opportunity there to go ahead and get
22:48
Speaker 7: a little bit more of the market, to go ahead
22:50
Speaker 7: and sort of adhere with they're already sticky premium base.
22:55
Speaker 4: I'm still a Green card holder. They try to sell me,
22:58
Speaker 4: upsell me for all the other stuff, like I'm staying
23:00
Speaker 4: with the classic green card.
23:02
Speaker 2: Okay, here's my thing with you.
23:03
Speaker 7: What you need.
23:04
Speaker 2: So my husband has the purple fancy one, right, somehow
23:07
Speaker 2: I only have the silver one. But I'm the one
23:09
Speaker 2: that spends all the money and pays the bills, and
23:12
Speaker 2: I don't like them. But I don't like that at all.
23:13
Speaker 2: And somehow I'm not in charge of this. It's still
23:15
Speaker 2: in their hist him nothing me. I think it's five
23:21
Speaker 2: hundred dollars.
23:22
Speaker 4: Oh that's such a company.
23:24
Speaker 2: Please, all right, Shelby, let's get remembers.
23:27
Speaker 4: Let's go where John and I shop Costco. It's not
23:30
Speaker 4: just for the dollar fifty hot dog. Talk to us
23:32
Speaker 4: about the Costco story.
23:35
Speaker 7: Yeah, the Costco story is one of just prime operators.
23:38
Speaker 7: I mean, I think that's the simplest way to put it,
23:40
Speaker 7: so they were able to navigate not only supply shortages
23:44
Speaker 7: in sort of the mid days of the pandemic recovery period,
23:47
Speaker 7: but also navigating the depths of inflation or the heights,
23:50
Speaker 7: if you will. They were one of the few companies
23:53
Speaker 7: that was boasting about lowering prices. So not only do
23:56
Speaker 7: they have this annuity model where they're going to be
23:59
Speaker 7: making the majority of their money in terms of absolute dollars,
24:01
Speaker 7: but in margin on the annual fee that they're charging,
24:06
Speaker 7: but they're able to garner more consumers by saying, hey,
24:09
Speaker 7: we're going to give you the best deal you can get.
24:12
Speaker 7: Obviously in a large amount, so as long as you
24:13
Speaker 7: have another room in your house. But they're able to
24:16
Speaker 7: keep people in that regard, and because it's an annual fee,
24:18
Speaker 7: it's something you budget for once and then it stick. Also,
24:22
Speaker 7: knowing that they were probably going to have more in stock,
24:25
Speaker 7: having that really robust shifting network allowed them to hold
24:28
Speaker 7: on to people. So I think consumers knowing that Costco
24:31
Speaker 7: is sort of on their side is a breath of
24:34
Speaker 7: fresh air compared to some of the other retailers. So
24:36
Speaker 7: the operators they have the succession planning went fantastic Over
24:39
Speaker 7: the last twelve months, no one's really had any concerns,
24:42
Speaker 7: and there's a huge opportunity.
24:43
Speaker 8: For e comm.
24:44
Speaker 7: A lot of folks really just kind of trudged through
24:47
Speaker 7: it on the sort of legacy platform. There's that Instacart
24:50
Speaker 7: partnership they have right now, but we give Costco to
24:53
Speaker 7: the five to ten years. They may really have something
24:55
Speaker 7: to compete with some of the peers on e comm.
24:56
Speaker 2: All right, Shelby, we always appreciate you. You have the
24:59
Speaker 2: best stuff, honestly, thank you so much. Shelby mcfadd investment
25:01
Speaker 2: analyst in Motley Fool Asset Management, joining us from Alexandria, Virginia.
25:05
Speaker 2: Wait a second, they have one hundred. They have a
25:06
Speaker 2: dollar fifty hot dog.
25:08
Speaker 5: Still yeah, still fifty?
25:10
Speaker 8: What is it?
25:10
Speaker 3: John?
25:10
Speaker 2: I buy him at bulk?
25:12
Speaker 4: No, it's what is the dollar fifty?
25:13
Speaker 2: But the one where you go and you get it
25:14
Speaker 2: like in in maybe to get it long rack of the.
25:17
Speaker 6: Door there, it's to die for.
25:19
Speaker 1: I still don't have a membership.
25:21
Speaker 2: I mean, at least happened your shot there without a membership.
25:24
Speaker 4: He doesn't show you.
25:25
Speaker 3: You want to tell her, oh, you.
25:27
Speaker 2: Use someone else in membership?
25:28
Speaker 5: I got it.
25:29
Speaker 2: I admit, I admit to not pick look at me
25:31
Speaker 2: being all smart.
25:33
Speaker 1: All right, you're listening to the Bloomberg Intelligence Podcast. Catch
25:38
Speaker 1: us live weekdays at ten am Eastern on Apple, card
25:41
Speaker 1: Play and Android Otto with the Bloomberg Business. You can
25:44
Speaker 1: also listen live on Amazon Alexa from our flagship New
25:48
Speaker 1: York station Just say Alexa playing Bloomberg eleven thirty.
25:53
Speaker 2: You know, so Disney was closing, Yes, Paul got in
25:56
Speaker 2: in the nick of time.
25:57
Speaker 4: Yeah, so I was there. When was that there?
25:59
Speaker 2: Sunday, Sunday, Monday.
26:00
Speaker 4: Sunday, Monday, a little bit Monday, and even during the
26:04
Speaker 4: rain and it was raining, it didn't stop people at all.
26:07
Speaker 4: You buy the poncho for like fifteen bucks each, but
26:11
Speaker 4: you buy the poncho and they're just standing there and yeah, Yeah,
26:15
Speaker 4: Disney's a place. It's kind of like when I go skiing,
26:17
Speaker 4: I don't even think about the money I'm spending because
26:20
Speaker 4: that would be too upsetting and impact your enjoyment of
26:22
Speaker 4: what you're doing. She just kind of shut your eyes
26:24
Speaker 4: and go That's how you do it at Disney. But
26:26
Speaker 4: apparently there's gonna be a financial impact to this whole thing.
26:28
Speaker 2: Interesting, and wonder how long it gets depends on how
26:30
Speaker 2: long it's gonna be closed and if there's gonna be flooding.
26:33
Speaker 8: And all the like.
26:34
Speaker 4: Fortunately, we pay somebody to think about this stuff, Keitha Ranganath,
26:36
Speaker 4: and she's a media analyst for Bloomberg Intelligence. One of
26:39
Speaker 4: the big names that she covers is the Walt Disney Company.
26:41
Speaker 4: She knows it back, you know, inside and out. And
26:45
Speaker 4: you know, Githa, you know, I've covered Disney for a
26:46
Speaker 4: long time and we never really cared that much about
26:49
Speaker 4: the theme parks. They were in nice business, they contributed
26:52
Speaker 4: nice profits, they kind of grew every year. But now
26:56
Speaker 4: if you think about the Walt Disney Company investing in
26:58
Speaker 4: the Walt Disney Company, you better be really bullish on
27:01
Speaker 4: the theme park business because that's now the major part
27:03
Speaker 4: of the profitability. So talk to us about the theme
27:06
Speaker 4: park business and what might be some of the risks
27:08
Speaker 4: for shutting down Walt Disney World.
27:10
Speaker 8: Yeah, absolutely right, Paul. So it's it's about a third
27:13
Speaker 8: of revenue, but it's about two thirds of profits.
27:16
Speaker 1: Wow.
27:17
Speaker 8: So almost yeah, almost sixty to sixty five percent of profits.
27:20
Speaker 8: And that is a complete shift, as you correctly pointed out,
27:24
Speaker 8: from just a few years ago, maybe even just five
27:25
Speaker 8: years ago before they kind of went into the streaming
27:28
Speaker 8: business before the linear TV business kind of is seeing
27:31
Speaker 8: the circular declines that it is right now. So it
27:33
Speaker 8: really the picture has kind of completely changed, and that
27:36
Speaker 8: means there is a lot of attention and a lot
27:38
Speaker 8: of focus on the theme parks. We do have, you know,
27:42
Speaker 8: some prior hurricane closures to go by, So they had
27:45
Speaker 8: one in twenty twenty two, which was Hurricane Ian when
27:49
Speaker 8: they closed the park for two days. With Hurricane Ian,
27:51
Speaker 8: they lost about sixty five million dollars. That was the
27:55
Speaker 8: operating income impact. You had Hurricane Irma in you know,
27:59
Speaker 8: twenty seventeen it was one hundred million dollar impact. We
28:02
Speaker 8: think though that with more and more reliance on the
28:05
Speaker 8: theme parks, just with the fact you know that it's
28:08
Speaker 8: become a bigger revenue contributor, a bigger profit contributor, obviously
28:11
Speaker 8: the financial hit is also going to be larger. Remember
28:15
Speaker 8: just the Florida parks pull in roughly one hundred and
28:18
Speaker 8: thirty five to one hundred and forty thousand visitors every
28:21
Speaker 8: single day. It's fifty million visitors a year, so you know,
28:25
Speaker 8: it obviously has huge ramifications it's losing roughly, you know,
28:28
Speaker 8: fifty million dollars per day. We think the operating income
28:33
Speaker 8: impact will be at least at least one hundred and
28:35
Speaker 8: twenty five million.
28:36
Speaker 7: So this is the first time.
28:39
Speaker 4: This is the first time I've been to a Disney
28:40
Speaker 4: property as a civilian. The other times I've been to
28:43
Speaker 4: a Disney property is always with Bob Iger walking next
28:46
Speaker 4: to me, so we have that analyst and investors and
28:48
Speaker 4: things like that. When they either close the park so
28:50
Speaker 4: we're the only ones there, or they give us like
28:52
Speaker 4: some super duper passes that we can zip at any line.
28:55
Speaker 4: This is the first time I wanted, like a civilian
28:57
Speaker 4: red to kind of wait in line and do all
28:59
Speaker 4: that kind of stuff. But and jillions of people do
29:02
Speaker 4: it as key.
29:03
Speaker 9: Yeah.
29:04
Speaker 2: At the airport, there were definitely reports of little children
29:07
Speaker 2: being just sobbing because they had to leave Disney. So
29:11
Speaker 2: just okay, you said they're losing fifty million dollars per
29:13
Speaker 2: day by shutting down Disney World, Like that's that's how
29:15
Speaker 2: big that Florida resort is for them. I heard that right, Yes, absolutely, yes,
29:20
Speaker 2: So it go ahead. Do they wind up? Do they
29:23
Speaker 2: make that up? Is it in the pent up demand
29:26
Speaker 2: or is this just lost.
29:29
Speaker 8: This will pretty much be lost, because remember it's not
29:31
Speaker 8: just the par closure. There is obviously going to be
29:34
Speaker 8: some you know, longer ranging repercussions for you know, all
29:38
Speaker 8: of the theme park businesses in Florida, in the Orlando area.
29:42
Speaker 8: So we are actually expecting attendance itself for the fiscal
29:46
Speaker 8: first quarter, which is the current quarter, to actually beat
29:49
Speaker 8: down maybe about mid single digits. Attendance was flatish in
29:53
Speaker 8: the you know, in the September quarter. It is definitely
29:56
Speaker 8: that there is definitely pressure all around and this obviously
30:00
Speaker 8: is not going to help them at all. The other
30:02
Speaker 8: thing that we're watching for alex as we kind of
30:05
Speaker 8: get into twenty twenty five, and this is going to
30:07
Speaker 8: be a special pain point for Disney, is that Universal,
30:11
Speaker 8: its closest rival, actually has a new theme part that
30:14
Speaker 8: they're opening in Orlando, and that basically doubles Universal's footprint.
30:19
Speaker 8: They're adding Epic Universe sometime in March April of next year. Again,
30:23
Speaker 8: a lot of people have been holding back on their
30:26
Speaker 8: you know, travel to Universal because they knew, they know
30:29
Speaker 8: this new attraction is coming, and so again we think
30:31
Speaker 8: that's going to be a little bit of a hit
30:32
Speaker 8: for Disney once we get into twenty twenty five.
30:35
Speaker 4: It's funny you mentioned that gig because I wrote Home
30:37
Speaker 4: with a Scottish family. They're on their way back to
30:40
Speaker 4: their home in Dundee, Scotland, and my seat my new
30:43
Speaker 4: buddy Rarely. I thought he was eighteen. He turns out
30:45
Speaker 4: he's thirteen.
30:46
Speaker 7: Huge.
30:46
Speaker 4: The girl in a big over there. But they came
30:48
Speaker 4: as a family. They came over from Scotland to Orlando
30:52
Speaker 4: just to go to Universal. They didn't go to Disney.
30:54
Speaker 4: They're wait a minute, So I turned on to asked
30:56
Speaker 4: this mom, this kid's tell me you guys came all
30:58
Speaker 4: the way here and you just went Universal, and she said, yeah,
31:01
Speaker 4: they're big like Harry Potter fans, so they do all
31:02
Speaker 4: that kind of yeah stuff. So that's and that's a
31:05
Speaker 4: Comcast property, Isn't that right, Keitha.
31:08
Speaker 8: That is a Comcast dropped And you're absolutely right. I
31:10
Speaker 8: mean it's for the younger kids, like the two to ten.
31:13
Speaker 8: I think Disney still continues to be the go to,
31:15
Speaker 8: but once you get into the teenage years, Yeah, you're
31:17
Speaker 8: absolutely right. Harry Potter seems to be like the bigger
31:19
Speaker 8: attraction you find a lot of families going there, and
31:22
Speaker 8: Epic Universe is going to have a lot of that
31:24
Speaker 8: as well.
31:24
Speaker 2: Also, to be fair, can't they just like hop over
31:26
Speaker 2: pairs to go to Disney World there? It's not the same,
31:28
Speaker 2: it's not the same. Okay, well, fair enough.
31:30
Speaker 4: Been there, done that. Hey, Keith it I know Disney
31:33
Speaker 4: is really ramping up their investment in their parks, right,
31:36
Speaker 4: Didn't they like double their capex over the next number
31:38
Speaker 4: of years.
31:40
Speaker 8: Yes, sixty billion dollars in capex spending over the next
31:44
Speaker 8: ten years. Almost twelve to fifteen billion dollars of that
31:46
Speaker 8: will just be for new cruise ships. They're really kind
31:49
Speaker 8: of doubling down on the cruises, so that's going to
31:52
Speaker 8: be a big part of their business going forward. But absolutely,
31:54
Speaker 8: they're almost doubling their footprint in some of the areas,
31:57
Speaker 8: like especially in California, they're kind of going to their footprint,
32:00
Speaker 8: going to almost add a whole new park in you know,
32:05
Speaker 8: in Orlando when all is said and done. So, yeah,
32:08
Speaker 8: big investment in in the parks, and they're kind of
32:10
Speaker 8: hoping that's going to pay off as they keep increasing prices.
32:13
Speaker 2: So I sent Paul an article this morning. Was one
32:15
Speaker 2: of the first things, I read that when it ran,
32:17
Speaker 2: it came in that Disneyland raises prices by about six
32:20
Speaker 2: percent on the most popular days. So the most expensive
32:25
Speaker 2: tickets now, typically weekends and holidays, are climbing over six
32:28
Speaker 2: percent two hundred and six dollars a day. At what
32:31
Speaker 2: point here are we capping out on price increases. I mean,
32:34
Speaker 2: if you have a family of four and there are
32:36
Speaker 2: two parents, it's twelve hundred dollars for one day.
32:40
Speaker 8: I don't think we're capping out. I think, you know,
32:42
Speaker 8: Paul kind of summed this up perfectly. You know, once
32:44
Speaker 8: you go there, you're not thinking of how much you're spending.
32:47
Speaker 8: And so actually, as we kind of model out the
32:50
Speaker 8: average prices, you know, it's close to about it's about
32:53
Speaker 8: one hundred and ninety dollars right now, the average you know,
32:56
Speaker 8: per capita spending per person. We think this pretty much
32:59
Speaker 8: goes to a about three hundred dollars over the course
33:02
Speaker 8: of the next four to five years.
33:04
Speaker 4: And nobody does it better than Disney. I mean, you
33:06
Speaker 4: get this little wristband, so you know, you're not even
33:09
Speaker 4: physically taking out your credit card.
33:11
Speaker 5: So easy to tap it and you just tap and go,
33:13
Speaker 5: and you know, it's just and you.
33:15
Speaker 2: Don't see it until you look at your credit card
33:17
Speaker 2: statement in like a month or something exactly.
33:18
Speaker 4: So it's nobody's better at it than Disney. All right,
33:22
Speaker 4: So let's step back on the Disney story here, the
33:25
Speaker 4: theme parks. We've got a good handle on that. Where
33:28
Speaker 4: are we in terms of profitability of the streaming business?
33:32
Speaker 4: Is this still a big big headwind for the company
33:35
Speaker 4: in the stock?
33:36
Speaker 8: Not anymore, Paul, So you know, the turnaround has finally
33:39
Speaker 8: taken place. It happened last quarter, and we are actually
33:42
Speaker 8: going to see the streaming business now become a major
33:45
Speaker 8: contributor to actually the bottom line. So so far it
33:48
Speaker 8: has been a huge drag. There were almost four billion
33:50
Speaker 8: in losses just a few years ago. But now we're
33:53
Speaker 8: seeing that it's breaking even. It's going to become a
33:56
Speaker 8: positive profit contributor. Why, because they're increasing prices. You're going
34:00
Speaker 8: to see a huge jump in your Disney Plus subscription
34:03
Speaker 8: come October seventeenth. They're cracking down on password sharing. That's
34:07
Speaker 8: something that you know, they're just copying from what Netflix did. Again,
34:10
Speaker 8: that should lead to a nice bump in their average
34:13
Speaker 8: revenue per user. And then they're also they've also introduced
34:17
Speaker 8: the advertising tier, and so advertising, which is already a
34:19
Speaker 8: pretty big business for them, they're really going to double
34:22
Speaker 8: down on that as well. So they have multiple levers
34:25
Speaker 8: that they're pulling now. As far as the streaming business
34:27
Speaker 8: is concerned.
34:28
Speaker 2: What how is the stock trading? Is the stock trading
34:32
Speaker 2: encompassing all of this? Do you think it's undervalued? Overvalued?
34:34
Speaker 2: I know you guys don't give actual valuations on the
34:36
Speaker 2: equity market for that, but I'm just curious is to
34:39
Speaker 2: see in terms of relative valuation.
34:42
Speaker 8: I think in terms of relative valuation it's definitely a
34:44
Speaker 8: little bit undervalued right now. And I think that's just
34:47
Speaker 8: because you know, we kind of have to wait for
34:49
Speaker 8: higher visibility in terms of the theme parks. So they
34:52
Speaker 8: have clearly said that the theme park business is going
34:55
Speaker 8: to be under pressure through most of fiscal twenty twenty five.
34:59
Speaker 8: So we see like a nice ramp up in growth
35:03
Speaker 8: with the parks. I think we're going to see that
35:07
Speaker 8: somewhat of a negative sentiment and somewhat if that's sustained pressure.
35:10
Speaker 4: Boy, because it seemed like it seemed for a while there.
35:13
Speaker 4: Once they make that turn, that's when you want to
35:15
Speaker 4: dive into the stock. But I guess that's at a
35:17
Speaker 4: time where maybe the US consumers you know, a little
35:20
Speaker 4: bit weaker on the margin, and that's going to hit
35:22
Speaker 4: the theme parks compared to what yours or exactly yes,
35:26
Speaker 4: spending like crazy. They're gonna have a blowout quarter this quarter,
35:29
Speaker 4: gith that you can call it right now, all right, Githy,
35:31
Speaker 4: thanks so much for joining us. Githa RANGANATHANCI is a
35:33
Speaker 4: US media analyst for Bloomberg Intelligence. She covers all that stuff.
35:37
Speaker 4: Disney obviously a huge, huge name in that sector, and again,
35:40
Speaker 4: investors have been waiting for the turn and profitability for
35:43
Speaker 4: the streaming business, and it looks like they're at that
35:45
Speaker 4: point making that turn there to profitability. So we'll see
35:48
Speaker 4: to what extent taken Rampant. I mean, you look at
35:50
Speaker 4: the margins, the profit margins at Netflix, and I don't
35:53
Speaker 4: think Disney is saying they're going to get to those
35:54
Speaker 4: profit margage margins. But if they get to something close
35:57
Speaker 4: to that, that's a lot of cash and a lot
35:59
Speaker 4: of earnings here for the company. So but the stock, again,
36:03
Speaker 4: it's one hundred and sixty seven billion dollar market cap stock,
36:05
Speaker 4: but it's only up two percent year to date only
36:07
Speaker 4: up about ten percent or trailing twelve months, badly trailing
36:11
Speaker 4: the market there. And that's what Scott, that's been, you know,
36:14
Speaker 4: a real concern for media investors, the sector tough for
36:16
Speaker 4: that sector to work if Disney sstant work.
36:18
Speaker 2: Yeah, yeah, absolutely U I've takeing a look at all
36:20
Speaker 2: of that. As Hurricane Milton continues to bear down on
36:23
Speaker 2: Florida with house toppling Wins.
36:28
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36:32
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36:38
Speaker 1: live on Amazon Alexa from our flagship New York station
36:42
Speaker 1: just say Alexa playing Bloomberg eleven thirty.
36:46
Speaker 4: I was just looking at an Nvidia that is within
36:48
Speaker 4: a couple of points of its all time high again,
36:51
Speaker 4: So there was a little bit of a solved there
36:53
Speaker 4: in some of those AI names. But they seem to
36:54
Speaker 4: be coming back a little bit, So see what's going
36:56
Speaker 4: on there. Kim Forrest joins us. She's a founder and
36:59
Speaker 4: she's a chief investment an officer at Boco Capital Partners.
37:01
Speaker 4: She's at there in Pittsburgh and longtime technology analysts really
37:04
Speaker 4: have some good views there and I love to Kim.
37:07
Speaker 4: I love to get your thoughts kind of on this
37:09
Speaker 4: AI traded. You know, had a little bit of a
37:11
Speaker 4: lull there for a while, but it seems to be
37:14
Speaker 4: coming back. How do you think about it?
37:19
Speaker 10: Well, it's generative AI is the thing, and it has
37:22
Speaker 10: been the thing for I don't know, maybe twenty four
37:25
Speaker 10: months now, it seems like forever. But here we are,
37:28
Speaker 10: and every once in a while people go, uh, oh, wait,
37:32
Speaker 10: it's it's wrong, sometimes right, and then they go wait,
37:36
Speaker 10: like it doesn't solve any problems, but we know it's cool,
37:39
Speaker 10: So should we keep funding it, you know, as investors?
37:43
Speaker 10: And the answer seems to be yes. But there are fears,
37:46
Speaker 10: and I think rightly placed, that we don't really know
37:50
Speaker 10: how big this market is. We keep being told that,
37:53
Speaker 10: you know, data centers are going to take over large
37:56
Speaker 10: swaths of America. I don't know that. I believe that.
37:59
Speaker 10: I think think my biggest problem with generative AI is
38:03
Speaker 10: there it's unclear about what problem it's solving, and then
38:07
Speaker 10: that leads to the question how much would you pay
38:09
Speaker 10: to solve this problem? And I don't have answers to
38:12
Speaker 10: either one of those, And I think that's what makes
38:14
Speaker 10: a lot of investors uncomfortable.
38:16
Speaker 4: Well, maybe given that lack of comfort there and maybe
38:19
Speaker 4: some of the finer points of the AI story, is
38:22
Speaker 4: technology still a sector that can lead the broader markets higher,
38:26
Speaker 4: like it's done for much of the last I don't know,
38:28
Speaker 4: ten or fifteen years.
38:31
Speaker 10: Absolutely, I'm a cute you know, even though I'm like
38:35
Speaker 10: a little bit of a doubting Thomas here on the
38:37
Speaker 10: whole generative AI.
38:39
Speaker 3: I used to work in AI, and I.
38:40
Speaker 10: Know the power of the problems that it can solve,
38:44
Speaker 10: and they're much smaller than somebody talking to a computer
38:47
Speaker 10: and say design me a new car. Computer, Like, that's
38:50
Speaker 10: not a thing, you know, ridiculous, you know, just one
38:53
Speaker 10: sentence problem solving, you know what I mean. But I
38:58
Speaker 10: do think that productivity is the thing that drives businesses
39:03
Speaker 10: to invest, and that drives technology companies to try to
39:08
Speaker 10: solve those business problems. And at the end of the day,
39:11
Speaker 10: that is what drives technology. Although people like to use it,
39:15
Speaker 10: it's fun, it's interesting, but they don't pay nearly as
39:18
Speaker 10: much as businesses do to run technology.
39:21
Speaker 4: All Right, Kim, We've got a federal reserve that isn't
39:24
Speaker 4: a rate cutting mode. Maybe there's some debate about how
39:27
Speaker 4: far and how quickly they do that if you look
39:29
Speaker 4: at the bond market. But earnings, I think they still matter,
39:33
Speaker 4: and JP Morgan is going to really kick things off
39:35
Speaker 4: on Friday. What are you looking for out of corporate
39:37
Speaker 4: American this earning season?
39:40
Speaker 10: Sure? Well, October is really the twitchiest earning season because
39:44
Speaker 10: a lot of companies didn't know if they were going
39:48
Speaker 10: to make their quarter because of the vacation schedule of everybody,
39:51
Speaker 10: So that always adds a layer of uncertainty.
39:54
Speaker 4: To this time.
39:56
Speaker 10: But that being said, I think the bar was set
39:58
Speaker 10: low enough. I haven't seen very many, if any pre
40:01
Speaker 10: announcements from companies. That's still ongoing as they tally things
40:06
Speaker 10: and the SEC forces a company to give in meaningful
40:11
Speaker 10: material information to its investors, so we always look for that,
40:14
Speaker 10: but I don't see very much much in the way
40:17
Speaker 10: of pre announcements. Now. What we're going to now look
40:20
Speaker 10: at is what do companies see going forward. I think
40:23
Speaker 10: there are some questions about whether or not this economy
40:26
Speaker 10: is truly as strong as some of the numbers forecast,
40:30
Speaker 10: So that is what we're going to be looking for
40:33
Speaker 10: all season long. All earning season is do the company
40:37
Speaker 10: see the next six months to a year strong week
40:40
Speaker 10: or somewhere in between.
40:43
Speaker 2: Do you think it's going to be mag seven or
40:45
Speaker 2: the other four hundred and ninety three stocks this time?
40:48
Speaker 10: Oh my god, I wish Meg seven would just take
40:50
Speaker 10: a break sometimes, you know, Oh gosh, But I think
40:54
Speaker 10: mag seven still has that generative AI magic going on.
40:59
Speaker 10: But there is room for other companies, especially in a
41:03
Speaker 10: declining rate the smaller companies get bought by larger companies,
41:07
Speaker 10: and that's really been in quite a lot because of
41:10
Speaker 10: the high interest rate environment. Now that companies know that
41:13
Speaker 10: the or have a pretty good idea that the interest
41:17
Speaker 10: rates are dropping, they are going to go back into
41:20
Speaker 10: the shopping mode, which is always exciting for me because
41:23
Speaker 10: I own some of those smaller names.
41:25
Speaker 4: So small cap again, we've heard it that maybe in
41:28
Speaker 4: a lower interest rate environment they will do better on
41:30
Speaker 4: a relative basis. Certainly there's valuation. There are there certain
41:34
Speaker 4: sectors on a small MidCap that screen well for you guys.
41:39
Speaker 10: Well you know, there's technology that's always good. And you
41:43
Speaker 10: know one of our smaller companies is getting bought by Synopsis.
41:48
Speaker 10: So that's really the key here is a small company
41:52
Speaker 10: that can fit into the larger companies product suite or
41:56
Speaker 10: expand its total addressable market. That's what you're looking for
42:00
Speaker 10: in a takeover candidate. And I think just about every
42:03
Speaker 10: industry has, you know, some smaller companies that could get
42:08
Speaker 10: bought by larger companies.
42:10
Speaker 4: You like.
42:13
Speaker 2: Like, yeah, say individual names, just give me Like, where
42:19
Speaker 2: are the sectors where that might make the most sense.
42:22
Speaker 10: Well, there's banking, there's always banking, right, there's too many banks.
42:26
Speaker 10: There's that technology. There's lots of point products that would
42:31
Speaker 10: go nicely into a larger, larger companies suite of products.
42:37
Speaker 10: Retail not so much, God knows, we love to talk
42:40
Speaker 10: about retail, but I think that's that looks pretty good
42:44
Speaker 10: for right now. Maybe industrials again, point products going into
42:50
Speaker 10: a larger company to allow that larger company to satisfy
42:54
Speaker 10: its customers with a broader suite of products. So those
42:58
Speaker 10: are the key areas that I look at.
43:00
Speaker 4: All right, Kim, thanks so much for joining us. Always
43:02
Speaker 4: appreciate getting your thoughts. Kim Farst. She is the founder
43:04
Speaker 4: and the chief investment officer Boca Capital Partners. There are
43:08
Speaker 4: out there in Pittsburgh, PA.
43:11
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43:29
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43:41
Speaker 4: Sustainable aviation fuel, I didn't know it was a thing.
43:45
Speaker 4: Alex knows it's a thing. I did not know it
43:46
Speaker 4: was a thing. Fortunately, we have people actually do that
43:48
Speaker 4: stuff here. Anna Davies is one of them. She's head
43:51
Speaker 4: of Renewable Fuels at b n EF. Joining us live
43:54
Speaker 4: here in our Bloomberg Interactive Brokers studio. And I just
43:58
Speaker 4: use jet fuel, throw it in my jet and I go,
44:01
Speaker 4: what is.
44:02
Speaker 2: Sustainablen't have an actual private jet.
44:04
Speaker 4: Just in my mind, what is a sustainable aviation fuel?
44:07
Speaker 3: What is it?
44:08
Speaker 4: And is it being used? And how well is it
44:11
Speaker 4: being used these days?
44:12
Speaker 9: So hey, nice to be here. What is sustainable aviation fuel.
44:15
Speaker 9: You use it exactly like that. You can throw it
44:17
Speaker 9: in your private jet and go and it'll work just
44:19
Speaker 9: the same way. Really, it is in as simplest form,
44:23
Speaker 9: molecularly pretty much identical to fossil jet fuel. The only
44:26
Speaker 9: difference is it doesn't come from fossil fuels, so mostly
44:29
Speaker 9: it comes at the moment from biofuels. So instead of
44:32
Speaker 9: having a crude oil, you're using a biooil, so something
44:36
Speaker 9: like soybean oil, or use cooking oil the leftover oils
44:39
Speaker 9: from your deep fryer.
44:40
Speaker 2: Which would be the issue now, supply or demand when
44:44
Speaker 2: it comes to staff.
44:45
Speaker 9: That is a very good question because everybody says we
44:47
Speaker 9: need more, there's not enough produced. There's all this demand
44:50
Speaker 9: that we need to replace fossil jet. But we have
44:52
Speaker 9: seen both suppliers and actually airlines kind of push back
44:55
Speaker 9: on roll back their targets.
44:57
Speaker 5: Right now.
44:58
Speaker 9: The problem is it's expensive and no but he is
45:00
Speaker 9: really willing to pay it. So we see buyers not
45:02
Speaker 9: quite willing or able to step in to take it,
45:05
Speaker 9: and as a result, we don't see suppliers able to
45:07
Speaker 9: secure financing to build their facilities.
45:09
Speaker 4: So how do That's a chicken and Yan type type
45:11
Speaker 4: of thing. How do you think you solve for that?
45:14
Speaker 4: Is that bringing the cost of production down? Is it
45:16
Speaker 4: trying to stimulate demand somehow?
45:18
Speaker 9: So we anticipate the cost of production at pnof we
45:21
Speaker 9: try and calculate and mart exactly, and we do not
45:25
Speaker 9: see the cost coming down to reach parity. Really like
45:27
Speaker 9: current jet fuel prices, it's always going to be orders,
45:30
Speaker 9: a couple orders the magnitude above. So the real crux
45:33
Speaker 9: that's needed is policy. You need to have a policy
45:36
Speaker 9: push to either incentivize its uptake or force it, and
45:39
Speaker 9: we're seeing both of those policies developing.
45:41
Speaker 2: Which basically what that means is that you have to
45:44
Speaker 2: subsidize the difference between staff and a regular jet fuel
45:47
Speaker 2: And what the IRA did it was really helpful and
45:49
Speaker 2: incentivizing the supply, but not the demand side of it.
45:52
Speaker 2: How close do you think that is right now?
45:54
Speaker 9: So the IRA, the Inflation Reduction Act, does offer a
45:58
Speaker 9: tax credit for sustainable aviation fiel perdu, which does help
46:01
Speaker 9: to project gap. There's still a lot of uncertainty as
46:03
Speaker 9: to what will qualify. You need to have a certain
46:06
Speaker 9: amount of types of feedstock in order to bring your
46:08
Speaker 9: actual emissions reduction down. That's a big issue in the market.
46:12
Speaker 9: It also is not only in place for a couple
46:14
Speaker 9: of years, which isn't going to help finance a thirty
46:16
Speaker 9: year facility. You see places like Europe taking the opposite approach,
46:20
Speaker 9: where they're just mandating blending in. So they're saying airlines
46:23
Speaker 9: and airports have to blend a certain amount and that's
46:26
Speaker 9: going to ramp up of the next few years. Sort
46:28
Speaker 9: it out, figure out the cost. And then you see
46:30
Speaker 9: places like Singapore which is actually imposing a levee on
46:35
Speaker 9: airline tickets and saying, okay, we think staff is going
46:37
Speaker 9: to cost this much in order to blend in, we
46:39
Speaker 9: have blending targets. We're just going to put an additional
46:42
Speaker 9: cost on airline tickets in order to cover the cost
46:45
Speaker 9: of staff.
46:46
Speaker 2: I mean, see what works in theory? That makes sense, right,
46:48
Speaker 2: Like you just pass it down to the consumer. But
46:50
Speaker 2: it does point out that any anyergery transition that you
46:53
Speaker 2: can do will eventually be then passed on to the consumer.
46:55
Speaker 5: Consumer or tax payer.
46:57
Speaker 8: Yeah.
46:57
Speaker 4: Probably interesting. So what the US airlines are here, I'm
47:00
Speaker 4: just reading some of your research here. So bn F
47:02
Speaker 4: tracks airline net zero commitments and sustainable aviation fuel commitments,
47:06
Speaker 4: and currently forty four airlines counting for just under half
47:09
Speaker 4: of jet fuel consumed globally have some saf target usually
47:13
Speaker 4: ten percent by twenty thirty. Is that good enough?
47:16
Speaker 5: Well, it's a target, So the question is will they
47:19
Speaker 5: hit those targets?
47:20
Speaker 10: Is it real?
47:21
Speaker 9: Can they do that? And that's where we are starting
47:23
Speaker 9: to see some airlines procure SAFF volumes like United procures
47:27
Speaker 9: a lot. If you fly out, if you fly on
47:29
Speaker 9: say United out of San Francisco or La chances are
47:31
Speaker 9: there some staff in the tank.
47:33
Speaker 4: Can they blend it?
47:34
Speaker 9: They can blend it one for one. That's one of
47:35
Speaker 9: the beautiful things about sustainable aviation fuel.
47:37
Speaker 2: Well all in that you can just like easy replacement,
47:40
Speaker 2: you can take the jet full fuel allowed and put
47:42
Speaker 2: it back in versus if you did a hydrogen plane
47:44
Speaker 2: or some other kind of plane.
47:45
Speaker 9: Yeah, so you don't need new tanks or new aircrafts.
47:48
Speaker 9: You can blend it up to fifty percent.
47:50
Speaker 5: Currently is the regulatory produces system.
47:52
Speaker 9: It is currently produced in very small quantities. So right
47:55
Speaker 9: now less than one percent of all jet fuel a
47:57
Speaker 9: sustainable aviation fuel. So we're talking very Smalllliams.
48:00
Speaker 5: It's produced.
48:01
Speaker 9: A lot of oil and gas companies and refiners are
48:03
Speaker 9: in on this space. So Neste, there's a company called
48:06
Speaker 9: World Energy and one called Montana Renewables that are producing
48:09
Speaker 9: at the moment. We're seeing P sixty six and Valero
48:14
Speaker 9: through their partnerships with Darling Ingredients.
48:16
Speaker 4: Those are regular refiners, so does like Valero regular who
48:19
Speaker 4: does jet fuel today?
48:21
Speaker 5: A lot of the refineries so if you think of
48:22
Speaker 5: a refinery, go.
48:23
Speaker 4: Talk to the refinery. So you guys need to put
48:24
Speaker 4: out more.
48:25
Speaker 9: And a lot of them are looking at it because
48:27
Speaker 9: a lot of the process at the moment is similar.
48:29
Speaker 9: You basically, instead of taking a crude oil, you take
48:31
Speaker 9: a biooil, you put it through a refinery and get
48:34
Speaker 9: sustainable aviation fuel. So you can actually convert some existing
48:37
Speaker 9: oil refineries to take biofeedstocks and therefore make these biofuels.
48:42
Speaker 5: So we are seeing them active.
48:43
Speaker 2: What about the okay, so a different question, how do
48:47
Speaker 2: you think this industry develops and where does the strength develop?
48:51
Speaker 5: So a lot of this is policy led.
48:53
Speaker 9: We are starting to see a lot of policies support
48:55
Speaker 9: it though, because aviation is one of the crucks you
48:57
Speaker 9: can make these types of sustainable fuels into a whole
49:01
Speaker 9: lot of things. You can make diesel molecules, you can
49:03
Speaker 9: make methanol molecules, petrochemicals, But aviation is the industry where
49:07
Speaker 9: there aren't any really good alternatives, especially if you're looking
49:10
Speaker 9: at like a twenty fifty SAP or net zero target,
49:13
Speaker 9: because hydrogen aircraft, electric aircraft, it takes decades to get
49:17
Speaker 9: those off the ground.
49:17
Speaker 5: It takes decades for fleets to roll over.
49:19
Speaker 9: So if you really want to decarbonize aviation by twenty fifty,
49:22
Speaker 9: you're going to need to decarbonize the fuel that they're
49:24
Speaker 9: currently using. So this is the area where we're seeing
49:27
Speaker 9: a lot of policy start to move. I've mentioned a
49:29
Speaker 9: few of them. We're starting to see some interest from
49:31
Speaker 9: different producers. We're starting to see a lot of investment
49:34
Speaker 9: going into this because everybody assumes the market will get there. So,
49:37
Speaker 9: for instance, there's a different way of producing it where
49:40
Speaker 9: you take green hydrogen and captured carbon dioxide to make
49:43
Speaker 9: the fuel that's popular because you don't have the food
49:46
Speaker 9: versus fuel issues of a biofuel. Just earlier this month,
49:49
Speaker 9: we saw Brookfield invest over a billion dollars into one
49:52
Speaker 9: of these e fuel facilities.
49:54
Speaker 4: I need to go check out when these word are
49:56
Speaker 4: these things are? They just like in Texas and Louisiana.
49:58
Speaker 3: World they California calful.
50:00
Speaker 9: A lot of the fuel is sold in California and
50:01
Speaker 9: a lot of the old refineries are being converted there,
50:03
Speaker 9: but they are being produced everywhere. It depends on where
50:06
Speaker 9: the feedstock is. So you can see a lot of
50:09
Speaker 9: feedstock in the Midwest. A lot of the productions coming
50:11
Speaker 9: out there. We're starting to see fuels which are take
50:14
Speaker 9: green hydrogen. They need to be near cheap renewable energy,
50:17
Speaker 9: and so you'll see a lot of these.
50:19
Speaker 4: Fuel as efficient as carbon the regular fuel, because I
50:23
Speaker 4: don't want to be thirty five thousand feet in the
50:24
Speaker 4: air and then engine.
50:26
Speaker 2: As reliable thank you yeah.
50:27
Speaker 9: So it has to produce. It produces jet aspec fuel.
50:32
Speaker 9: There are questions if you had one hundred percent staff
50:34
Speaker 9: in your tank. Actually, a lot of the fossil jet
50:37
Speaker 9: fuels have some aromatics that end up in the jet
50:39
Speaker 9: fuel stream and that actually helps with seals in the engine.
50:42
Speaker 9: So they're testing that out, but nobody we don't have
50:44
Speaker 9: the quantities produced that you're anywhere near one hundred percent
50:47
Speaker 9: these days, and in general, you could think of it
50:48
Speaker 9: as exactly the same as jet fuel.
50:52
Speaker 4: I mean, all these people get we haven't had like
50:53
Speaker 4: a clunker yet at it.
50:54
Speaker 2: And for a long time she used to cover literally
50:58
Speaker 2: everything at Bloomberg Intelligence, no PF. It was like oil
51:03
Speaker 2: was gas, it was all. It was all the things,
51:04
Speaker 2: all right, and I was good to see you, Thanks
51:05
Speaker 2: so much. Anna Davis, a head of renewable fuels over
51:08
Speaker 2: at Bloomberg b n e F, where we get all
51:11
Speaker 2: the data that you need to know about the energy transition, honestly,
51:14
Speaker 2: from oil to gas to hydrogen. We'd get it all
51:17
Speaker 2: for you.
51:18
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