Apple Growth Decelerates, China Sales Miss

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This is Bloomberg Businessweek Daily. Reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast. With Carol Masser and Tim Stenebeck.

Apple just a little bit lower there. And we're going to be, of course, breaking their earnings down in just about seven minutes. So we'll have full analysis. And that includes with our next guest. He's really a member of the family.

Yeah, yeah. I mean, you know, we talk about the instant insight analysis that we get from our Bloomberg team, and he is certainly crucial for it. Anurag Rana is Bloomberg Intelligence Senior Tech Analyst. He joins us from Chicago. Okay, we're gonna talk to you about Apple in a few minutes. I mean, we still got six minutes until these earnings cross.

But Carol, there's some other stuff on our radar that we wanna talk about, including the correction that the NASDAQ 100 is officially in. Third one this year.

Third time's a charm.

Third time's a charm, yeah.

Anurag, is it third time's a charm? I mean, I like to see markets go up, pull back, you know, get some of the excess out. But you are the expert here. And when you see an index three times hitting official 10% correction, I don't know, is that a healthy market? Is that a market that's a little bit troubled?

So one of the things we would talk about is there is certainly a lot more you could say, ups and downs.

In this time than the last few years.

We all know a few things for sure, which is there is no shortage of demand for AI compute, which means everybody wants it. It is very difficult for people to come up with their ability to deliver it. So there is no doubt in that mind. Now, there are certain things that are emerging. First, it started with higher memory prices at the beginning of the year. And we'll find out from Apple as to how they're dealing with this.

So that was one.

So the component costs go up, the price to come up with a new data center goes up. The second thing was this whole notion around data center scrutiny, which is you're having a difficult time coming up and creating new data centers, them going live. And that has a trickle-down effect on that. So that's the second thing. Third thing is rates have gone up from a year ago till now. We've seen a massive change in that. And I would say the last thing the question is, those same people who were giving a lot of credit to infrastructure build are just, I wouldn't say pausing because, you know, the Oracle did fine today in terms of their demand for their bonds. But people are questioning how long can it go through. So there is a lot more uncertainty

right now on some of these other factors.

That was not the case a year ago.

Okay. So, I mean. How long does this go on? Like, where are we in this cycle? Because one thing that we've noticed this year and you've pointed out to us is that sometimes you're punished for spending money and sometimes you're rewarded for spending the money. Sometimes you're punished for not spending enough money. Sometimes you're rewarded for not spending too much money like Apple in recent months. Like, you know, what's going on?

So one of the things I think is, you know, maybe it's a blessing in disguise for some of these vendors. if we do see some kind of delay in their ability to get some capacity up online. And I know it's controversial, but the reason I say that is because a lot of these large companies that are seeing their free cash flow go negative very quickly may not see that.

So for example, Microsoft in the most recent quarter had guided for capex of about 50 billion. One of their third party data center companies decided that or not decided that got a delay in their ability to give that capacity to Microsoft. So they only spent 45 billion. So instead of 50 billion, they spent 45. Now that actually gets added up to free cash flow. Now the question is, how soon will the demand be realized? Even if we extend it out by a couple of years, one year, two years, I don't think that's going to change the story.

I think it just gives you a little bit of breathing room. But the big question is, if you are a trader that's really trading these things in and out, do you have the patience to stay out of the market for that long?

You know, there's appreciating a company because of what we'll see in their numbers. Because whenever Apple reports, Anurag, you know this, it just feels like their numbers, their sales numbers and everything is just massive. Having said that, this is a stock that has had quite a run and added about a trillion dollars to its market cap since late June. You know, you look at a valuation that's roughly about, you know, if you just use the PE, about 40 compared to some of the other big tech names.

it's getting a little pricey. Is so much of the good news already priced in when it comes to Apple?

You know, I think there could be an argument that does make sense with that statement.

And the only reason is if you go back a year ago, you.

Know, we talked about that their lack of CapEx spending is probably going to be one of the bigger highlights in this year. And as things have gotten nervous for the others, I think this is an area where everybody is trying to find some refuge. But if you look at the catalyst for Apple, the model, which is they're getting the LLM technology from Google, that's already played out.

The Duo is already out and it's doing so well.

So one could argue that all the good things you could think about in Apple is probably out there. And we just have to see what these guys say in terms of their next projects. fiscal year, we are already seeing services being slowed down a little. We are seeing margins being impacted by memory prices. So I think it's a question as, where do investors focus on? Do they still stay in this name as a margin of safety, or they find other areas to go in? As you rightly mentioned, there are certain companies that are not at all, I mean, in terms of valuations, trading at that same level as Apple is.

Why are services slowing down? And I ask this. Last Saturday, I sat at my daughter's swimming lesson, and I went through and quit all the streaming services that we don't watch right now. And in fact, I quit a couple memberships through Apple for apps or services that I don't use. I ended up quitting a lot of stuff through Apple a couple weeks ago. Are a lot of people doing what I'm doing, or is there something else that's going on?

Yeah, I think there are two different things.

Remember, services over the last few quarters has had a very good run. you know, I mean, not even the few quarters. I can extend that to many years. If a company is growing product revenue by 5% to 7%, services revenue cannot be 15% all the time. That's just where the size of these businesses is so large. You know, sooner or later, you get into that law of large numbers.

I think that's one. Second, they do have certain areas, such as in the U.S., they have something regulatory issues or where they're not allowed to charge for certain things.

Anurag, I'm going to jump in just because Apple just crossed the Bloomberg terminal. So let's get to it, folks. Fourth quarter revenue, $ 114. 48 billion. That is a beat, folks.

$ 113.

47 billion was the street estimate. Fourth quarter EPS... $ 2. 10 a share. That's a dime better than what the street was expecting. Greater China revenue. A bit of a disappointment again. $ 17. 54 billion versus the street estimate of $ 18. 75 billion. We've seen certainly some good and bad quarters when it comes to China for Apple. Fourth quarter revenue, as we said.

A beat.

I'm just looking at Apple shares. They were down about half a percent leading into the earnings. Right now, they're up about, well, now they're down about seven-tenths of a percent. So investors going through the numbers here.

Okay, so let's go through it from a beat or miss perspective. Fourth quarter iPhone revenue, a beat at $ 57. 58 billion. Fourth quarter revenue, a beat at $ 114.

4 billion.

Billion. Fourth quarter, greater China revenue coming in below estimates, once again, $ 17. 54 billion. The estimate was for $ 18. 75 billion. Wearables was a miss. iPad revenue was a miss. Total operating expenses came in in line with estimates at $ 19. 19 billion. Fourth quarter services revenue coming in we can say that met estimates 31.57 billion. The estimate was for 31.58. I'm going to give that one to Apple. That's a meat of expectations. Mac revenue came in above estimates. America's revenue came in just above estimates. Fourth quarter products revenue coming above estimates at $ 82. 9 billion. So fourth quarter, greater China revenue missing at $ 17. 54 billion. But fourth quarter iPhone revenue

A beat there, $ 57. 58 billion. And fourth quarter Apple revenue, $ 114. 48 billion. A beat on the overall top line, Carol. And also a beat on the bottom line. Like you said, earnings per share, $ 2. 10. Estimate was for $ 2.

I want to go back to Anurag, but I just want to jump in. Mark Gurman on the live blog saying Apple just beat estimates coming in at $ 114. 5 billion led by sales of the iPhone 18 Pro. and iPhone 18 Pro Max. The iPhone was a beat overall, but big misses in greater China and on the iPad. Anurag Rana, you're looking through these numbers as well. Come on in as we see the stock just down about half a percent here in the aftermarket.

Yeah, the China thing is a very interesting one, and we'll find out why that's the case. The one number that hasn't been discussed and I'm looking for it is the gross margins, because I was surprised that they beat on the bottom line I just want to understand how that happened because we were expecting some kind of compression in the gross margins because of higher memory costs. But iPhone revenue, which is extremely important to us, that was above estimate. So that's probably what's holding up the stock right now. But I think the biggest thing for us is what kind of guidance do they give going forward?

Because there are a couple of things that are happening. One, remember that the base phone is not updated right now. That's going to happen in the subsequent quarter. So There's going to be shipments that got moved from the December quarter into the March and the June quarter. So that's going to be, you know, things that are going to be important. And the second is, you know, what's happening with Duo, all the screen issues, and whether they can take care of the strong demand of Duo in this particular quarter.

Do you think they can take care of the strong demand in this quarter?

You know, it's tough to say because, you know, everybody came up with their own estimates of starting the year at, let's say, 10, 12 million units.

But frankly speaking.

the reception that I have seen, even with the folks that I have talked to, has been extremely strong. And that, I think, is partially true to their lease plan. And if that's the case, we think they're going to be about 15 million units this year And sometimes it's not easy to come up with those units, you know, in that short period of time.

Especially if you have people going to the Genius Bar saying, hey, this is cracked. I need a new one. I'm just kidding. I'm just kidding. But we will, like you said, we should we should get some there will likely be some questions about the the cracked issue. Hey, services revenue, as Carol mentioned, came in almost exactly as expected. That's a bright spot on a rock for you, I bet.

You know, but it was somewhere in the, you know, around the 10% mark. So the question really is what kind of guidance they give. Because now, initially what used to happen was guidance was very predictable when it came to the services business. But I think it has been slowing down for the past two quarters. And if they give a guidance right around 10%, I think that's fair.

But if they go out and say, well, we're going to, you know, go down, the growth rate is going to go down even more for the services business, that's not good. So I think a lot hinges on guidance this time than in the prior quarters.

Yeah, we know that December quarter, right, is just such an important one in terms of what it means for their top line. Let's just rehash. We're talking with Anurag Rana of our Bloomberg Intelligence team. We are talking Apple already out with its earnings stock down about nine-tenths of a percentage point. Here's some of the highlights. Fourth quarter revenue, that was a beat, $ 114.

48 billion.

Street estimate was $ 113.

47 billion.

iPhone revenue, you know this, folks, so important to this company, 57.58 billion. Street estimate was a little bit below that at 56.49 billion. Fourth quarter, greater China revenue, a bit of a struggle there for the company, still 17.54 billion. Street estimate was 18.75 billion. And again, the stock right now down about 1.1% here in the aftermarket. It has had quite a run, though, Since late June, we've talked about this, adding about a trillion dollar in market cap.

So as Anurag, you said, what we get in terms of a guidance.

I think China is such a big question here. I mean, when was the last time we were sitting here being like Apple beat on China, right?

Well, what is the longer term story here, Anurag, with China?

I think it was like one time in the last few quarters, truly.

They always talk about what an important market this is for this company, but there's increasing competition.

Yeah, but if you think of China, I mean, the last two quarters, they grew like 28%, 22%.

I mean, it's a very big number in China.

We are now, you could say, after one quarter, we're going to get into a point of very tough comparison of growth in China. You know, from my side, China is one of the most important stories for Apple. In terms of unit shipments, this is an area where they can sell more products than any other geography right now.

U.S.

Is a saturated market in terms of unit growth. China, they have a good market share. But it's still an area where they can gain more market share down the road. India is another area, but I think the per capita income in India is a lot lower than it is in China. So in India, it's only the middle class.

And when that goes up, that's really the big story there. So China, for me, is one of the more important.

What's their entry into India? I mean, for so many years, we talked about a cheaper iPhone being that entry into different emerging markets. But is it that newish laptop that's just a few hundred bucks?

No, it is the phone.

I mean, to be very honest, the product is always the phone. Let me be very, very candid about it.

It's a very expensive phone.

Yeah, but the thing is, like, the base model is there. You have refurbished models. You know, India is becoming a lot more affluent when it comes to the middle class. And Apple is an aspirational brand over there. And that's the discussion there.

We have a lot.

I mean, they have opened so many stores in the last few years. So I know India is becoming an extremely important part of the pie. But again, the overall contribution to Apple is still very small. And I think, you know, over the next 10 years, yes. But in the near three years, I think China remains the most important growth driver.

What's your top question to the C-suite when it comes to Apple?

Gross margins.

You know, tell me how are you going to maintain gross margins over the next I would say three to four quarters with memory prices up going so high. And then what are you doing with your supply chain to ensure that people have and get the phones that they need in the right amount of time?

Stay with us. More from Bloomberg Businessweek Daily coming up after this.

Now we've got to go to our own Mark Gurman, of course, who knows the insides and outsides of, I feel like, Apple. He is Bloomberg News Managing Editor for Global Consumer Tech, joining us from the LA Bureau. Mark, we keep reading everything you've got on the blog.

I don't know how he's doing it. He's live blogging. He's on TV. He's on radio.

It's his digital twin.

He's doing it all.

Maybe it's his digital twin.

No, that's really Mark Gurman, I think.

Apple just down about three-tenths of a percent here in the aftermarket. Where should we go? Where should we start when it comes to the Apple story right now?

Well, let me give the backdrop. No regular iPhone 18. The iPhone 18 Pro is the most minor year-over-year upgrade we've seen in a long time. Nobody can find an iPhone Duo. No iPhone Air 2. All the major fall products, the MacBook Pro with Touch, the Home View, the HomePod Mini, the Apple TV, the OLED iPad, none of them launched until 2020. the holiday quarter, yet they still beat, and they beat because of the iPhone 18 Pro. Likely also from continued demand for the iPhone 17 Pro Max and all the carrier deals you saw earlier in the quarter.

So this is a phenomenal report for Apple. The big news, which I think will be less phenomenal, is the guidance for the December quarter. Given the backdrop of everything I explained, it all comes down to how the iPhone Duo is going to perform. And so far, the iPhone Duo supply is very difficult to understand. New pre-orders didn't come, aren't launching until the end of January for many buyers. You can't get them at retail stores right now unless you're an AI bot. So I'll be interested to see the commentary there and what the numbers actually turn out to be.

The other piece here is greater China and services, both either a big fall or a strong deceleration.

Okay, so yeah, a big miss when it comes to China. We'll get to that in just a minute. First, though, I want you to help us with the math. When we do get that guidance about halfway through the call, as you remind everybody on the live blog, Mark, that we're going to get, how do we know the share of Duo in there based on the number that we get?

Oh, we have no idea, and they're not going to tell us. So it's going to be difficult to discern.

But a bigger number will— it' s a $ 2, 000 phone, so a bigger.

Number— Yeah, a bigger number will mean that there's quite a big uptake for the iPhone Duo. But they don't register revenue, or at least they traditionally have not registered revenue until the consumer actually receives the device. An order being placed doesn't mean we're going to add that to the numbers. It has to be the person has received the phone, has kept the phone, etc., The good news for Apple could be that we're going to see a very strong tailwind because of the supply chain shortages and give them positive numbers into Q2, Q3, Q4 of next year, given how hard this phone is going to be to get for quite a while now.

Will that ultimately hurt them? You know, it's great to have pent up demand, right? It makes for a great story, great headlines.

I don't think it'll hurt them. I think what Apple is trying to do anyways, especially under Ternus, is create more consistent revenue across the year. For a long time, Apple has pushed everything into the very back part of the year and now spreading things across, whether that was the intention or not for the duo, is them hitting a goal they've had for quite some time.

Mark, I'm wondering about that. I mean, like a week ago, one of the most read stories in the terminal sitting here was the story you were writing about the cracked screens on the duo. Has that issue gone away? Do we expect it to be addressed at all? I imagine an analyst or two will ask about this.

We've seen a dramatic slowdown in people reporting the cracks. The cracks were reported from the first units that were sold. There does not appear to be any consistency on which units are impacted, whether that's a color, whether that's if you bought it online or in the retail store, whether it was manufactured in China or India or what have you.

I'm sure they'll get a question about it, but it is completely died down, which tells me this was an early batch defect. It was a real issue. There were some influencers online trying to gaslight people into believing this was not an issue. But the fact of the matter is, for a small percentage of iPhone Duo buyers, you open the phone the right way, and it cracked. And that's a real problem, but it clearly was an isolated problem.

Mark, one of the things I jumped out ahead of the earnings, as Tim and I were reading through the blog, your comments about how this is going to be the first for Apple with new CEO John Terneson. charge and, you know, what we might hear from him on the call. He's a product guy. So I'm just curious what you're going to be listening out for of what he might say or not say.

Yeah, he gets all this credit.

Yeah.

He gets all this credit for being a product person. But at the end of the day, Apple is a product company and nothing has changed here. All the initiatives that you see introduced over the past several weeks, these were all in the works for half a decade under Tim Cook. Obviously, Ternus was extremely deep and in the thick of things. But the reality is that nothing is changing a ton at Apple because of this, at least for now. I have reported, though, he wants the company to run faster, wants it to run leaner. There have been a lot of under-the-radar layoffs and less under-the-radar layoffs at Apple recently. There's been cost cutting and I expect more cost cutting to happen. And so the guidance definitely

is going to be the most interesting part here. Why are they looking at all these layoffs? Why are they looking at the cost cutting? What does that mean for revenue and what they're expecting there?

Hey, Mark, let's go to the AI story here. Apple's up roughly 25%. One AI story.

Okay.

So, well, that's the point. So Apple's up roughly 25%. It's best performing mag seven going into today's print. beating by far Microsoft down up 10%. So not only is it beating the greater index, but it's like the only one that's beating the greater index, right? So Apple has been punished in the past and criticized for not having an AI strategy. But what that means is it does have a free cash flow position that is enviable if you are spending a lot of your cash right now, like some of these hyperscalers are. In is that, am I, am I looking at this incorrectly?

No, I think you're looking at the most optimistic view here, but at the same time, we've seen zero evidence from Apple that they're going to be able to successfully take advantage of that cash holding and trade that in, uh, for a strong AI strategy. I've been using open AI chat GPT dot over the weekend, uh, have completely immersed myself in it. Apple has nothing close. It's a game changer.

It's literally like an all day assistant. That's like a human that you can have.

This is the agent. This is their answer to muse.

This is their agent.

Yes.

Answer to Claude, answer to Muse. It's been pretty terrific. And Siri AI is operating nowhere close.

What about Siri, the Siri AI chatbot? Have you played with it? Do you like it? Is it, yeah.

Siri AI is fantastic for 90% of use cases.

You ask it questions.

It uses that Gemini model to get you the answers. You need to get something done on your phone. It can get something done on your phone. But in terms of replicating a real-world assistant, it's not that. It's basically what the original vision of Siri was 15 years ago, but finally executed correctly. That's an amazing thing. It means that the core AI product that Apple has finally works.

That means they have an excellent foundation. Now they have to actually build something on top of it.

Services. This has always been an important revenue generator, and it looks like it's slowing. How problematic is that, or what's the question to ask of John Ternus and the C-suite about that?

Well, the question is why, and one of the answers is because Google searches are down because of AI, and a big chunk of the revenue Apple gets from services is a revenue share from Google search done in Safari. And as people move to the Gemini app, as people move towards the ChatGPT app or the Cloud app or the Muse app, or even Siri AI to get things done that they normally would do in a search engine, that services revenue is going to come down. What Apple needs to do is figure out a way to make up for that revenue loss by monetizing search on its platforms, or shall I say AI search on its platforms, because they're not doing that.

We're speaking with Mark German. He's Bloomberg News Managing Editor for Global Consumer Tech. We're in the midst of Apple's numbers. That call does start in just about 14 minutes. Mark's going to go to that in a few minutes. We do have a few more minutes with Mark. But to catch everybody up, if you are just joining us, the company reported revenue gains of 12% to $ 114. 5 billion. That was a beat on the top line. China sales, though, fell short of analysts' estimates. iPhone revenue climbed 17% to $ 57. 6 billion. The shares in the after hours, they're flat right now. They fell, they moved higher, and now they're flat.

Yeah, stock is really flat. So Mark, we've always had high expectations for what's next from Apple. Where do they go next from here?

Well, next year is going to be an extremely strong year in terms of AI wearables. So where they're excelling is AI hardware. Smart glasses are going to be there. The AirPods with cameras, those have been off delayed. We're going to see those. The touchscreen MacBook Pro goes on sale Friday. I'm excited for that as lack of revolutionary as it is. The Home View goes on sale in a couple of weeks. I'm excited for that. So there is a chock full product pipeline here. The big question is 2028, 2029, 2030 and beyond. Things like robotics, things like augmented reality glasses? Are they going to take another swing at autonomy? Those are the big questions for the company's future and certainly things that you will not hear

from John Ternus today.

All right, so we're all in on the elections, as you can imagine. How does that, you know, Tim Cook has been a master, right, in terms of really overseeing things with Washington and just kind of.

With Beijing, too.

Navigating all of it pretty well, to say the least. But how does the midterm outcome, you know, kind of impact this company, if at all?

Yeah, it's a fascinating question. I've been asked this the last several weeks. I think there's going to be no impact. You know, the big political thing when it came to Apple, you know, with the Republicans in charge has been tariffs. No matter who wins, I don't see that changing. I don't think there's going to be anything dramatic or even less than dramatic when it comes to whether it's the Democrats or the Republicans in the lead after these midterms.

What's your favorite Apple product right now?

Me? Oh, I'm using the iPhone Duo.

I think it's incredible.

And are you loving it?

And I feel bad for people who want, yes, and I feel bad for people who want it and aren't able to get their hands on it because it's a game-changing experience. And I think if you really should give it a shot, I mean, I've seen some people buy it and return it, but give it the two weeks and I think you'll get used to it. The inner screen is simply incredible. It's changed my workflow completely. You can use a lot of what you would use a laptop or an iPad for on this thing. So I encourage anyone who has the means or the desire to give.

It a shot or the patients or the.

Patients to wait in line for it. You know, people are trying to buy them. through the Apple Store app. And the AI bots are, you know, taking these things very quickly, 30 seconds, 60 seconds, 15 seconds. And it's hard for consumers to get their hands on it.

We have to wrap with you in 10 seconds, Mark. But when do you think it won't be an issue where somebody could just go and get one if they want one?

February, March.

Okay.

Mark your calendar, Carol.

Well, just have.

A little patience. Gotta update this iPhone 13 Pro that I have.

Yeah, you do kind of. I would. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

I mentioned this earlier, but just think back. Go back in time, Carol. It's just one week ago. Seven days ago, okay?

That's amazing.

Here we were, poring over the books, Anthropix S1, getting a first official look at the books.

Not everything.

No.

Of a company that could raise as much or more than the $ 86. 2 billion that SpaceX did when it went public earlier this year. Now we're getting updated. Look, the company reporting third quarter revenue of close to $ 17 billion as of September 30th. It's a 12-fold increase versus the same period a year ago.

What could be wrong? What could go wrong?

I don't know.

Seth knows.

We should point out, that's right, the updated filing further illustrating, though, the scale of the company's ambition, both in terms of its future growth and the surging costs. The spend alone, every time I look at that number, we'll get to that in just a moment, it kind of blows my mind.

We got Seth Figerman with us, Bloomberg News AI Editor. He joins us here in the Bloomberg Interactive Brokers Studio. So we got some updated numbers today. Does it change the picture... at all for investors who are thinking about this IPO?

Yeah, first off, I guess every Monday is going to be Anthropic S one day until the end of time.

Please, please, no.

I'd say a little bit, a little bit, compared to what we chatted last time. I'd say the company, like you said, is still showing strong revenue growth, but it's slowing a bit. You know, slowing from a very, very, very high peak, but slowing a bit. And at the same time, we're still seeing this continued acceleration in what it's spending, and it's spending commitments towards data centers. I think the figure was something like 800 and, The figure actually that stood out to me was a subset of that that said just since September 30th, they've committed to another $ 100 billion in spending on computing resources over a little more than a month. That just shows you the pace of investments here, and that's based on its assumption

of what it needs to meet its own demands, so that there's a sense of optimism in that. But I think if you're an investor, you have to really take stock of, there's no end in sight to the spend here.

That's the tricky one, the demand, right? Will this demand continue and at what rate, right? So if you really believe that it's going to be these kind of crazy strong, big rates in terms of demand. The spend makes sense maybe, right? But I mean, that's the tricky part of the equation right now.

Yeah, and like you said, 14-fold growth year over year. I mean, that's stellar. Most companies would kill for that or some version. But I think at the same time, it's just hard to predict. Stepping back from what's actually in the filing, a lot of the AI industry has sort of been vibes for the whole time I've been involved in it. Three, four months ago, the vibes were that Anthropic was the undisputed leader in AI development. Today, I think there's a feeling that OpenAI is pretty much back at par or perhaps even better in some categories.

So that's one factor that they're dealing with. The other is the pricing thing, and I do get into this.

Well, that's what I wanted to get to.

Yeah, so they say in the filing that something like $ 600 million in revenue was lost because they've lowered their pricing. And that's part of a larger dynamic at play here. The bull case would be that the companies are able to offer competitive services for less money and certain tiers of their products. But The other case would be that they're facing a lot of competitive pressure here in China.

Yeah, I'm glad you said China because that, I mean, let's say a price war emerges because there is some sort of competing product from China. I mean, we've seen that play out.

And I think we have been in sort of a subtle price war dynamic for months now.

Between who, though?

Between OpenAI and also between those two companies and the wider market.

They're not offering.

free services across the border, anything to compete with these more affordable ones. But I think if you had asked Anthropic six months ago, because they felt like they had this market lead, maybe they didn't feel the same pressure to try to downwardly price their products. I think today, though they're not saying it, there's that feeling that the companies have to be more competitive, at least at certain tiers of their offerings on price.

So if a lower price, does that mean more customers are using their product? Can we read that into them? Into that.

Or that the customers that they have are using it for more things. I think part of the concern here is just the idea that the customers that you do have might want to run these AI agents for not just like 10 minutes, but for months on end at every hour of the day. And we saw people were starting to get a little bit of sticker shock from that.

So part of it, I think, is just to kind of make sure that you're able to appeal to your customers more. and meet them where they're at, and part of it is to deal with mounting pressure from other companies.

How sticky are these contracts? Because if there is some sort of price war that emerges, and let's say a a group of people at a company is used to using a certain product. Can they just easily switch to the competing? Is there any sort of mode here? Yeah.

I mean, I think that there's different tiers of categories. Like you and I can say this month, I'm going to spend 20 bucks on opening eyes product. And the next month I'll do, I.

Know I was like, should I actually even save 40 bucks and buy a year subscription to Claude? Yeah.

There's not really a moat for the average consumer. I do think for the businesses, there's probably been more of a relationship dynamic there. I don't know that they're locked in for, a month, three months, or a year, but, like, they are working with different companies to help them deploy these tools in a way that makes sense for them and to kind of fine-tune them. And so there might be some cost there switching. And also a lot of companies are using both products or a multitude of products.

I do also think about what Anthropic says against the backdrop of Oracle doing another spend, debt markets, Alphabet doing, like, we continue to see that, right? And how do you guys, like, think about all of these players and ultimately, will there be just a couple that are really the behemoths when it comes to AI?

Yeah, I mean, to your first point, there's a lot of people asking for a lot of money all at the same time right now. You have to wonder how much the market can support. To your other question, I think there's been an assumption throughout that it wouldn't be one player takes all, you know, that there would be a room for a variety of offerings in this market.

And I think you see that borne out in our everyday experience that maybe the average consumer like us doesn't necessarily need the top of the line fable or mythos model to like act as a agent to help you like book play dates for your kids. Um, but that there are people, but that there are people working out like, you know, the cutting edge of whatever their fields are, who do want the best possible service that they'll pay top dollar for. And so there'd be room for a variety of offerings here. But if we enter a landscape where companies like Anthropica and others are really struggling to get the capital they need to build the data centers as fast as they need to build the tools that they need as fast, then you start to see a

winnowing of the landscape potentially, which is a whole separate issue.

I can't remember the column I was reading this morning, the newsletter I was reading this morning, but it talked about the Anthropics moat and one of the bull cases being the fact that if you actually look at spend that large multinational companies are doing, it's still such a small portion of overall budgets and that the real bull case is that these companies that they have relationships with now are going to spend more and more money. Is that what analysts are saying too?

I think one of the encouraging things in the original S1 filing was the idea that Anthropix said they had something like nearly 12,000 customers who were each spending at least $ 100, 000 on an annual basis on Anthropix products. And then I think a certain percentage of the Fortune 500 who were spending something like a million dollars. And the idea was, okay, if you've gotten them, if you've kind of lured them to start using your product, there's a lot of potential to grow that. And I think a lot of the concern around this industry has been the fear that NVIDIA is largely supported by four or five customers, hyperscalers.

SpaceX's business comes down to a couple big customers, including Anthropic, as we reported last week. I think there was a fear heading into the S1 that like, well, what if Anthropic is just two big customers supporting it and a couple other on the side.

That's not what we saw.

It felt like their business was healthier.

So I think that was encouraging.

But again, the amount that they're spending to support that kind of growth, we'll see if Wall Street has that same appetite today that they did a few weeks ago.

Seth, what's missing in kind of the Anthropic story that you would love to have answered right now?

Long are you moving forward with this IPO?

Is that still a question to you? Because it's supposed, I mean, the reporting all indicates like this should happen before Thanksgiving.

Yeah.

I mean, that's certainly that's what we're reporting too, but you can't ignore the wider market dynamic out there. You know, we are going through maybe not a historic route, but a pretty prolonged period of uncertainty here. We've seen these like in my entire time here, every few months, it feels like there's some whiplash in the market. Maybe it's deep seeks, you know, more affordable model. or Moonshot from China, or something else that makes the market rethink and reconsider the value proposition here. But it feels like we've now been in a weeks-long period of a market route. And we know that that's the kind of thing that the bankers who are marketing this IPO will be paying attention to, whether they can get what they.

Want out of it.

And they could certainly stay private longer.

Maybe?

Maybe.

Stay with us. More from Bloomberg Businessweek Daily coming up after this. Marvell Technology has agreed to buy Lumentum Holdings at an enterprise value of $ 115 billion. It's a push to capitalize on runaway data center spending. We were talking about, Carol, how both of those stocks, the acquirer and the acquiree.

are down significantly in trading today.

Yeah, both have had tremendous runs so far in 2026, but investors certainly weighing in. It is Marvell's boldest bet yet to recast itself as a star of the artificial intelligence industry. Company already designs chips, used an ever-growing AI infrastructure. You know that with Lumentum, though, it will now have components that use light-to-speed information around data centers and basically transfer data between data centers online. Marvell down 12% as we speak. Lamentum, Tim, almost an 18% decline.

Market not buying this, at least this version of the deal. For more, I want to bring in Ryan Gould. He's Bloomberg News deals reporter. He joins us from our Washington, D.C.

Bureau.

Ryan, why is the market not at least liking the company that's being acquired? What's going on here with the trade?

Tim, there's something always tricky about all stock M & A like this, which is that if you're not putting a cash component in this deal, you as the buyer, you transfer all the risk of the deal onto the target. And therefore, with Marvell down pretty badly today, you're basically seeing a lot of risk being put on the target.

And so it's just creating, it's hard to see the floor here. This is a deal that had there been some cash in there, a cash collar, as they say, it might have helped it to preserve some of that value more properly. That $ 115 billion value on the headline, which came out in the release this morning, is now starting to look a little bit lower. Again, that's the parallel of stock M & A.

It also doesn't help that they're coming off. I mean, if you think about the last week and just a tricky week for tech overall, Ryan, the environment is a tough one. And there's a lot of question about the AI spend and the AI deal making, if you will. So it kind of came into a rough market. But I guess when you're ready to announce a deal, you just do it, right?

Well, that's the thing, because we broke the story last week that these companies are in advanced talks. That was Thursday. Thursday and Friday were incredibly tough days for the market. You saw the NASDAQ down 1.5, almost two points then. We've obviously gone into the trade today. It's a little bit mixed. Again, the NASDAQ lower. I mean, first of all, that's right, Carol. It's not a great time to be announcing a deal like this. I will say that there was a Morgan Stanley note that went around this afternoon from their team basically saying, in a sense, Marvell's announcing this deal for Lumentum at, quote, peak cyclical conditions. Now, that's not a great thing to sort of read if you're maybe the boards of both of these companies. But

you know, this is the same calculus that they've been thinking about for a while, because deals like this don't just happen overnight. I think in terms of de-risking it with the leak already out there last week, I'm sure they would have gone into the weekend thinking, well, we can't have this hanging out there if the NASDAQ is going to sink another three, four points next week. So let's just get it out there. Let's just try and convince shareholders of both sides of the merits of this deal.

And I think Just a third piece, you made the point on the AI trade generally. I think there is always skepticism right now about what those returns might look like, that jitteriness. I wouldn't like to be a person in that boardroom with that sort of thing hanging in the back of my mind thinking, is now the right time?

Because once it's out there like now, it's on them to just get it over the line. Because another piece here, this is a historic trade for many reasons, but there by, I think, our reckoning, is maybe the third highest break fee ever. It's something in the region of, like, $ 5 billion that Marvell will have to pay to limit this deal.

Oh, my God.

Okay, so someone's getting money one way or another. It's called pull off the.

M & A band-aid and do it.

Danged if you do, danged if you don't, as they say, right? Hey, Ryan, when we talk to you about M & A, oftentimes there's this idea that the parts together are more valuable than they are separate. What can Marvell do with Lumentum Technology as a part of the company that it can't do if it's a customer of the company or if Lumentum is an independent publicly traded company, like why do they need to buy it?

Yeah, it's a good question for sure. These are two companies that have worked very closely together. Lumentum has been, sorry, Marvell has been a customer of Lumentum for quite some time already. And so what they're basically saying with this deal is that we know that going forward, all of these data centers are going to need these incredibly advanced chips.

We at Marvell can design them on a custom basis. But in order to simplify our supply chains and reduce those costs, we need to bring in those optical components earlier than later, i.e. we can build those optical solutions into the chip at the design phase, which is crucial because it essentially flattens out that cycle later on. If you think about these NVIDIA stacks that are now sort of in these data centers across Northern Virginia and the like, Most of those systems are running on what is known as copper, copper stacks. All of those that are running on copper stacks, Marvell thinks, or is betting on those having to be replaced with optical solutions. And so herein lies the sort of draw, which is that if you

can get access to those optical solutions earlier than later and design them into the chips, you're not then beholden on someone else to go out and supply those to you and have to pay another customer and therefore elongate the supply chain.

Hey, one of the things I want to ask you, you know, all of this AI stuff, Ryan, there's just, it's like the whole family's involved, right? You know, this like circular financing or circular relationships. NVIDIA announced an agreement to take a $ 2 billion stake in Lumentum back in March. And this includes plans to collaborate on photonics. I just, is this an important part of this deal? And NVIDIA kind of as a backstop or involved? I just, I am curious about the role here.

Yeah, I'm glad we touched on that because NVIDIA also took a stake in the same month earlier this year in Marvell. So NVIDIA took a $ 2 billion stake in Marvell and took a $ 2 billion stake in Lumentum. At the time, obviously, you would say that Jensen Huang did not know that these companies were coming together. You would imagine that was in March. But yeah, I mean, what is a semiconductor deal today without NVIDIA? I mean, clearly, when NVIDIA shows up saying that these are the kinds of demand constraints that we're seeing, And then you have Matt Murphy over at Marvell saying, okay, well, we might have a solution for you. I'm pretty sure that Jensen would be quite favorable of this deal today being announced

because it gives him sort of a more of a one-stop shop. And I think to him, you know, one of NVIDIA's biggest competitors in this space is Broadcom. What this does now is essentially create a more meaningful, robust competitor to Broadcom with the combined Marvell-Lumentum combinations. So I'm sure Jensen's quite pleased over at Nvidia to be thinking about the fact that there is now more competition in this space versus Broadcom, which is a big Nvidia rival.

The backdrop of today's program is the election, midterm election happening tomorrow. You're in Washington, D.C. I don't know why you're in Washington, D.C. Usually you're here hanging out with us. We won't take it personally. I'll be back tomorrow. Okay, good.

Why are you in D.C.

A lot?

I don't want him to tell us.

What's going on?

No, no. He's got to do his sourcing. We can talk about that later.

I know.

He's a busy guy.

Ryan, we're not going to make you answer that question, but I'm going to make you answer a question about regulatory risk here and about whether or not a deal such as this gets approved by the deadline here in the changing political climate. Could that change the outcome here if something happens tomorrow or even in 2028 that changes the balance of power in Washington?

It is quite something. I would contend that you're seeing not only the biggest deal by equity value of the year, but also one of the biggest tech deals ever announced on the eve of the midterm election, which could end up being actually quite critical to the balance of power, not only in the U.S., but in terms of how we share that power around the world. I will say that the big sort of question mark around this deal from a geopolitical point of view is China, as is so often the case with semiconductors. You know, penny for the regulators' thoughts in China as to how they think about the impact of this deal on the market. These are obviously spread out quite diverse customers across the world,

including in China. So I would say that's probably what the boards of both of these companies are thinking about as far as the regulation goes. In the US, they'll probably be okay. You saw that they announced that It's going to be a first-half 2028 closing target.

Target.

It does feel like a long way off. And obviously that could be extended. But, you know, you're thinking 18 months. So there's clearly some work to be done here in terms of getting those closing conditions met. They'll probably rest around China.

Is there any. You know, okay, I think back to a million years ago. I'm dating myself here, but like Google buys Waze, okay? It removes Waze as an acquisition target for other companies. It allows Google to then take that technology, do with it what you will. Is buying Lumentum from Marvell removing any Lumentum customers from having access to this technology? In other words, does it cut off any of them?

That's a good question, and I'm sure our BI colleagues will have a much better answer than me on this one. But I think that if you were to just take it on the face value, it is reducing a player, right? It's basically reducing a player. Therefore, you could make a case that it could increase costs. These are the things that antitrust regulators everywhere don't like. So I think if you're trying to sell this deal to not only your shareholders but also to regulators, you're going to have to come up with quite a robust defense of that idea.

And the other thing as well, that's a good point as well, because this is a deal that, as of right now, you're staring down the barrel at these declining share prices. Both sets of shareholders are going to have to vote on this deal. And providing that Marvell continues to decline, you might argue as a momentum shareholder, I mean, where has that value gone? Because the 24% premium on the unaffected that was announced this morning in the press release has pretty much almost disappeared in just one trading session.

Here's some topics. Customers, according to the supply chain analysis function on the Bloomberg for Lumentum, Alphabet, more than 26% of Lumentum's revenues. Sienna's about 15%. Apple, about 4.6%. Nokia, more than 3%. NVIDIA, about 2%. Yeah, I.

Mean, these are the customers, right? You would think in this networking realm, I mean, Nokia's an interesting one to have up there.

I mean, Nokia.

And obviously Cisco, Ericsson, also Nokia's competitor in Europe. I mean, these are all facing the same transition from copper to optical. And, you know, Marvell, if you're a Marvell shareholder, you're looking at this thinking that, you know, this is great. This is a great sign for us that this still goes through.

This is the Bloomberg Businessweek Daily Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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