Big Tech Earnings Kick Off | Bloomberg Daybreak: Asia Edition

Bloomberg Audio Studios podcasts radio news. Welcome to the Daybreak Asia podcast. I'm Doug Krer. Equity trading in the Asia-Pacific is being influenced today by some after the bell earnings in the US. Alphabet among them reporting second quarter cloud revenue above expectations. However, at the same time, Alphabet raised its estimate on capex by roughly 15 billion to as much as 205 billion for the year. For a closer look, let's bring in Shai Balour. Shai is chief market strategist at Futurum Group. Shai is for the moment based in Seattle. Thank you for making time. Let's talk about the alphabet because I think that what we're going to get here in terms of reaction in the AP pack particularly among some of the hardware producers is going to be driven by this uh upward revision in capex for Alphabet. Wouldn't you agree with that? >> Yeah, I think the semis are probably the biggest winners if I had to pick a group after uh this earnings afternoon because it wasn't just Google. I mean Tesla also increased their capex commentary as well. But on uh Google specifically, I mean, they're they bumped their capex to $15 billion, but it wasn't they didn't just stop there. Like they also made some commentary in 2027 that they anticipate spending even more um in that year and even after that it could exponentially grow even faster. And I also think the commentary on temporarily renting more expensive infrastructure from outside providers because Google cannot build its own capacity fast enough. That just shows how much of an imbalance supply and demand still is at this stage. >> So when you mentioned the chip makers and it comes when it comes to Alphabet I think of the the TPUs the tensor processing units. This is a specific chip developed by Google for certain AI related applications. Does it necessarily give this TPU give Alphabet a significant edge in what we're seeing unfold now in the AI landscape? >> Yeah. Yeah, I mean, I think you saw it in their Google Cloud numbers. Uh, it's kind of crazy to say at at the scale that Google Cloud's at, but they're it's growing 82% topline and this is now a $25 billion business. It's actually becoming 20% of the total revenue right now. So, that segment is just growing at a rapid pace. I think it's growing several times as fast as the search, YouTube, and uh services side of their business. So I think that that 82% topline growth combined with 36% operating margins is showing that this is um real ROI like their their ability to control their AI economics because they own so much of the vertical stack is being proven in those Google cloud fundamentals. And I think that it's they had a very high bar to beat. Uh I think 70% was like the whispers on Google Cloud growth. They came in at 82%. And not just that, margins u the operating incomes tripled year-over-year to $ 8.8 billion. So I think that this is like a rare combination of topline growth and margin expansion that is just being proven due to their ability of controlling the chip cost their TPUs. And uh even though they're falling behind in the benchmarks in the Gemini, that's totally fine because really the TPU was meant for internal use. There was a brief period where there was such a awkward supply demand imbalance due to the Blackwell delay that TPUs were starting to get entertained as an external use. But really it was supposed to be for internal and I think that you're showing it in the cloud margins of how efficient they are operating that. >> We also heard from Tesla after the bell second quarter earnings short of the estimate from the street. I think adjusted EPS around 33 cents below the 51 that analysts had been looking for. There was a strong quarter of auto sales, but this company is dealing with some other headwinds right now. What's your feeling about what Tesla is going through at the moment? >> Yeah, I mean Tesla delivered a quarter that looked excellent uh like you mentioned on revenue deliveries, but it was substantially weaker on the automotive profitability. I mean I they clearly uh sacrificed a lot of their margins in order to fulfill that delivery number or be on the revenue number. I also think that their energy margins was a bit of a disappointments as well because of a couple one-off situations that occurred but my main takeaway from Tesla is obviously their quarter contained two very different stories. I think the automotive business is producing a lot stronger demand which is great to see but really disappointing margins. the long-term autonomy thesis is actually receiving a lot more of its commercial signals that uh I was surprised to hear on the conference call through accelerating FSD adoption and uh some timelines I looked a little more near-term than long-term but the automotive gross margins if you exclude the reg regulatory credits like that's the reason why the stock is down after after hours right now it's down 4% it's just they're sacrificing a lot to hit those delivery numbers and I think they're doing so because they're seeing the adoption on FSD uh hit 55% and they want to sacrifice the near-term margins in order to get that software margin the FSC FSD side of the business. >> So how is this company now focused on the Chinese market which for a while there I think was was critical. It seems far less critical these days and we know what the EV story is in China and how dominant uh Chinese players have become in the industry. Has has Tesla kind of relaxed it its position a bit when it comes to China? >> Totally has. I think it they waved the white flag on China. I really don't think it's a really a topic of conversation anymore uh in the internal circle at Tesla. I think that they're clearly all about robo taxi um humanoids like h going from that slow then fast roll out of uh cyber cab like energy business. China. They're just like they think it's a secondary market that is just lost already due to the Chinese competitors that are just absolutely killing on that front and they just think it's a a bit of a lost cause. So, I don't think it's uh at all on top of conversations in the internal uh Tesla circles. >> So, we also heard from IBM after the bell. things were not really that surprising because we had the preliminary results last week that indicated weak sales for both infrastructure and software and a lot of people were a little alarmed by that as maybe an indication that AI is is the bigger issue right now and IBM has been left out of that story. Uh the stock was down on that news last week about 25% when the preliminary numbers were released today. It seemed to confirm everything that we learned last week. Where are you in understanding the mainframe business and whether or not it's even relevant these days? It's still somewhat it's still relevant. I do believe that um the issue at IBM was more of a expectations. I think entering the preliminary guidance that they revealed like a a week ago like the stock did run up significantly. I think that uh there was maybe some commentary that Enthropic is going to become some kind somewhat of a tailwind for Red Hat. I think there was even some commentary today that the CEO mentioned that it would be like a $10 billion TAM uh for Red Hat. So like the software side of the business for IBM should in theory experience a tailwind from AI and there was somewhat of a bump in the stock price heading into those prints in anticipation that there was going to be some kind of AI beneficiary stance but clearly that wasn't the case. I think that you're seeing that there was an execution miss on the management front IBM. They are very upfront about that. I think that they're going to they're experiencing a couple headwinds that are late in second quarter that they're going to focus on how to get ahead of in the following quarters. Uh but end of the day like this is a stock that just has an absolute place in the enterprise world. It's just the stock got ahead of itself and I think that their guidance had to get taken down a bit and you're seeing it wasn't really an enterprise issue because Service Now had a really strong earnings report today. Uh so this does feel like an IBM specific issue and if software can go back to growing 10% I think that would be fine. It's just management even today talked about that software revenue is going to grow 7% in 2026 due to several delayed software deals. Well it's from what we're hearing everything right now is going towards either these frontier models or cyber security. So I think that's there's only a finite amount of dollars that can actually be spent on these IT budgets. And unfortunately IBM is part of the bucket where it's not as essential as these cyber security and frontier spendings. >> What about what we've been hearing from IBM regarding quantum computing? Is it far too early right now to make that bet in quantum computing? >> Oh, this is not a this decade thing in quantum. I think quantum is going to be a 2030 plus thing. I think that you're going to see sovereign spend going towards the space. I think that that's going to create this illusion that it's commercially ready due to these like a lot of these commentary chair and headlines on national spending towards quantum due to security fronts or a lot of this like research and development that's happening in quantum. But the commercial front on quantum will not be until at least 2030. We're just nowhere close to that. Even then, it's going to be an incremental thing on workloads. It's not going to be a replacement towards AI. I just think that right now it's purely a sovereign spend angle that it's fine. I mean, the pure play is like the Ion Q's of the world. They're going to do well just because they have a smaller base. So, the rate of change will be more exponential for them uh due to this national spending for sovereign sovereignty uh defense. But for an IBM or Google, even a Microsoft, it's not going to be a needle mover for a decade. Shai, before I let you go, I want to get your take on what you've heard from China regarding Moonshot, this new AI model, Kimmy K3. It seemed to rattle the market quite a bit. It seems like a lowcost solution to the world of uh large language models. Does it represent risks to companies like, let's say, open AI or anthropic? >> Yes, both of those. Absolutely. I believe so. And I think that's great for the AI economy, bad for those two duopolies on the model fronts cuz I think that right now they have a great they're obviously have a ton of mind share and a great uh first mover advantage. But I think you're seeing signs that there's going to be a lot of creative ways to get around the duopoly bottleneck that those two companies have. And I think that that's going to be great for everyone else because I think the clear sign that ne to me after this Kimmy K3 revelation is that uh they're compute constraint e even right now and I think that it's really interesting that they're compute constraint right now because Kim Kimmy K3 has already been trained. So the bottleneck is now appearing when the companies try to serve the model to users at scale rather than while it's trying to build that model. So that to me is like the clearest signal that the next phase of the AI cycle is going to be like driven by less number of u companies and more on like dozens thousands of other companies that are going to be requesting more billions of daily requests flowing through those models instead of just everything going through these two models. So I think bad for those two companies but great for infra AI infrastructure companies. >> All right, Chai, we'll leave it there. Thank you so very much. Shyalure is a chief market strategist at Futurum Group joining from Seattle here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia podcast. I'm Doug Krer. Semiconductor related stocks in the Asia-Pacific are trading higher. That's after Alphabet raised its estimate on capital spending. And that's where we begin our conversation with Vikas Pashad. Vikas is Asian equities portfolio manager at M&G Investments. He spoke with Bloomberg TV host Sheron and Heidi Straoud Watts. >> We have a very nuanced AI trade right now coming from the US. Right. When it comes to Alphabet, we saw this major cloud beat. We had Tesla disappointing. We had IBM cutting guidance. How does that necessarily translate into the Asian trade? >> Good morning, Sherry. Well, it's a good place to start. There are a few takeaways from the Google announcements for me. The first one is that the the increase in capex should come as a surprise, but for those who are expecting the the $750 billion to grow perhaps to a trillion from the big five spenders in the US for calendar 27 or maybe even early 28 on a 12-month view. We're probably not heading towards that number yet. So, that's number one. Second, we've been investing not directly in the picks and shovels of the AI trade this year, but the picks and shovels of those picks and shovels. So what does that mean is that we're looking for beneficiaries or companies that will benefit even if the overall hyperscaler capex pool doesn't grow very much. So optical networking company, photonics based companies, some of the advanced packaging companies, the underlying shifts in technology underway. Uh that that's what we're looking for in Asia and there are plenty of opportunities still at this stage of the the AI trade that we've seen over the past four years. Also, what I would say is that there's a lot of noise these days, but if you look back, let's say you go back to the April of last year when we had the the Trump tariffs released uh across the world, there have been a few genuine signals. One of the re real signals uh in recent months was last week or over the weekend with the Kim K3 model. Our our view is that there's going to be a divergence between compute and memory demand. compute is going to become more efficient and so we're revisiting our holdings in the memory sector where we had been quite overweight last year. We have been overweight uh in more recent months but we're revisiting that. So a lot a lot to look at in Asia but I would say that the the overall takeaway is that we might see a deceleration in AI capex hyperscaler capex but that doesn't change the opportunity set uh for long-term active managers. Yeah, it's very layered and nuanced what you're saying right now, right? I mean, if we see a slowdown because of what's happening across China, you would revisit memory, but at the same time, you're actually investing in the picks and shovels of the pigs and shovels. So, uh for investors who want to sort of unpack this, are there any regions or or markets where you would find more opportunities? And when it comes to future investments, would you go into the Chinese tech sector itself as well despite of course some of the more fundamental issues with that economy? >> Yes. So to answer your last question first, whether an investor is looking to allocate more capital to AI and tech and hardware or or just the economies, the companies of the future or if you just want to understand what's happening in the world, I I I do think that you need to start with China. The center of gravity of AI has already been shifting towards Asia over the past few years. That shift is accelerating and it's move moving from hardware and memory to now the models themselves. If you look at the recent announcements, the recent being over the past year or so, first from deepseek in January, February last year and now from Moonshot just a few days ago. The the pace of the acceleration in Chinese tech development is astonishing and and that will have implications for all the sectors that that touches. So yes, we're spending more time and we're allocating more capital to accelerators, GPU accelerators in China, to the semiconductor production equipment companies in China. And also all all this capital allocation and the time and the research spent on China is yielding a lot of learnings for Japanese companies, for Taiwanese and Korean companies, many of whom are now more vulnerable than they have been in the past. So there is a a shift underway in our portfolios a little bit more caution on some of the uh North Asian names outside of China and more constructive views on China despite the headline top down slowdown that we are seeing. There's there's a very broad opportunity set in China and it's not just about AI. Same thing goes for other markets. Japan we remain very constructive even though we're more than a decade past the the launch of AB's arrows. This this might be the most slowly repricing equity story in the world. the corporate governance transformation in Japan. If we look at India, some stability in Q2 after one of the worst quarters for Indian equities in Q1 and there's a lot to like in India as well. 7,000 listed companies, almost 2,000 with a market cap of over $100 million. Every sector you can imagine uh is listed in India. So the the big three markets in Asia remain very exciting for us. If we've taken some capital away in recent weeks and months, it's been from to the other large markets in North Asia, that's Taiwan and South Korea. because do you think there's now a tech talk put in China with the national team returning with intervention? >> It's a fair question. I I would heir on the side of saying yes. And so when we look at valuations in China, why are they so much higher now than they have been in recent years? It's because of the acceleration in tech spending. It's the acceleration of the progress that we're seeing coming into this year. The expectations for WF wafer wafer fab equipment expenditures was seen to be about 110 to $120 billion with flattish uh growth or limited growth in China. 6 months into the year we're seeing very significant increases to those estimates overall but especially so in China and and so this is why the premia are expanding for Chinese companies but it's not just scarcity premium these companies are doing well. they're taking share. The Japanese and Taiwanese and Korean companies that we speak to, whether they are wafer companies, SPE companies, even memory companies now acknowledge that they are there are vulnerabilities in their business models on a longerterm view, whether it's DRM, uh, HBM or conventional memory or NAND or the etching and deposition equipment that in which the Japanese and the American companies have been leaders for a long time. So yes start with China spend time there understand what's going on and again it's not just AI pretty much anything that is happening within China is touching sectors that is happen sectors outside of China whether you look at healthcare pharma and biotech defense aerospace and then of course autos ancillaries renewables the list is very very long >> I guess the question is when it comes to the broader landscape for Chinese equities it's helpful to have national policy report, right? And of course the national AI ambitions as well. But do you require a strong economic fundamental situation which perhaps hasn't come through yet with the recent slowdown? >> It it would it wouldn't hurt. But if you look at our China strategies and our portfolios in China, the the the top holdings are not AI related companies. It's a very broad opportunity set that we're seeing. You're seeing single-digit PES, double-digit free cash flow yields, high and rising dividend yields, reasonable earnings growth, very smart capital allocation, much smarter than than we've seen over the past 5, 10, 15, 20 years. And so our portfolio in China, the the largest exposures are in in banks, in ship builders, in some of the retailers. Yes, of course, we do have exposure to tech tech hardware, and we're doing our work on a broader universe of names as well. But the opportunity set again in in China is is very broad. For long-term active managers, this is the right time to to look at China. If you look at China's contribution to global trade and the global economy on one side, there there's an there's a material dislocation between that and the allocation to global to Chinese equities in global portfolios and and we think that that should normalize over time and if it doesn't, it just extends the opportunity set for long-term managers like us. Vicas, before we let you go, just super quickly, I wanted your take on what we're seeing from the BOJ uh sources telling Bloomberg that they could actually consider going even at a faster rate when uh pace when hiking rates. Would that alter your investment case for Japan? >> Not really. We we've seen the yen go from 100 or actually around the time of AB's era being launched around 80 to now 160. We we don't share as you know we don't invest in the market we invest in stocks we're not ignorant of the macro uh at the margin it might impact how we see some of the exporters perhaps but our view is if you do your homework and you bet on the right management teams with the right business models and the right unit economics you'll win over time but as you were mentioning just before I came on on air there is a credibility question so we'll see how the market perceives this they're being transparent the headlines are out there but the yen continues to weaken so we we do have our eye on that but it does not change our long- term enthusiasm for Japanese equities. >> That was Vikas Pashad, Asian equities portfolio manager at M&G Investments, speaking earlier with Bloomberg TV host Sheron and Heidi Strad Watts, bringing you their conversation here on the Daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia-Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krer, and this is Bloomberg.