Meta and Tesla Beat Expectations. So Why Are Investors Unimpressed?

0:02 Bloomberg Audio Studios.

0:04 Podcasts. Radio. News.

0:09 This week especially is kind of a tricky one to really take the temperature of investors. You know, Meta reported people seemed very happy with the report. The stock rose after hours. Everyone got nervous overnight, whether it be Meta's spending or that coupled with the tensions in the Middle East. And all of a sudden, you know, we come in on Thursday morning and the stock is now down. So everyone rethinking, well, what is the interpretation of these earnings?

0:34 That shows how fast the faiths can switch.

0:36 Right, right.

0:37 And the emotions can turn. Exactly.

0:44 I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, as big tech companies start to report earnings... all eyes are on their AI build-out plans. Bloomberg Big Tech Editor Sarah Fryer and U.S. Stocks Editor Mike Regan join me to make sense of why investors are nervous about overspending and underspending, and whether there's any agreement on what's just right. AI has been making the markets jittery lately, swinging between fear and greed, as you put it a few weeks ago on the show, Mike.

1:19 The big news last week was from CoreWeave, the neocloud company whose spiking bond yields were making investors nervous. This week, we've gotten the chance to peer into the financials of several large tech firms, which are offering more color on the AI trade. whether these companies are actually starting to see some revenue come in from all their investments. So, Sarah, what are tech earnings telling us so far?

1:39 Well, it's been a really interesting picture because while we are seeing some pickup of AI tools and a lot of enthusiasm from executives on the potential demand for their products and the initial uptake, The spending is increasing, too. Meta said that it would spend more going into next year. And then they disclosed that they have actually $ 825 billion in commitments. Billion with a B. Billion with a B in commitments that aren't currently reflected on their balance sheet.

2:14 So that's like leases, obligations, contracts for cloud computing and data centers and energy and chips. That is still in Meta's future, and they may even see that number climb. So this is just a time of incredible growth. initial spending on a future that may or may not be as lucrative as investors want it to be and may never achieve return on investment for the incredible amount of capital that has been deployed.

2:49 I think you both hit on sort of what I would think would be the big themes. Obviously, the CapEx spending. Is this too much? Are they, you know, and how are they going to pay for this? You know, you mentioned the core weave bond yields getting into distressed territory. I mean, that rang a lot of alarm bells for people. Now, you know, I come in this morning and I'm reading references to Meta's credit default swaps, which, mind you, these are at very sort of low levels. You know, these are not levels where a credit investor is concerned. But You don't want your credit default swaps being discussed in public, no matter who you are, what company you are.

3:25 You don't want volatility in that space.

3:26 Yeah, and you don't want to see them going up. I mean, there are something like 119 basis points, which is super low. I think Quora Weaves were over 1,000 basis points, to put it in perspective.

3:36 But the gauge of credit risks has been rising for Meta.

3:40 It's been rising. And so the question is, to Sarah's point, how are they going to pay for all this spending? Their cash flows are going negative because they're already investing enough. So they're going to have to raise this money either in the debt markets or in the equity markets. So a big thing that caught a lot of people's attention with Meta this week is they're introducing a new share class.

4:03 Non-voting shares. Now, part of the reason for that is to keep Zuckerberg happy and keep him in California.

4:08 Because of this billionaire wealth tax.

4:10 This billionaire's wealth tax.

4:11 So how does that work? That issuing you non-voting?

4:14 He can pay his taxes without reducing his voting control.

4:17 Right.

4:17 Right.

4:18 But I think if you jump to, well, what else could they do with that? Clearly, they could use that as currency to pay off this enormous bill they have. And that's whether it's, you know, taking on more debt or issuing more equity to Both of those things are going to give investors a little bit of pause. You know, these are non-voting shares. Well, Zuckerberg controls the voting shares, so you don't get much for your voting shares anyway.

4:43 So this is still dilution potentially, should they decide to use this new class of stock as a currency to fund all these ambitions.

4:50 I'm wondering where debt comes into this conversation, because, you know, obviously the core we've concern was that they were taking on too much debt as part of the infrastructure build-out. How levered is Meta compared to some of the other hyperscalers?

5:07 Well, Meta has been, I guess we'll say, creative in terms of its ways that it's raised money to do data centers. There was their Blue Owl deal for their Hyperion data center in Louisiana. I think it was a $ 30 billion deal. deal that was financed by Blue Owl and was backed by the value of the chips and structured as a special purpose vehicle. So that debt did not appear on Meta's balance sheet or dilute its rating.

5:38 To Sarah's point, a lot of this commitment is off balance sheet, which is good and bad. If you remember the global financial crisis, a lot of the problems that many firms face ran into was off-balance sheet debt that came back to sting them. You know, these commitments, a lot of them are leases that they're just signed up for X number of years.

6:01 Right, so Meta's not actually holding the bag in that case.

6:04 This was Meta's first earnings report since the launch of the company's AI personal assistant Muse, which has made a big splash in the consumer market. What did we learn about how successful that release has been or how they're thinking about that?

6:17 I think they said like 10 million people are using it.

6:20 Around 10 to 11 million users. They said that they've seen a lot of small business uptake. They said that they eventually want to create a Muse network. So get it to the point where enough people in a social circle or in a corporate environment have these agents and those agents can like collaborate with one another and talk with one another to get things done. So they had a lot of A lot of buzz. A lot of excitement that they tried to drum up, but they said that it's an incredibly compute-intensive product to be offering for mostly free. and that they continue to want to offer it for free to build up that user base, they're not going to be able to wait as long as they have with their other products. Like, for instance, Instagram, WhatsApp,

7:07 Zuckerberg had this mantra that he didn't want to try too hard to make money off of a product until it had a billion users, because that was like, in his mind, like, there's a habit that's a network that's a fact that's strong enough that the product will sustain a little bit of advertising.

7:22 And they're not going to be able to wait to a billion Muse users in the same way.

7:25 No, they're not going to.

7:26 I think how and when their strategy comes into picture of how they will monetize it, I think, is so important for them. And what the competitive environment will look like versus, you know, Anthropix agents and OpenAI agents. And, you know, will there be sort of a competitive.

7:41 It's just like anyone building their own agent. I mean, with open source AI tools, if you're savvy enough, you can. It's just for meta... So different for them to build this kind of business. They just are not as experienced at building like a consumer product that people want to use as opposed to a social media company.

8:01 Yeah.

8:02 Yeah.

8:03 And I do wonder if the ghost of the metaverse investments are kind of haunting it to some degree.

8:08 Yes. Like Zuckerberg's extreme conviction about the metaverse and willingness to lose tens of billions of dollars on that before finally saying, OK, like that was all in service of getting to this point of AR glasses. That was kind of disappointing for folks after that. Yeah, we had businesses that were appointing, like, chief metaverse officers.

8:32 Ghost of the Metaverse would be a great Halloween costume.

8:35 That's my solo album coming out.

8:37 Yeah.

8:43 SpaceX, Tesla, and more tech earnings after the break.

8:58 Well, what about Tesla?

8:59 Because there's been a lot of anticipation around a potential SpaceX Tesla merger, which Elon Musk teased more explicitly in a SpaceX earnings call on Tuesday. On the show on Wednesday, my co-host David Gurra talked about the politics of such a merger, the potential antitrust concerns, geopolitical implications. But I'll ask you from an economic standpoint, what is the merit that Musk sees in combining these companies and who would see that upside?

9:22 Well, I think just allowing him to focus on one company instead of splitting his time between several companies is one obvious benefit. But then all the sort of synergies that follow on from that, you know, whether they can collaborate on AI together, which I think they do a little bit already. And, you know, are you able to sort of cut some costs and sort of innovate at a larger scale when you combine the sort of brainpower of both these companies? To me, seems like the main sort of And.

9:50 They sold a lot of future wow factor in the Optimus robot, which is nowhere close to achieving the vision that Musk eventually wants it to achieve. But I think that that's the kind of thing that you could marry a lot of the engineering with the AI vision. across both companies and just put your best people on making it a success.

10:11 Well, Tesla reported earnings on Wednesday after the bell. So when you look at SpaceX and Tesla's earnings, what do you see about the health of these businesses, the future spending outlook, and, you know, what combining them would mean or how they're doing separately?

10:26 Yeah, once again, I think all roads lead back to CapEx to some degree. And it's interesting because there's almost this sort of Goldilocks effect with CapEx, like, oh, meta, that's a little too hot. A lot of the reaction to Tesla was like, that's not enough CapEx. We need more.

10:40 I love that analogy, the Goldilocks analogy, because it is really and it's really unpredictable whether like you will see a high spending number beyond expectations and we'll think, oh, my gosh, is the stock going to fall on this? But then the stock rewards it or, you know, it just depends on how investors are feeling in the moment.

10:56 What is the Goldilocks level?

10:58 Well, you know, so when you think about Tesla, they're kind of flatlining a little bit on sales this quarter. They do have these ambitions for flying cars and Optimus robots and other things. So I think the investors there are like, all right, great ideas. How are we going to get there? We need more CapEx from you. I mean, Elon has been, you know, selling his ambitions and his dream of the future has been his success all along, right?

11:23 That's been the key to him. And so how do you get there? You know, it was interesting to me that the CapEx seemed to be disappointing on the downside for Tesla versus the opposite for Meta.

11:34 So investors are saying we like the vision, but are you going to actually spend.

11:37 To make it happen?

11:37 Are you spending aggressively enough to get there?

11:39 Yes. Yes. Versus for Meta, it's like, oh, why are you spending so much money?

11:42 Right.

11:43 I want to ask about one more AI-exposed company, Texas Instruments, which makes some of the chips that are used for power management in data centers. They reported Wednesday Texas Instruments did have a positive revenue outlook. It's planning on expanding its capacity. What did its earnings tell us about the demand for AI infrastructure right now?

12:01 Yeah, I mean, it's interesting. You know, this is not a company that makes the chips that everyone's, you know, clamoring for AI models and for inference, you know. But there's a lot of other chips you need in the data center. Certainly, it's enough. I think their data center revenue almost doubled in the quarter, you know. And it's been the story all year with these chip makers is, you know, it's not just NVIDIA that's benefiting from this boom.

12:24 I think for investors, the question is, well, How sustainable is this, you know, eye-popping sales and earnings growth for these companies? You know, are we going to eventually hit a wall in data center development, whether it's political risk or the credit markets, you know, saying no mas? So, Texas Instrument, it's having a great year. I think it's up like 60% that stock. So certainly a major tailwind from the data center boom. You know, the question in a lot of investors' minds is like, is this as good as it gets? Or have we seen the peak in growth? And will it plateau and maybe start going down, you know, in call it 28 and beyond?

13:04 Well, as we've talked about during this conversation, you know, there's been a lot of nervousness over big tech firm spending. Is Meta committing too much? Is Tesla not spending enough? When you think about that Goldilocks level of spending that investors are looking for, what could the reports from the rest of the Mag7 tell us about how the industry is doing?

13:28 Some of the big tech companies, you know, they went from being these tremendous cash cows just kicking off. enormous amounts of cash, buying back their stock with that to help lift the stock price. Now, a lot of them are looking at sort of negative free cash flow, which is a whole new paradigm for these companies. And it's all because of how much they're spending. And instead of buying back their stock to support it, they're issuing new stock to pay for all the spending. So it's just kind of this really 180 of a sea change for how investors view- Breaking all the models.

14:00 Yeah.

14:00 Breaking like what you came to expect out of a tech stock and what really made them do so well for so long. And so to Sarah's point, it's like how much is too much? Well- You kind of have to wait to see how the market reacts and what they're expecting. You know, I think meta sort of indicates that we probably will see a little bit of bigger CapEx spending from the Microsofts and Alphabets.

14:20 The thing that's going to be different, though, about Microsoft, Alphabet, Amazon earnings is they do have a business that gives a lot of insight into the demand for the ultimate customer of their CapEx. And that's the cloud business. And so if we see what's known as, like, the backlog, which is, like, the future contract value or, like, the contracts that they've sorted but they don't actually have the ability to fulfill right now, that is going to give us a lot of insight into whether the CapEx is worthy because there's an end customer. And as we've talked about, like, CoreWeave and all these NeoClouds and how risky it's getting and how much debt is in the mix, that is what companies keep coming back to is, like, why? This

15:08 is not a, if you build it, they will come moment. This is a, our customers can't get enough cloud computing right now. The computing power demand is so intense that That we're trying to build this stuff at warp speed, stuff that requires real estate and energy and just the labor and all of those factors to get a data center online fast enough. There's already backlog for years.

15:34 It's more they're coming. Can we build it?

15:36 That's another factor. Can we build it fast enough?

15:41 You know, and I think, and you started mentioning the jitters, you know, and I think a lot of the jitters in the market come from sort of the more smaller, fringier players, the neoclouds, you know, Nscale getting some pushback on the valuation they're looking for in their IPO. And CoreWeave, obviously, you know, when you get the numbers from a Google and a Microsoft and an Amazon, I mean, these are the heavyweights. And we'll give us a much clearer picture about what Sarah's talking about, where that How risky are they getting with this CapEx versus, no, we're just meeting demand, you know? So it's very much a clarifying moment one way or the other. We'll see which way.

16:16 If we get the Anthropic S1 within the next week and all of those earnings reports, we're going to have a hopefully much clearer picture of the financial health of the AI boom.

16:34 This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you liked this episode, make sure to subscribe and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening.

16:55 We'll be back tomorrow.