Earnings Roundup: Alphabet Beats on Cloud Sales, Tesla's Profit Disappoints | Bloomberg Talks

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He is of course uh Bloomberg uh intelligence, excuse me, head of global uh technology. We've also got our Keith Nton, Bloomberg News auto reporter. He joins us here in our Bloomberg interactive broker studio along with Mandep. And then we've got Ed Lllo, Bloomberg tech uh host out there in our San Francisco bureau. All right, we're going to start. I do want to start with you, Mandep only because I feel like the AI trade is so important. Um what do you make of it? >> I mean great print. I think overall the results were great. Cloud 82% growth. uh it's a hundred billion dollar run rate business now which is phenomenal you know for a company like Alphabet which was really consumer focused but backlog is probably where I would say uh the whisper number was higher simply because when I look at Microsoft's backlog number it's higher than Alphabets and given its growing 82% and it has got anthropic as one of its main customers of Google cloud I would have expected that to go up I Anthropic is signing deals left and right. So why is it not showing up in the Google backlog number? >> Gemini models now process 22 billion API tokens per minute and the Gemini app has 950 monthly active users. Contextualize that Mandy for us compared to Open AI and >> I mean it's great but look Gemini has an attached rate because of all the other properties that Google has the search YouTube. So for me until unless they talk about usage of Gemini really uh taking off uh relative to the last quarter it's hard for me to extrapolate that into you know Gemini really taking share away from a chat GPT and uh all these companies are reporting very high MAU numbers but it's really the usage that counts and to my mind the 950 million is a reflection of the high attach rate that Google has because of the distribution through search and and the operating system and browser. >> Ed, we're going to come to you in just a moment on both, but I want to bring Keith Nton in. Tesla, it is it is a lot of technology in that one. So, as we talk about all of this, um, what do you make of kind of some of the numbers that we got from Tesla? >> Well, that's a big miss. You know, 33 cents versus 51 cents. And I get that Tesla is no longer really a car play. It's an it's an AI play. Well, here's the problem with that, Tim. The [laughter] thing is is that to fund that 25 billion in capex they have planned for this year, they need to sell a lot of cars. So they did sell well in the second quarter, but yet we're coming in low on on you saw the gross margin is also below expectations. So they need to make money. They went negative cash flow. We expected that. They didn't go as negative as was expected. So that's good. But they did go negative cash flow. So, you know, you got to generate revenue and profit from the car side of the house in order to pay for the robotics and the AI and the cyber caps. >> Yeah. Ed Lllo, come on in on this conversation. Is Tesla in your view and based on the folks you talked to, is it still a car company? Yeah, like the street wanted to see Tesla spend a lot of money, more money than they are spending currently based on the trajectory of capex to make some progress on robo taxis and robotics and you know the the looking back at the quarter was the problem that they had is even though they had record vehicle deliveries you know they are spending on R&D that's an impact stockbased compensation is a big impact remember like talent and stockbased compensation in the valley on the software and engineering side is like a really important factor. Um they had lower average selling prices. So you have record vehicle deliveries but lower ASP has not gone well for them. It's such a simple story. Capital expenditures came in in line with expectations. But on the buy side, just put your money where your mouth is. Elon Musk, spend more money on the AI story and and it hasn't really translated. But again, it's just an earnings deck. The real meat of it probably comes in the call. >> All right. So yeah um I want to bring well Ed before we I want to bring Mandep back in your thoughts on also Alphabet here. >> Yeah I was listening very carefully to everything that Mandep said. I mean the way that I look at it you know we we looked at the back backlog mandep explained Gemini and the trajectory of the cloud business search is where the slight miss is and so I guess the other way of looking at it is that there's a concern out there that the core search business gets more impacted by the behavior of using a chatbot in lie of the search engine and so it's a slight miss right that's not evidence of that again a very high bar quarter for Alphabet I just can't get over the cloud growth Mandy, like save me a bit. Like cloud growth 82%. It's pretty good like relative to what you and I talked about earlier in the week. >> Yeah, look, I I think overall uh it's hard to find any fault in the print. It's just, you know, because everyone is expecting capex to go up to 300 billion. I mean, look, uh, believe it or not, this company will have negative free cash flow next year. So, from that perspective, you have >> wild. >> Why? Why? Because of capex investment. >> Uh right now they are probably uh you know uh 10 to 15 billion free cash flow for this year. Next year if it goes to 300 billion, there's no way they're going to be positive free cash flow. So from that perspective, despite that 24% topline growth, we're talking about a company that'll have negative free cash flow at their scale. And that's where, you know, you want to see all these businesses really doing well. Right now it's cloud that's carrying all the weight but you want to see that to Ed's point in search and you know YouTube and other businesses and you're not seeing that kind of lift. >> Ed, you're laughing. Why? At the amount >> No, I I I [laughter] take it super seriously, but like remember when Oracle flipped to negative free cash flow for the first time since the '9s, the markets melted down. >> Yeah. >> When Amazon goes to negative free cash flow. >> So what? Sorry to our audio listeners. I shrugged my shoulders and made a funny face. [laughter] But like you know the the the interpretation of Mandep's analysis and the research that BI's done on this, the market's very sanguin about that. They want to see capital expenditure high. They also want to see topline growth directly evidenced as a result of the capex. But on the cash flow thing like everyone seems pretty calm about that. >> Mandep when's the payoff on this spend? >> Is it already happening? >> It's happening in a big way with the cloud business. I mean when have you seen you know a company get to hundred billion dollar uh new business line in a matter of you know 3 four years. So they are seeing that in the cloud business and it's a great investment. It's just uh I think with Alphabet Search is always the cash cow that funds everything and even though the topline growth uh to my mind 17% isn't bad uh in terms of topline growth, it's just I I think the backlog number combined with where search would be 2 3 years from now. That's where you start to get a little worried. But you know maybe they come out in the call and say Gemini 950 million users saw engagement growth of X%. And then suddenly everyone will be okay but you really want to see Gemini delays not carry forward. Remember there they have seen a delay in their Gemini Pro 3.5 release. Now all that is adding to the anxiety is Alphabet really falling behind when it comes to the frontier model race. Yes, they're doing very well on the cloud side, but what is it that will prevent search from really uh going down or you know the company falling behind in the frontier model race? >> It's interesting. You have to spend right to build out some of these these businesses in a big time and that is certainly a metric in terms of how you're you're judged. I want to go back to Tesla. Same thing though. They want Elon to spend to kind of do what he needs to do. >> Yeah. I mean, he's made some very large promises, hasn't he? about and about the cyber cabs who are supposed to all be riding in them by now, right? And that hasn't happened. The launch is slower. Optimus is not being built yet out in Fremont, although he says that'll happen by the end of the year, but we've heard that before, right? >> So, until he actually delivers some, you know, deliverables, some tangible results, you know, we're still relying on the car business to deliver the mail and and, you know, this report isn't showing that that's meeting expectations. Ed, is the case being made by investors or by at least Elon's investments uh at Tesla right now that yeah, SpaceX could absorb this company at some point in the near future. >> You know, it's still the prevailing sentiment um in industry and of the existing investor base on the SpaceX side that this will happen with time, right? The the financial mechanics of that are a bit of a mystery. you know, one public company backing into another. Um, but to lots of people, you just go back to why they believe that they believe that this the joint scale makes sense. Two very deeply vertically integrated companies that have a shared initiative on the compute side and semiconductor side where there is already a lot of cooperation on the engineering side. Um, you know, to lots of people it's just logical. Um, I we just don't have an answer for that. I found it, you know, I put it in the blog, right? I found it amazing that, you know, but but is it to be expected there's no mention really of SpaceX at all in the Tesla earnings deck and the only thing is that they have a $1 billion um unrealized gain from their prior equity investment in XAI which rolled into SpaceX. >> Um interesting. >> Yeah, I do wonder too uh and I want to bring this question to both Mandep and to Keith. I mean, Mandep, do you you have to think about Tesla and you have to think about SpaceX and their role in AI and kind of where this company is going, right? You we've talked with you about this. I mean, you've got to kind of think about where this goes next. >> I mean, to my mind, why did Google have to rent compute from SpaceX at such a high price, [laughter] you know, when when they have their own cloud business that what? Well, maybe they can monetize it better than SpaceX data centers can on on their own. So from that perspective, Google cloud business is more established. They can get a lot more out of that compute than SpaceX can. But really that's the case to be made that Google should go big in terms of capex increase because right now they're renting from SpaceX. >> Well, the same thing though to you Keith. I mean do you increasingly think about okay, you know, Tesla is not just going to be this car company anymore. You really have to think about the whole Elon universe, >> right? and he and he has to start showing that and just talking about that and he also has to make promises that he can achieve and uh so far he's overpromised and underd delivered. >> Yeah, it's just the date always moves. [laughter] >> All it takes is 2 gawatt of capacity and suddenly that will be another you know $50 billion in revenue that SpaceX can add. So it's not that hard right now at least in this environment. more gigawatt capacity is equal to $2 billion in revenue per gigawatt. >> Mandep, do you think it's odd that there's no mention as um Ed mentioned really of SpaceX in the Tesla results? >> I mean, right now these are independent companies. Why why would they be mixing those up? same same boss, you know, is [laughter] >> Keith, I want to play this out with you a little bit and what we were talking to Ed about and the idea of of Tesla being absorbed by SpaceX at some point. I know there's no historical precedent for this, but you do have in some cases uh auto manufacturers that are part of big conglomerates, right? You know, Tata comes to mind for me. But is there is the history mixed with with this sort of like a a a huge company that also turns out cars? >> Tesla as a car company is is not really a growth story anymore. They are contracting. I know they had a good quarter, but the previous two years they were down in car sales. And they're not even a luxury car maker anymore. They stopped making Model S. They stopped making Model X. Their most common trade in now is a Toyota. A Toyota hybrid. So, >> so meaning people come with >> people trade in their Tesla for a Toyota now. That's what's happening. Edmonds tells us today, wow, >> people are getting out of Teslas and going into Toyota hybrids. So, they're a mass market car maker now. That's why the margin shrink, right? You no longer in the luxury business. the the most common trade out of a Tesla previously had been a luxury car maker, a German car maker. Now they're going into Toyotas. So Tesla's um growth engine is slowing on the car side of the business. And that and so linking up with SpaceX could give them uh new ways to find revenues and to to monetize the AI side of the business, which so far it has not. But Ed, Ed to Keith's point, could the Cyber Cab or the the you know the um robo taxi come to the rescue here? >> You know, there is a they stopped the SNX in the period, right? Those were higher margin, higher price point vehicles. So like what Ke's outlining is completely correct. People forget the business model and actually what I would say the biggest tone shift in the deck, it's just a document is that this is Tesla the sort of complicated compute industrial robotics company. You know that's the kind of inagreate takeaway from it. The robo taxi business plan is multifaceted. Cyber cab is a vehicle that Tesla purpose produces and operates within a proprietary ride hailing feed fleet itself but also plans to sell the consumer. Makes not a lot of sense to a lot of people. But there's also like the Airbnb model where you as an existing Tesla owner submit your vehicle to the fleet. So when you're not using it, it goes out and operates in the ride hailing fleet like an Uber, but it's your vehicle that you own. And what's not clear is the economics of that mixed fleet. People just don't understand it. And Tesla hasn't really explained it since they first made the proposal. So that doesn't answer your question, Tim. But that's the problem with this print. The the Cordon was bad and there's not a lot of evidence that the future is underway. >> All right, I want to go back to Alphabet if I may. Um Tesla's still under pressure um selling off a bit uh after the uh market trade here. Uh Alphabet's been bouncing around. So I want to go back to you Mandep because I'm looking at our live blog, our markets live blog, and they're pointing out most of its biggest businesses were ahead of analyst expectations with the exception of search which was a touch below. What is it that you think we need to hear on the call? Is it about what's happening? Um what's going on with spending like the outlook here more? I mean the world of AI is measured in terms of token consumption and even though they gave a token consumption metric around API usage going to 22 billion from 16 billion uh last quarter so that's a nice uptick but really on the whole you want to see them continue to grow that token consumption across the family of apps and uh I think that's where you will see the usage of the model how much uh Gemini is getting used so token consumption along ong with that capex guide. To me, those are the two key metrics. >> Do we have metrics on AI overview versus traditional Google search? >> They do talk about how much >> does that matter to you? >> I mean, I care more about the aggregate even if there are some offsets that they are moving some of the traffic to AI overviews and AI mode. At the end of the day, it's the time spent on Google family of apps. That's what >> Okay, so that's Okay, Ed, come on back in here. I don't think we've talked to you about this. uh which is sort of the the little incremental updates that Alphabet is making to I don't want to call it family of apps because I don't want to confuse meta but it's like you know Google's Gmail having this sort of like AI inbox or you being able to ask Google Maps questions that are more conversational and AI does that move the needle in your view do analysts talk about that making this stuff more engaging because AI inbox is great for me >> you know I I I'm not deflecting I I really I would go to Mandep on this, but it's it's not the consumer that moves the needle, right? You know, look at what they did say. 90% of the Fortune 100 are using the Gemini Enterprise. According to the statement, Gemini models process 22 billion API tokens per minute. You know, this is the token economy. That's how we're judging uh success of the utilization of different AIs that the Frontier Labs and the Hyperscalers are developing. That's in the enterprise. you know, it's it has very little to me to to to see the needle move on on the existing suite of software that Google adds. Just like Microsoft's having a very hard time telling me that 365 has anything to do with their AI story and then boosting cloud sales. It just doesn't. >> Yeah, that's a good point. I mean, but Mandep, if but if a lot of consumers are are sort of interacting with Google's AI through these tools that they've used for years, then certainly that makes them more engaging. >> It doesn't. But like Ed said, maybe it doesn't move the needle. >> I mean to my mind right now because the LLM companies don't have a premium models with ads, the consumer side is somewhat shielded and the battleground is really the enterprise side to Ed's point because that's where the consumption is measured around tokens and you are seeing that backlog uh really come to fruition. But the consumer side is important in the sense all the internet platforms leverage the data to make the platforms better. That's why Google has been so successful over the years. So if you lose the engagement on the consumer side over time it's going to affect how good your product is and that's where people moving their queries to chat GPT or cloud will have an impact because right now Google has that monopoly 90% it used to have I I don't think that's the case anymore but that's how the platform got so much better the search box got so much better is because of the usage so I wouldn't underestimate the usage on the consumer >> [music] >> Hi, I'm Tom Keane, inviting you to join me for the Bloomberg Surveillance Podcast. It's about making you smarter every business day. >> I'm Paul Sweeney. [music] We bring you complete coverage of stocks, bonds, commodities, even crypto. All the information you need to excel in the markets. >> And I'm Alexis [music] Christopherus. 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