Featuring:
Elfreda Jonker, Client Portfolio Manager and Investment Specialist at Alphinity Investment Management
Pat Gelsinger, Chief Executive Officer at Intel
Maribel Lopez, Founder and Principal Analyst at Lopez Research
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Good morning, and welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Prisner. Here are the stories we're following today. I'm Charlie Peloton for Doug Prisoner. This week Stateside, we got a number of big tech earnings from the likes of Apple, Amazon, and Intel. We'll hear from Intel CEO Pat Gelsinger later in the program, but first up reaction from ALFREDA Jonker, client portfolio manager at Alfinity Investment Management. She spoke with Bloomberg's Sherry On and Annabelle Droolers at.
A time when we got those more disappointing outlooks when it came to Meta and Microsoft as well. Yet when it comes to your top picks, Apple is one of them for you.
Yes. If you look at the results from the start of the reporting season up to now, it has really been a bit of a mixed reporting season overall for all the tech stocks. If you think back at the start, we had a few misses, something like a Kitence with a good result this morning, Microsoft as well as Apple, probably a little bit below what the market was hoping for. You've discussed China, but also I think it's all about the outlook statements. I think the key point to make here is that these step giants are still coming through with really really strong earnings growth and strong revenue growth. The shock and awe of the AI trade is just probably over now. They are not surprised about thirty forty percent anymore as they did before. So yes, they've done a great job, and yes, some of the areas are still doing very well, particularly some of the businesses like Microsoft has got a range of different businesses that they can generate revenue from an AI, but we have started to see a little bit of capacity constraint and also impacting particularly on the cloud business side. But taking that all into account, majority of what the market is focused on is really the outlook statement, and that is where Amazon as well as Alphabet has come out probably better than expected guidance for the next quarter. And then Apple, where they generally generate thirty five percent of total financial hairs sales in the fourth quarter, that was a little bit softer, and if you take that into account with just releasing their Apple Intelligence, there are a number of questions that we need to work through and understand how long there's sort of short is it the shorter term problem or is there a little bit more in this later on? So yes, we will be taking it into account. We have been taking profits in this area over the last sort of year to date, we've taken a lot of profit out of Nvidia, Microsoft, Alphabet, so it's not the huge position that it used to be, but we still believe there is space work in that portfolio.
So then how are you thinking about your framing around this. Are you still looking at sort of the picks and shovels. I notice you say capacity constraint and that makes me think of Microsoft for instance this week. Are you still in that part of it or are you going more into the application side instead.
Yes, I think if you take a look back at what we saw during the Internet phase, it was very much semiconductors first, then infrastructure, then you have the software and services at the top. So we definitely have been exposed to sort of all through those different stages. But now we do believe that you know, it's probably worthwhile having a player in each of those games, but not have two or three players in each of those different stages. So we at is probably more adding to the infrastructure side. So, as I mentioned, Apple sits right there in the middle with their devices, but also something like Microsoft can still play in the sort of software and services that sits on top, as well as Amazon and Alphabet. So that is what we are currently looking for. We're looking for companies that can generate revenues out of each of those different phases. And in video the reason why we keep on holding it and we have been cutting back quite a bit given the valuation expansion. But if you look at the capital that these big mega hyperscalis of spending. We've heard earlier that they will just continue to spend even more next year. That's very positive for in VideA. We just need to understand exactly what's going on with capacity. So far, all the news that we've heard from Gensen has been that there is a massive demand for their new Blackbell trips. We will be doing a lot of work. Our analysts have been on the ground doing trips understanding that sort of back end to get a better sense of the capacity. For now, we don't think it is a huge problem, but we could potentially see not just in video but also for the likes of Microsoft, that some of those revenues could be postponed a little bit into next year rather than into the fourth quarter this year, so a bit of a delayed potentially for some of these revenue gen rating companies.
I'm a little bit concerned about the savings rate because when we talked about the broader markets, we always thought there was a little bit of buffer despite the downside and the pressure that we could see from uncertainty in politics to your politics and so forth. Is this going to be an issue going forward for the US markets is?
I think what you have seen currently clearly the data points coming through, like the GDP growth rate, even just the consumer numbers are tested. I consumer spending, even housing started to come through actually a little bit better than expected. So what we are seeing overall for the economy is probably an economy that's doing okay. And that's why we are not expecting that a hard landing or recession, but a software landing. I think the important thing to point out here is that the interest rate market is clearly not necessarily believing the indust rate cutting cycle with the market is sort of forecasting at the moment, and that could be a very important point to look out for. So on the consumer and the saving rate, yes, that is something that we do watch. I think the saving rate relative to where we've come from and relative to other countries, and the US is actually still relatively okay.
But from a.
Consumer's spending perspective, we have been pretty cautious on the consumer overall, and even the current reporting season, what you are seeing is quite a bifacated market where the lower end is definitely still struggling. Dollar stores not necessarily doing well. You stop, continue to see the down training happening, you know, eating at home, those sort of things. But then on the upper end you have segments that is doing quite well, so that sort of higher end consumer. But on the other hand, you also have luxury really struggling on the back of a week of China. So for the US economy itself, for us, the important thing really to understand here is what is happening to inflation and what's happening to the interest train outlook statement an interstate outlook in general, because if we do get a Trump win, for example, huge tariffs necessarily doesn't mean a positive outlook for the economy or for the interest rate outlook. So there's a lot that's that you currently need to bear in mind when you think about the.
Macro outlook and Alfred, I mean, I think to your point around around the luxury end, and that China risk essay Lauder was a perfect example of that overnight, the biggest drop ever really for the company after they withdrew their China guidance. But you speak about sort of that that rally perhaps broadening out, how are you thinking about positioning then, given we do have that risk of rate staying elevator going into twenty twenty five if Trump does indeed return to the White House.
Yes, So what we have been seeing of late is definitely sort of a resurgence of some of the sectors that's actually been in a deep position over the last two years. So if you think back over the last two years, we've actually been in an earnings upgrade cycle for the overall mark. We've had consecutive months of the market running more so than what we've had for many, many years. But you have actually seen that sort of underlying earnings trajectory. It's been eighteen months of positive earnings. But what we have seen of late is that sort of starting to falter. It's still positive, but not nearly as good as we want to see. And you have seen the broadening out from just tech stocks driving performance and earnings and where we are focusing on those sticktors, for example financials, it's starting to see earning growth come through, particularly capital markets opening up.
Unfortunately, got to leave it there, but that was our Freddie Younger, client portfolio manager at Alffinity Investment Management.
Coming up a conversation with Intel CEO Pat Gelsinger. I'm Charlie Palatan. This is Bloomberg. I'm Charlie Palette. Doug Prisoner is off. This week we go next to Intel, which surged in late US trading on optimism about a turnaround and for more we hear from CEO Pat Gelsinger. Here he is in conversation with Bloomberg's Ed Ludlow.
Pat, thank you for your time in the quarter gone. We were just talking about how you made painful decisions and those showed up as impairment charges and were reflected on the bottom line. To start, Could I ask if that's it now that those actions are taken and you now have line of sight on what you want to do, or if there will be more sort of restructure to come.
Yeah, we worked very hard this quarter to get this done and the people actions, the restructuring charges you'll largely finished this quarter, so it was a challenging quarter that way, but to also deliver better than expect the results if we eliminate those one time charges and to take our guidance up for Q four. I'm very proud of our team being able to do both of those this quarter. Some of the most difficult restructuring charges maybe in the history of Intel since our memory microprocessor decision almost forty years ago. Getting that done and still beating results and taking the guide up, this was a very significant quarter for our team to execute. Very proud of their discipline results.
Pat the investor base of cheering you. I'm going on the reaction of your stock in after hours, but a lot of that does seem to be a focus on what you were guiding to in the final three months of this year, away from sort of the financials and numbers. Could you talk a little bit about the product business and the foundry business that gave you some confidence in that guide.
Yeah, and if we take it apart a little bit, the client business. We've launched our lunar Lake product, the second generation of our AIPC, and the AIPC category very solid. We'll be launching the commercial version of that into a good market. We believe next year for a Windows refresh, a corporate refresh cycle, and we start to see more strength in the AIPC category overall, with strong set of use cases and ISVs bringing new software into the marketplace. So we feel good about the client business Data center quarter on quarter a little bit better than people forecast for that business, and a stronger product line with our Xeon six products now starting to ram, you know. And finally on the Intel foundry quarter and quarter growth in that area, and a strong pipeline of external customers. We announced Amazon and two other AT and A customers, some additional advanced packaging customers. So we're starting to see that business come to life. And that's a long term business because when people move designs, it takes several years for major designs to move into our foundry. So we've been at it now a couple of years, and we're starting to see the results of those hard work and getting back to competitive process technology with AT and A. So a very good quarter of operational results.
Pat We have a question from our audience, and that question comes from Clem DeLong, who's the CEO and founder of hugging face, and he makes the point that on his platform there are many more smaller models now available, and it's leading him to have a question for you about Intel's place in the on device trend we're seeing with AI and how you're going to enable more on device AI use.
Well, thank you, clem, A great question and a hugging face. A great company, and you know, as you think about these models, you know, we do see it moving from the training phase of you know, trillions of parameters to the inferencing phase. And exactly like the question says, in that inferencing phase, more of that will happen on prem for data center customers, and many of those smaller models will be retrained with enterprise's own data. A lot of those will just run on Zeon. We don't need a special accelerator, or it'll be Zeon plus an accelerator. But also then the edge use cases and AIPC use cases.
Ed.
I call it the three laws of the edge. Right, the laws of physics, right, the speed of light. If I have to go to the cloud, I had time. Your second law is the law of economics, right, it's cheaper to run on my device. And finally, the laws of the land, my data on my device in my data center. So we see it moving from a cloud training world to an edge and on prem world for inferencing for the future.
I therefore have to ask you about Goudi. Your AI accelerator did not get the traction that you'd hoped, and you won't be making the outline target of five hundred million dollars in sales for this fiscal year or calendar year. Why is it a use case issue that the data center operators aren't looking at it or something else.
Yeah, two factors that we pointed out. One is is that now we have Goudi three coming out, so there's more enthusiasm for the next generation product that we're just starting to ramp now. The second one is the software and the software use cases. The AI world has moved very rapidly and innovating very quickly, and the robustness and the completeness of the Gaudy software stack hasn't been as great. And it's an accelerator, not a full reprogrammable GPU, so that makes some of the software porting and optimizations a bit more difficult. Obviously, as we get more of that running on Gaudy, we solve the software products. But secondly then it's also to move to a complete GPU capability, which we'll be doing out in time, and that development effort is also well underway. So we feel we have a solid position. The world is coming to more on prem and enterprise use cases. Like the last question ask and GOUTI three good early indications from the marketplace and its success as we ramp it.
In twenty five, Pat Bloomberg's reported that on and Qualcom, two of your peers are interested in buying some or part of in Intel. Can you confirm whether or not you received a formal offer from them or anyone else, and what Intel's consideration of them would be.
Yeah, And obviously there's been rumors and churn in the industry, and I think all of that just indicates how important Intel is to the Intel into the industry structure and semiconductors, and how important those supply chains are for the world. We don't view any of these rumors as particularly emeritus. We laid out a strategy, we reaffirmed that with our board of directors, and obviously as we've taken these steps this quarter and restructuring and getting our costs where they need to be we have the capacity to go on the journey that we've laid out to produce sustainable profitability and results to shareholder return. So with that, you know, I'm committed, the team's committed, We have the board support for the strategy that we've laid out, and Q three shows that's exactly what we're going to do.
Trying to help our audience understand Intel's historic and current business right the products, but also foundry. And what you said was that twenty twenty six is when those third party customers start to show up. But could you just outline the path to that what you want to hold yourself to for next year in developing that business as a sort of standalone unit.
Yeah, and it's a great question ed, and clearly we've started to see that already emerge. And even this quarter we saw quarter and quarter growth of the external foundry business, largely driven by some of those early packaging design wins. So these advanced packages are sort of a faster on ramp, but ultimately it's becoming a wafer foundry for the industry. And as we said, you three major design wins this quarter, you know, one with Amazon and two other compute use cases, so we'll be updating, you know, the market as we win more of those customers and describing the lifetime deal value of those to the marketplace as well, give some of those breadcrumbs along the way. But it takes a couple of years for people to move these designs, a year to design it, a year to bring it into production until it starts to ramp in the marketplace. So key milestones for eighteen A that customers are now beginning those design cycles, the design tools, the design libraries are being moved over to eighteen A, but it really isn't until twenty six that those results start to really help Intel's products, and then twenty six twenty seven until we start to see meaningful volumes externally.
That were just days away from an election in this country. And I'm particularly interested in your assessment and planning for what might happen to the CHIPSAC programs. Of course, I don't expect you to know what will happen in the election. You do not have a crystal ball. But former President Trump has kind of made disparaging remarks about President Biden's economic agenda. How are you planning for that?
Please?
Yeah, And I'd say maybe three different perspectives. Number One, the Chips Act was a bipartisan act and with that strong support from both sides of the aisle, you know, and with that, we believe the importance of that in terms of industrial policy. The semiconductor industry is well supported by Congress and both parties. Second, we are disappointed by how long and how slow the dispensing of funds has been and well over two years at this point. I've invested thirty billion in capital and we've seen zero dollars of the Chips grants at this point. So we do believe that that has been too slow, and we're somewhat frustrated by that, and we've taken that out of our financials for this year. That said, there's also the investment tax credit that we are seeing, and it is much larger than the grant portion of the Chips Act, and that is now law, and that will be beneficial. But clearly, I think whoever wins the election, the importance of this industry, the importance of rebuilding this supply chain of manufacturing is well supported. And Intel as a designer, R and D and manufacturer is unique in the United States and in the overall structure of the industry, and we expect the broad support rate of the administration regardless which party wins.
As a result, Pat two quarters ago, your CFO told me you were two over indexed to CPU, and we know what happened with Goudi. You made painful decisions in the court to gone reduce headcount by sixteen five hundred. Do you now have the plan in place and are you confident from here?
Yeah. We laid out a clean sheet program that we went through to really benchmark the business. We took a conservative view of the funding plan, as we call it internally, saying you know, we're taking a modest growth outlook and we're building our cost structure to that very modest outlook. But we've also built now a lot of optionality to scale up into the business. We have a shell ahead, we have capacity that we can scale into if necessary, and we've made a smaller, more efficient Nimbore company that is able to execute with more agility and speed as well. So we feel like we're now well set up for the future. This was a challenging quarter for me for the company, but we feel like we're well set up for the future and the good operational results that exceeded the markets expectations and the increased guidance for Q four. We feel like we're now in a very solid position.
Intel CEO Pat Gelsinger, thank you for joining us here.
For more on the Intel story, we turned to Marabelle Lopez, founder and principal analyst at Lopez Research. She spoke with Bloomberg, Sherryon and Annabelle Droolers.
I'm curious for your reaction on the share price today because is it telling you that investors are really believing that that turnaround plan is taking shape or is it more just relief and a relief rally that's coming through that the numbers weren't as bad as what we'd seen in last quarters.
I think the turnaround plan was quite clear from the start. There was obviously a significant issue with the turnaround plan last quarter that really put into question the ability for them to execute. This quarter, we actually saw some really strong guidance around what's going to happen with the AIPT, which is really important for them in a very competitive market for Intel. We also saw wonderful news from AWS on the foundry bid, and if you look at a company like AWS investing in Intel from the foundry business that actually says that they've done some testing and they have confidence that that foundry business.
Could work for them.
But I think if you put those two things together, you're starting to see a path where there could be a return of Intel into the market in a more meaningful way, so less distressing news, more optimism about the future opportunities Intel has over the come in three years.
And which party is sort of more optimistic about, because we just heard there about the outlook for Gaudi three for instance, that side or is it more on the foundry side.
Do you think so?
I think the foundry side is actually incredibly important for Intel because it's really a new revenue stream. I think what we're seeing in the GPU market is that's a very difficult market to wrestle away from Nvidia. The opportunity there, of course, is if we look at the longer gain, which is in say at least a year or more, what we're seeing is that enterprise buyers don't necessarily need.
GPUs for everything.
They need a mix of CPUs and GPUs, and this is where Intel has the opportunity to enter into the market strong when the buying actually starts to happen we're all discussing the AI market is if it is here today, and we're really at the very beginning of it. We have product, we have use cases, but enterprise buyers have been flow to adopt. We've seen a lot of activity in the data center, but the data center is only part of the market. So what we're expecting, what we're optimistic about, is that incol can come in on the back half and grab some of that enterprise buying that we'll be coming up in the next fave year.
A Maravell.
Apple, of course also very much focused on Apple Intelligence, but we thought that perhaps a slow rollout of that feature would actually not lead to a lot of boost for the iPhone space. But were you surprised on what you saw in that the summer quarter.
I think in a lot of ways, Apple continually pulls a rabbit out of the hat. Just when you think iPhone sales are going to be fundamentally down and uninteresting, they come back and they show growth. We did see a bit more weakness in the Chinese market than we thought we would. I think there was an expectation that there would be a big pushback to growth. I actually think the Apple Intelligence side people overplay that in terms of when the features come out. The things that people really care about with Apple are that they're going to have a better user experience, that they're going to have great cameras, great battery life, you know, all the things that typically sell smartphones, and to continue to have, you know, in the higher digit growth in the smartphone market is actually quite a feat to continue to maintain. So I think we're all very surprised and optimistic about where that was. And the services business is actually quite interesting for Apple as well, and that seems to be progressing at a good rate.
Mara Bell, what do you think about the China market in particular, because it was really clear, as you said, that they're facing weaker demand there. Do you think that Apple needs to make a product that's specific for the mainland market and if so, how would that look to you?
I think that's absolutely not the cards for Apple. Apple tends to try to make a more ubiquitous high end, mid range, potentially low end. You could see that over time they've played those three tiers, but fundamentally different products aren't extremely scalable for Apple. If anything, I think they try to lean in and do more in India it is going to be an extremely competitive market in China. We expect that to continue, but over the course of time, I think Apple will have a very solid showing in the Chinese market. I think everybody is very interested in seeing how well hiawais high end flagship products perform, but they're very expensive products, and if you look at a mass market appeal, we see the opportunity for Apple to actually go head to head and do fairly well in the space moving forward.
And Iraville, of course, we've been getting a lot of tech earnings, including Microsoft Meta also sort of disappointing when it comes to the outlook, what do you make of the broader trend right now when it comes to AI really impacting these tech companies caps, future earnings and just business performance going forward.
So there's a bit of a disconnect and disillusionment between what people expected to happen with the AI market and where we actually are in the AI market. So one of the things that we see happening is there has been a strong revenue, but there continues to be heavy, heavy capital investment that has to happen in this market and will continue because we're not even at the point where we're seeing significant AI demand from enterprise customers. Once that happens and we see more workloads going to the cloud, that actually does continue to equal more expense. So I think what the cloud computing providers are trying to say is, hey, we continue to put out double digit in the twenty thirty percent growth, which is phenomenal when you consider the run. All of that growth is being driven by AI right now, but there's a cost that's associated with that, and they want to try to temper expectations of what the earnings might look like or what the capital portfolio might look like moving forward, because that train is still continuing on and the revenue is not going to pace equally with the expense, probably for several quarters.
Marvel Lopez always good to have you with us, founder and principal and list at Lopez Research.
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