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Byde's quarterly adjusted operating income beat expectations by five point four percent due to better cost control. However, AI related losses deepened and adjusted profit in BYDO was actually down seven point one percent, and the stock is trading off four point three percent in the early action this morning. Joining us now for some analysis is Robert Lee, who is senior analyst at Bloomberg Intelligence.
To take a closer.
Look, So revenue was up something like six percent. That's not particularly good for a company of this ILK really in the area of technology for Hong Kong and China. But then the expenses, as we mentioned there.
Were up a lot. Is that likely to continue? Robert? And can we see losses going forward?
Great questions. I think taking a step back the reality of what body is today. Although it was seen a year ago as China's leading AI play.
The reality is it's a.
Search engine business that accounts for the bulk of its revenue and the bulk of its earnings. Searches, like in most countries, are fairly mature industry. By Doo is the number one ranked search engine in China. You know, Google's actually, because of geopolitics, etc. Is not operational in China.
So the issue for the core of Bidou's.
Business is their search business is advertising driven revenue model, which is obviously tied to the underlying economy, and as we go into a period of slowing economic growth, obviously corporate clibs and advertisers are tightening their belts and that we saw early evidence of that coming through in the numbers that were reported last night, plus it was referred to.
On the call.
So I think that's one issue that impacted sentiment and accounts for the decline we're seeing in the market today. The sort of other side of the businesses, they have a fingers in a lot of different pies on the AI side, from autonomous vehicles to their early bot chap GBT like product. They do have some traction there on the revenue front or their revenues remain very small at this moment. They're looking for a few hundred billion of
revenue this year. That's in the context of a business that turns over something like one hundred and thirty billion revenue, So it's quite small beer at the moment, and it's AI businesses in aggregate and loss making, and those losses are likely to increase in the coming year. So you've got the core advertising business which is going into a period of slow in growth, potentially with some margin pressure, and AI businesses that remain very early stage, and arguably
the losses on those interneture are going to widen. So you know, we're not seeing that earning earning kicker come through unlike a lot of them, you know, magnificent seven.
So when it comes to the use of AI in search, whether you're by do or here in the States, whether you're talking about Google, is there a lot of evidence to suggest that the implementation of AI is necessarily going to deliver better results where we're kind of conventional search is concerned, or we just don't have enough data to make that statement.
Again, great question.
I think the anecdotal evidence is absolutely there that it does it will enhance the search capabilities, etc. But the key question is are people going to pay for it? Because on the consumer side, and particularly in China, we live in.
A world where people are used to these services for free.
I mean again, you go on the web, you Google, you pay nothing as a consumer. So I think it's very difficult for Buydo, and it's peers overseas as well, to.
Start charging for these services.
And the other side is again that the corporate users going to start paying extra for their advertising on the back of any incer enhanced search. And again that remains very unclear at the moment. So the monetization efforts are very unclear and indistinct at the moment. Not just for by Do, I'd say that also applies to a lot of the uspers as well.
So just to remind our listeners that we have our reporters in Bloomberg News and then we have our analysts in Bloomberg Intelligence. So Robert is giving you his neutral analysis of the company. And I want to go back to the point you made, Robert, which seems like you're saying that the misstep that we see here for by Do is really down to weakness in the economy and
not in fact missteps in strategy management considerations. Is this company do you think in good shape with its fundamentals and will get better if and when the economy improves.
It's a profitable business, it's generating healthy free CA flow. Its core search business may not be particularly high growth, and as I've said, it is tied to the outlook for economic growth, but there's no fundamental concern on that front. However, as I said, it was certainly a year ago it was seen as China's leading AI play. The sort of level of AI related revenues is going to generate in the next year is relatively.
Small and they're all loss making.
So are we going to get that earnings kicker coming through from AI in the next year or two.
It's highly unlikely.
Therefore, there's nothing fundamentally wrong with by Do in any way. But I don't think it, you know, anybody would really describe it as a growth company. And I you know, and the other thing on the AI side, the China's leading Internet giants like Ali, Barbar, ten Cent and Huawei, are you know, quite quickly narrowing the technology gap and catching up with by Do.
So theres a competitive.
Element potentially threatening them over the next three years as well.
We were just talking the other day about this investment that is making in a new AI startup. The name escapes me at the moment. I think it was a billion dollar leading the funding on the round, and I think the startup is valued now at around two and a half billion US. Was it Moonshot or something like that, Yeah, yeah.
Yeah, moon Ai.
Okay, So generally speaking, when if you had to compare what's happening here at the consumer level, where AI is kind of intersecting a lot of these platforms, with what's going on in China, one of the things that I think about in China is the restrictions on the Internet more broadly, and if you have to train these models on data that is really not as inclusive, I would think that that the end, the output is going to be very limited. Am I right in that?
Absolutely?
Because something like ninety percent or thereabouts of all the data and information on the World Wide Web is in English, so Chinese language data and information accounts for around ten seven and as you've just you know, referred to, their are censorship restrictions. So I think and I read something interesting last night as well, looking at the longer term performance and accuracy of some of these chatbots, and that they all sort of average out a sort of similar
level over time. The key differentiator is access to training data. So if China's AI models and chatbots are being trained off for a relatively restricted data set, that will impact their accuracy and usefulness in the long run. Having said that, by Do is China's number one ranked chatbot on the moment, and from you know, from where we see at the moment, it will likely remain in that position for the foreseeable future. But is it making money or is it likely to make money?
We've seen some notable stumbles from Google with Gemini and it really set back to start quite a bit. And then today we hear that even Microsoft has had some issues with its bot as well. And I'm wondering whether or not buy Do in China. I'm not sure it would be made public. But have we heard anything about any mistakes or distorted data coming out of it's AI search?
Yeah, I think again, going back to censorship in the early days, you know, if you want to ask something about politics or the president, you know, it gave some potentially inappropriate answers which have been clamped down on by sensors, etc. But you know, just again anecdotally, obviously myself and my colleagues of UC systems and experimented with them in a very sort of informal way. I think the accuracy of the answers that ernie bot produces versus a chat GPT,
there is a noticeable lack of detail on the Chinese side. Again, whether that's due to the underlying algorithms or the accessibility of the underlying data set for training, it's probably more the latter, I would say.
So next week we're looking to the NPC meeting and one of the questions that we've been asking is about you know, the growth target, yes, but also the focus of where this activity, this economic activity is going to come from. And I think for the private sector, particularly in China, where technology is concerned, there has been a little bit of trepidation, big question mark over government policy.
I think that the people who play in this field have sometimes felt as though the rug has been pulled out from underneath them perhaps midstream. Do you think the leaders in China understand the importance of this technology economy in providing a lot of the engine for future growth.
Absolutely, I think they do, and I speak as someone who's British and hopefully independent of everything. No, absolutely, Ali Baba and China. Ali Baba, Tencent and Huawei are the three and may arguably Bite Dance as well, are the three or four large technology giants within the Chinese economy.
They absolutely underpin not just the growth in the technology sector itself, but they're important drivers of economic growth and if you look at any pronouncements from the senior leadership in China, I think they do understand that.
However, as a one party.
States, there are you know, particular issues with the way trying to like to manage things, censorship, etc. But looking forward, I think we should see a more stable regulatory environment going forward. That's a key point which has obviously been an area of significant concern in the last few years.
Well, that fuels my next question, which was kind of about politics. So we saw Ali Baba stumble to a certain degree because of jack Maa's relationship with policymakers, and although it didn't come out in public, ten Cent with a little bit of a struggle ponym I had to step back a little bit. How is Baidu's relationship with the party.
As far as I'm aware, I think they have good relations so it's not so much an issue of that. Again, it's fundamentally it do have the monetization model, the right revenue model to drive significant earnings growth on these AI tools, and you know, it's very unclear. And then from my point of view, I think it's highly unlikely we'll see that earnings kicker come through, not just this year, but in the next two to three years.
That's the main issue for them.
It's just an issue of the corporate management and the fundamental earnings model.
It's not an.
Issue of their relationship with the party or the government, etc. I think the government would love to support them as in as best they can, but if they don't have the right business model there, they're not going to make money.
Yeah, I probably should have instead said the relationship with the party. I probably should have said with policy or with the regulators, and that would be a little bit less political. And the current always says after coming off this program that he really enjoyed his morning workout. Deep breath, excel slowly, Glad that's over with Robert. Nice to have you playing game with us, playing the game. Robert Lee,
Senior Analyst, at Bloomberg Intelligence. This is bloom joining us to discuss this a little bit further as John Leu, who is Bloomberg.
Executive editor in Beijing.
So, John, a couple of issues here. One is the root of the problem, what's causing people to want to short stocks and to make these downside bets. And the other is, you know, some of these measures taken by quant funds that actually sort of lead to exacerbating the losses, are they Do you think policymakers are getting at both of those objectives.
So on the first question, Brian, I think there is a lot of pessimism about the outlook for the economy. That has been the case for the last probably I would say a year or so. That last year, you'll remember, there was a lot of optimism coming out of COVID, people expecting an economic boom to happen as people got out of lockdowns, went out and spent, and that just never occurred. And on top of that, we had the
property crisis that has made things worse. And so we come into twenty twenty four with a lot of people worried about where the economy is going, and that has led to this desire to hedge their positions when it comes to the stock market, to short the market when it comes to this strategy and quant funds there the regulator at this moment has been trying to stop the trajectory of the downward trajectory of the market by every
means that its disposal. We've seen state funds go into the market, We've seen regulators step in to tell institutions what they can and cannot do, and this is part and parcel of that. There was a lot of blame placed on this strategy. People saw it as having amplified some of the some of the declines that we saw at the start of the year, partly because it was such a It was a strategy that relies so much on leverage.
Yeah, that was going to be one of my questions, the degree of which to which leverage is being used. And the other thing, I don't know what the swaps market is like in China. Here in the US it trades kind of in the over the counter market, so there's not an exchange per se that's creating a level of visibility into potential counterparty risk. So it just kind of exacerbates a little bit of the volatility. And if we're talking about using the equity market as a way
to measure sentiment. Obviously, if you're a retail investor and every day you look at you know, media to try to gauge an understanding of where equities are trading, just to use the equity market as an example, and you see a steady decline in the value of those assets, I mean it's going to weigh on sentiment in quite a dramatic fashion to the downside.
Exactly.
So, you know, the swaps market is fairly opaque here in China, and a lot of these this direct market access the strategy, A lot of it was directly between the quant fund and the broker, and so there was not a lot of visibility. That was one of the problems. You had leverage that was up to three times and now the securities regulators saying that has to be rained
back to one times. Whatever the amount of money is being deployed there is especially for the retail investors, if you look at the media, I think we have in the past few months seen a big attempt by state media to put a brave face on things, to try and highlight and amplify the positives, and I think the biggest thing that's happened so far is so far in February, we've mostly had green days, days when the market has gone up, mostly because of the regulator's intervention in the market,
but that is having an effect on centiment.
Sometimes you read between the lines on what the regulator puts out. In this case, it added the CSRC did that they would severely crack down on illegal activities. So it was this illegal and what sort of message does it send that you know that the regulators seem to always think that it's because of bad actors rather than bad policies, So.
This strategy is not illegal.
I think the there have been other actors that have been punished by the securities regulator in.
Recent weeks for activities that were illegal.
I believe last night the securities Regulator also announced that they were taking.
Some punitive measures against another fund for sort of.
Controlling unbeknownst to the regulator other funds that they had not disclosed, and so that that obviously was in violation of rules. And so I think the regulator is trying
to do two things at once. One is trying to rein in strategies that are illegal and allowed, but trying to reduce the amount of risks that they they bring to the market by raining in how much leverage they can take, but at the same time also issuing warning to any traders institutions that they have to get their acts together and that the regulator, if anything is being done that's not up to the rules, the regular is going to punish.
So I'm wondering, as I'm listening to you, John, I'm wondering whether at next week's NPC, the National People's Congress meeting that gets underway on the fifth, whether the new Premier Lee Chiung is going to address any of these issues that he will discuss, or at least address the issue of maybe tighter regulation in terms of the way financial markets have been behaving.
So I think a good way to look at the Premier's address at the NPC is to see it as sort of the Chinese form of the state of the Union that we have in the United States.
And so this.
Address will be will be written in a way to try, I believe and still confidence, to make the public feel good about the economy. So I would expect a lot of verbiage in there about how things are getting better, how underlying fundamentals are not as bad as people might think,
and how things are starting to look better. I think he will probably mention the fact that the economy is not as great as everybody had hoped, that the families across the country are facing hardships, But I think the main point he will make is that things aren't going to get better.
John, do you feel that policymakers will feel as though they need to be delicate here because if they come out with really sweeping policy changes, like let's say, running budget deficits spending up over four percent, that it might send a worrisome message.
Is that part of the consideration do you think?
I think there is a lot of concern within government here in Beijing that, let's say, if we lever up central government books and sort of borrow kind of borrows its way out of this current situation, that that will lead to an even worse crisis down there. There is a lot of concern about that. But at the same time, I think there's a lot of people here who are saying, if the house is on fire, you got to put the fire out first.
And so I.
Think at this point, the government, based on what we've heard from the premiere. Just a couple of weeks ago, they had a meeting where to discuss his work report that he'll deliver at the NPC, and the readout from that meeting actually had a lot of verbiage around him saying.
We got to do more.
We have to take real, concrete steps to show people that the government is responding to the economic situation.
So I do think in turns aside, they're going to try to do what they can.
So I understand what you're saying in terms of admitting that things are really difficult right now, But internally, I'm wondering whether what's happening right now in the economy is being viewed to something that is or was as serious as what we had in twenty fifteen.
I think the I think the concern is greater at this point for a few reasons. One, the relationship with the United States is not good. It's much worse than it was in twenty fifteen. That was the Obama administration. China hosted the G twenty. Barack Obama and Shijiqing stood up at the G twenty in Hanjo and announced that the US and China we're going to cooperate on carbon goals. That period of time has ended. The relationship is much more competitive. At the same time, there are other issues.
The population in China is now shrinking. There's a demographic sort of conundrum that is much more pronounced now than it was in twenty fifteen. And so those issues I think make this current situation much more different.
Yeah, it does seem it seems a little bit more dangerous at the moment, John, Thanks so much for joining us. John Liu, Bloomberg, executive editor in Beijing. Doug, if we had a political analyst on instead of our own executive editor, I might have asked him, is there a gap between the premier's approach and the president's approach? Most people would say perhaps no, but one seems to want to get more aggressive, the other a.
Little bit more cautious. This is Bloomberg.
Well, tech stocks have taken a little bit of a back seat of late in the US market. We've seen a few other sectors like industrials and financials and consumer discretionary take a little bit more of a leading role in the markets here of fleet.
Does that continue? Is tech done?
Let's get to Dan Ives, managing director and senior equity analyst at Wedbush Securities. I know that you will raise an eyebrow of that comment, Dan, because I know that you're still quite bullish on selected stocks in the tech arena. We had a guest on earlier this morning who said that the dollar has been strong in part because the money flows into tech stalks in the US and also the oil market expanding in the United States. Is AI fueling a mega trend in the US?
I think that's a great point, because, look, this is a revolution that we're talking about, a nineteen ninety five type moment star of the Internet, and I think that's why what we're seeing with tech and to your point, I believe this party is just starting. And there was a bitar view that we're in the midst of what's going to be a two to three year Tech Bowl market and that's something where led by the godfather of AI,
Jens and Nvidia and of course Microsoft and others. But now we're seeing the second, third, fourth derivatives of this play out. And that's why we believe unless you have a telescope, hard to find this recession that's bullish for tech with AI parties just starting.
Yeah, we were talking a moment ago about the buy do numbers and the reflection in the resils else that maybe there was a very aggressive tech spend on AI that's not yet panning out. I mean, so I understand what you're saying in terms of front loading the buying. I mean, I remember back in the nineties when Cisco's Systems was basically underwriting client purchases of their networking gear. Right when that went pair shaped, Cisco was left holding
the bag. I just wonder if there is a level of enthusiasm that may be, in the words of a great Sage, irrational exuberance. Yeah.
Look, and I think that's been the debate over the last year. But I think what we've seen over the last month with Microsoft's numbers, the godfather of AI, Jensen and Video last week named pall and Teer Mangoud deb and others the Monizian's happening. See that's the difference is someone like myself that's covered tech stocks going back to waight nineties. That's why we weave. This is a nineteen ninety five moment.
So.
Come right, this is like not like pet Dot's it will look.
I mean, there was so much fraud back then, and there was the monization was all on the horizon. Stocks were training a thirty times revenues and eyeballs. Now we're talking about companies that have thirty forty to fifty billion of cash.
But then you know, pets dot Com is probably not a good example because it didn't have much in the way of earnings. There are a lot of companies then that didn't. But there were companies then Cisco has already mentioned, that did have earnings and they still went into a kind of black hole for about ten to fifteen years. You need to pay close attention to valuations and whether
or not these earnings can continue. Do you see some of those parallels and do you worry that some of these stocks are getting extended.
Yeah, Look, I think it all if twenty three, to your point, if twenty twenty three was really the start of the AI revolution, and obviously all about multiple expansion. Twenty twenty four is about showing the numbers. It's not about multiple spects. It's showing the numbers. And that's what Look, that's what we've seen throughout earnings. Well you look you across earns, we've seen that and we believe the mons.
I think investors the street could be underestimated tech earnings by fifteen to twenty percent when we look out next two to three years.
So the techs, the cap x may be there. I mean in video, big beneficiarybody wants the you know the processors that in video manufacturers. But I'm just wondering, when you know the end user, whether they really get the bank for the buck, whether their productivity strengthens to such a degree, whether it becomes obvious that the AI revolution is not only durable but practical.
Sure, And I think that that hits on the key point. It's all about use cases. And from a use case perspective, we've over eatey use cases for AI. You go back three four months ago, it was fifteen to twenty so use cases are exploding. But right now the golden goose it's not the consumer, it's the enterprise. The enterprise where you're gonna see the use cases. The consumer piece that will be twenty five twenty six. That's where Google, Meta
and others are going to significant benefit. Right now, the focus is the enterprise AI revolution.
So you've mentioned a few names.
Clearly in Vidia and also Microsoft are among the leaders in the AI revolution. What are some other companies that you think are quite durable in their approach to AI and the benefits that they will derive from AI.
Yeah.
I think the best pure play AI play out there is that we call them the MESSI of AI pound tier. I think from a use case perspective, that is really front and center in terms of all of these use cases. Other names Mango, dB in terms of what I view as a core AI play. I also have used some of the software Salesforce, dot Com, Adobe that are going to be AI place. Then you look at areas like cybersecurity. There's names like varonas that benefits. You look at names
like Pegas Systems, which is on the developer tools. Our point is second, third, fourth derivatives of the revolution is what you got to be focused on right now?
Okay, Well, you mentioned Salesforce after the Bell Company giving a disappointing a full year revenue forecast, and I guess it suggests to some people that this AI revolution that we're talking about, certainly the features that Salesforce has been trying to embed in its applications have really not been driving a lot of growth. I mean, is that a fair statement? Is that the way that you're reading the Salesforce results.
Yeah, so I'd read it. It's a comeback for the ages from Benioff and Salesforce. And if you looked up conservative guidance in the dictionary, you'd see that.
And I think that's so.
I've used Salesforce as a stock that goes much higher from here. AI monization will be on the horizon. But look, Benioff's flying the plane. I'm very comfortable being in twenty nine E watching Netflix.
Dan, you're here in Asia.
You're coming presumably because you have a lot of clients that you want to see.
Do they want to see you?
Well, I mean, look, it's good.
It's funny because all these empty offices when I come in, I thought it was a hint. Maybe I should have got no. So but to that point, the demand maybe what i'd say here told say this year is dramatically different than it was a few years ago.
Because I was cheating on that, Doug, because one of the things we were chatting about before we started the session was that he's getting more and more people coming to the meetings.
Dozens and dozens and dozens where it used to be fewer. This is Bloomberg.
It's because Dan's here with us that we've got to talk about Apple and one of the things that I know you've been bullish on the stock for for quite some time. Were you disappointed that they pulled a plug on the car?
I mean, I'd say disappointed in the fact that it was a decade long headache where the billions could have been spent in other places, but actually happy that they finally ripped a band aid off and ended it because right now you need to see them leaser focus, all hands on deck on AI. That's that's where the focus is. This was really a race to nowhere. Rying was in the wall. They needed to shut this down.
You know, A big, big input for in Video was getting all these by orders from Meta. You know, he had the CEO out crowing about that for a while, not not in Video CEO, but Mark Zuckerberg. Is Apple going to become the next big customer of Nvidia or will they develop some of these chips on their own.
Oh?
I think they will be a major customer of Nvidia because when we look at their plant, we believe that they launched an AI app store this summer, that they that they'll talk about WWDC and then I believe AI actually gets incorporated into IPHI sixteen. So this is Look, this is the start of a renaissance of growth at Apple as they further monetized. They are not going to be left out as AI party cook and Coopertino tacticians. Every time you bet against him, it's been the wrong move.
Okay, But let's talk about regulatory risk. In Apple's case, it's the app store. The Justice Department, we are told, is taking a hard look at how the company is basically locked out competitors from playing.
In that space.
When Apple contracts with a lot of these software developers making and writing the latest apps. That's one, and then you've got other concerns. Elizabeth Warren just yesterday talking about the overconcentration of AI in names like Microsoft, Alphabet even Amazon at the exclusion of the startup community. And is there a way that you're viewing regulatory risk right now in this space?
Yeah, And I spent a lot of time in DC. It's a double edged sword because probably the biggest strength right now within the US, especially from a when you think from an industry perspective is tech is the community is AI. So as the mag seven that has the strong have gone strong, that's actually been a huge positive, which is part of that double edge short when you look at the regulatory I think the lack of consensus
it continues to make that more noise than reality. I think for Apple it's a little different when you could DJ and them, you know clearly coming down on the app story, looks that's gonna be something that they're gonna need to navigate. We still don't believe that that's going to dramatically change, but this is going to be a fighter on their hand, and I think that's what we're going to see is the strong get stronger. They're going to get more scrutiny from the belt.
I'm kind of curious about what I started off with about a broadening in the market. We have seen a lot of sectors outperform tech of late. Are you worried that we're going to see a pause in some of the investment in tech while some of the other areas outperform. And if so, is that just a short phase or could it does it have the potential for lasting longer?
Why?
I view it as a positive because what we're seeing just broader earning is coming at financials and others. In terms of market breath, but it's it's the torch bear. The leaders are going to continue to be tech because of the revolution where you see we believe textocks are up in our twenty twenty five percent, and I think this goes back to this AI party just starting with tech leading it.
What's the downside here? Potentially if the market goes into some kind of you know, corrective mode. Maybe it's temporary, but is there some downside risk that we need to explore very quickly, then.
Yeah, you could see them down to risk on fed jaw boning, things like that, potential black swan events, but I believe any sort of those events will be short lived with the market that we see going much higher this year.
Okay, your top three picks number one, number two, and number three.
Number one Mango, dB, number two, Microsoft, number three, pound tier, those are the three core AI plays.
Whoa not in video so look in video.
It goes back to that's been the mean way to play it. But now and that we continue to be sure bullish on Nvidia and the godfather of AI, but now it's focused on what are the names that are not reflecting what we see the second, third, fourth derivative and it's software that's now taken the rains from chips.
All right, Dan, good stuff, what was a pleasure? Enjoy your time in the Hong Kong. Dan Ives, Managing Director also senior equity analyst at Webb Bush Securities, joining here on that Daybreak Asia.
This is the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app