Amazon Earnings, Musk in China, Intel in Ohio

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On Today's Bloomberg Intelligence Show, we dig inside the big business stories impacting Wall Street and the global markets.

Each and every week we provide in depth research and data on some of the two thousand companies and one hundred and thirty industries our analysts cover worldwide.

Today, well look at why New York Community Bank posted earnings that were better than analyst feared.

Plus we'll discuss how McDonald sales are being impacted by war in the Middle East.

But first we dive into big tech and Amazon. Amazon's cloud unit posted the strongest sales growth in a year.

It's really a sign that the retailer's most profitable unit is recovering from a slump as businesses resume spending on technology products, including AI services.

Despite this, Amazon sales forecast for the current quarter fell short of analyst expectations, reflecting concern about the main e commerce business.

From where We're doing Now by Anna ag Ran on Bloomberg Intelligence Technology Analysts. We first asked him for his big takeaway.

I think the big spike in AWS profit is something that really alarmed us because you know, that was a number we weren't expecting for I honestly a few years. So if you look at it, AWS margins, operating margins came close to thirty seven thirty eight percent, little over thirty seven, and that was like eight points or eight percentage points higher than what Street was looking for and

All right, and give us a sense if we just step back, give us kind of the market share layout. How does this market look between some of these big players like Microsoft, Google and Amazon.

So Amazon only plays on the infrastructure layer, which is trying to give people raw material to build their applications. And when that they have a commanding market share over forty percent of the market, and in fact that they have maintained that for a while, I mean, which is surprising because Microsoft has been gaining share on it, you know, for a very long period of time, but from smaller players.

To all tech spending is you know, north.

Of two trillion, frankly, so there's a lot of room to grow for everybody, not just Amazon, but Amazon, Microsoft, Google, you know, even Oracle, I mean, all of them will grow in this market.

So if we take a look at the different layers of how AI kind of plays into cloud, the one area where Amazon maybe isn't getting as monch market share and maybe they're still developing that is the consumer facing side. What can they do there? What is their growth opportunity there?

Yeah, I mean they have a lot of you know, I would say some apps that are working on it, but really the reason why Microsoft is ahead right now in that game is because of open Ai. They have a partnership with open Ai, and they run open AI's back end, which is when you do a search and chat GPT, Microsoft is running those searchers in the background or you know, the application runs on it, which is

There's a high likelihood they're going to choose.

AWS as much as they're going to choose Microsoft or Google. And that's really what Amazon's betting on.

So you mentioned the margins, high margins at AWS. Can they maintain those margins? What are the risks for those margins?

Yeah, I don't think they can maintain them, only because they have to spend a fair amount of money in order to you know, fulfill the demand expanding in data centers, buying new hardware, buying chips. So I'd be very surprised if you see that number again for a very long period of time.

You know.

Frankly speaking, I'll be happy with the thirty percent margin for the next several years while they make sure that they're doing the right investments to drive double digit growth rate on their top line.

Let's talk about those investments. So they said they're going to quote meaningfully step up their capex to pay for all this AI infrastructure. But there was no like number given when Meta said that market didn't like it. What was the pass here that Amazon got?

Yeah, but you know, Amazon's basically showcasing that they actually have been doing this successfully in terms of expanding data centers based on the capacity, so you know, before going in, you know, they had close to fifteen billion dollars yesterday in the first quarter in terms of capex, and it's going to go up over the next quarter. So we think it's going to be north of sixty five billion at this point for all of Amazon, with most of it going to AWS.

But there's a reason for it.

They are in contracts to fulfill cloud demand or you know, they need to be able to expand that to fulfill that massive cloud demand.

An rug.

You know what I did not see an Amazon's report a dividend.

Why is that?

Yeah?

I mean I I you know, again, they're going to spend that sixty five billion dollars next year on capex also, so I'm I'm okay with not having a dividend for a while. I would rather you're a tech animals.

You guys think that if you if you put out a dividend, it's signals that you're no longer a growth story.

Yeah, it's a kiss of death. I'm not a big fan.

Not Microsoft, Google. They disagree with you.

Yeahb IBM kind of agrees with me at this point of that. So look at IBM. I mean, they have a massive dividend yield. I would rather they you know, they take that money and buy a bunch of new Hashi corpse kind of companies that are growing at fifteen to twenty percent. That will change the face of the company, make them, you know, even more relevant in the tech space than.

They are right now.

So I'm always in that camp that when you are a tech company, you got to constantly reinvent yourself otherwise somebody will come and eat your lunch.

I mean, on Rock and I we just fundamentally disagree on this. We agree to disagree. We go to our separate corners.

Can I ask a dumb question for the two of you, then is there room for both of you to be right?

Like?

Can these tech companies throw off enough cash they can reinvest in a healthy way and also pay a dividend.

Yes on our own Yes, yes, absolutely, Alex, I completely agree with that because what happens is if you give a very small token dividend, it opens the doors to a lot of institutional investors that are bound by their charter to only invest in companies that pay are dividend. So there is a logical reason to do it. But I'm okay with Amazon. It's going to take a year or two years to get to.

That path, all right.

So there's a whorl where you.

Can both be ready.

We can there's a place where we can meet in them.

Is there a capex number that you wouldn't like from Amazon? They didn't give a.

Number now, not at this point. The only reason is because we see forward contracts. As of this morning, when they filed their ten Q, we saw cloud commitments go up twenty nine percent.

I mean that's a very big number.

And frankly, when on the enterprise side, we haven't seen orders coming for AI at this point. AI orders are only coming in from consumer applications like CHACKGBT, people running that at this point, over the next few years, we should see a massive spike in you know, people creating new applications or companies creating new applications, and that's going to only drive more growth for AWS, Microsoft and Google.

Our thanks to Anaagrana, Bloomberg Intelligence technology analyst.

We move next to the EV space in Tesla CEO Elon Musk recently paid a quick visit to China and it paid immediate dividends for the ev giant.

Tesla received an in principle approval from government officials to deploy its driver assistance system in China. Also reached the mapping navigation deal with Chinese tech giant Bydo, and met requirements for how it handles data security and privacy issues.

From more on all of this, we were joined by Craig Drudell, Bloomberg Global Autos Editor. Craig began by telling us that his tentative China deal has been in the works for some time.

It wasn't necessarily the case that this was, you know, kind of an overnight saying, actually, the last time that Musk was in China, this was something that we reported at the time was on the agenda. It's been something that Tesla has been after for quite some time, and it's increasingly a way that you know carmakers are competing in China is you know, how advanced is your driver assistant system. You know that that keeps you from crashing, that keeps you in your lane, that allows you in

So who owns the stuff it.

Is importantly you know, it's a matter of ownership and where it's kept. And so you know, this has come

So how does this change, if at all, kind of the competitive landscape for Tesla in China. I know, you guys have been reporting a lot of how some of the local ev makers have really become very good and very competitive.

Yeah, I think it absolutely is something that's been missing for Tesla that, assuming all goes well here, it will no longer be a sort of strike against them among consumers who really, you know, want the most cutting edge technology. It remains to be seen how big a deal it will be for Tesla from a revenue standpoint, because we don't know at this point how much Tesla will be looking to charge for it. We don't know, you know, to what extent they may have to share some revenue

This also raises the question too, it doesn't take a lot of news to get Tesla stock moving, not that a trip to China wasn't a big deal, but like you said, there's so many questions as to the actual revenue driver and what it's going to mean.

I mean, you have to wonder is.

Not going to take a lot for any kind of shorts Craig to cover.

I think that's right. And this is also a name that you know, options traders absolutely love. It's it's sort of like the meme stock that has lasted as a meme stock as that craze has sort of faded away. And so you know, anytime to your point, you know, Musk is able to sort of get the momentum with you know, the narrative, it tends to lead to big swings. So you know, early this year, I think he lost

Our thanks to Craig Trudell, Bloomberg Global Autos Editor.

All right, coming up, we're going to break down why McDonald's is now looking to focus on affordable prices in the US.

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We look next at the food service industry. At McDonald's, the fast food chain's quarterly sales fell short of analysts expectations in the first quarter, and results were hurt by slow and growth in the US and Boycott's related to the Israel Hamas war.

The restaurant chain now looks to focus on affordable prices in the US for more and all this, we were joined by Michael Halen, Bloomberg Intelligence Senior restaurant and food service analyst. We first asked Michael for his reaction to McDonald's quarterly it results.

I'd say the biggest takeaway was, you know, the fact that April's flat so far in the United States. That's trailing the industry level, you know the industry data that we get so and also you know, Burger King showed an acceleration in the US and their US numbers, so

Mike, I see just in the Bloomberg reporting here. Executives have also said that low income consumers in the US, which is an important part of the company's customer base are pulling back. That does that mean we're going to see more promotions which might put pressure on the margins.

Yeah, McDonald's has come out and said they're going to focus more on their value menu. They're going to continue to offer promotions, a lot of them.

Through the apps.

So it looks like a full on value war is here. I mean, Burger King Borg Kings could be a little bit more careful with their discounting because in the last five years or so they've gotten too aggressive and it hurt franchising margins. So they kind of hoopooed that a little bit. But we think a full blown value war is here and it's on the table for twenty twenty four.

So does the value war take into account a bigger burger? Is that the deal?

Well? Value?

You know, it's measured in a couple of ways. It's not just the price, but it's what you get for the price, right, And so I'm sure McDonald's has done their legwork and they have some customer feedback that says that they want some Bigger burgers on their menu, and so that's going to be interesting. They said they're going to start testing it in the second half of this year, so it may not hit the United States for quite some time. But yeah, there's a couple of ways to measure value.

Hey, Mike, what are the McDonald's of the world, and you know, the other restaurant companies you talked to, what are they saying about these GLP one drugs? Are they really going to impact their business?

You know, I don't think there's too much worry about that anymore. I know that was a big thing last summer and into the fall, and it really impacted the prices of some of these quick service restaurant chain stocks,

Yeah, I mean you have to think that translation is going to hit in many different ways. But before we let you go, we have about a minute left. So who wins the value war right now? Based on what you've seen.

It's interesting because you know McDonald's historically has and so that's what's most interesting about them underperforming in April. Burger King is an interesting one because you know, they have easier comps. They struggled coming out of the pandemic for a few years, right, and so they have easier comparisons to lap lower average unit volumes at the store level,

Thanks to Michael Halen, Bloomberg Intelligence Senior restaurant and food service analysts, we.

Move now to regional banks. New York Community Bank posted quarterly results that were better than analysts had feared, and the lender also outlined a plan for reshaping it into a more diversified and profitable bank.

For more, we were joined by Herman Chin, Bloomberg Intelligence Senior analyst for US regional banks. We first asked Herman for his key takeaways from the bank's earnings.

We learned a lot. So they gave a path forward remains to be seeing if everything's going to go and lockstep to their expectations. But they basically said they're moving to a three year plan with a transition to be more of a commercial bank and expecting any sort of credit issues to be mostly cleaned up this year with an earnings loss for the year. But it was a low bar and they cleared up pretty healthily.

Okay, so just that review here. Their risk was rent control departments in New York City, very focused business. They were in, very niche Are they exiting that business. Are they fixing that business is? How are they going to make things right there?

The part of the three turnaround is de emphasizing that multifamily rent regulated piece. There's thirty billion dollars of those loans now on the balance sheets. They can't get rid of them because there's not going to be a lot of buyers, and if they would have to sell, they take a big discount and take a big hit to the balance sheet. So they're just going to manage through it.

There was an article at the Bloomberg today that talked about how rent stabilized apartment buildings are Actually the rent's going up and if you assigned two year leases, the top can be like six and a half percent, And I was in an americ control department it was like half a percent, Like it was really really low. Are those kind of increases enough to really help the likes of a New York community bank.

Yeah, that's it helps. But a lot of the issues that these borrowers, these landlords are facing is higher debt, service coverage ratios and higher operating expenses. Right because if you have to they gave an example, if you have to replace the HVAC unit that costs thirty percent more than it did two years ago. So all of these operating expenses pile up. But then you can't raise your

So rent stabilizers apartments, I was never I've never been in one. Do they not just rise on the radar of inflation or they really really fixed?

No, it's it's fixed.

Well, that's that's a tough business to be in if you're a landlord, isn't right?

It is now And there was a change in the New York state laws that really capped how much the rents can go up every year. So we're seeing the repercussions of that for banks like your community.

Just so, I lived in one twenty years ago. For a while, I had a two bedroom apartment huge on one hundred and eighty third Street. I paid eight hundred and fifty dollars.

Wow, it saved me.

Like, there's no.

Man, why you would give that up on those things you keep it in your I got married, okay.

And my husband owned his apartment, so that was just better.

Yeah.

But like the dream was that it would go co op or something and then I could buy it for like crazy, crazy cheap. But also there was no incentive on that end to like fix it up, like it hadn't been fixed in forever and twenty years and the kitchen was horrendous, But there's no incentive to like spend money to do it to just then raise your rent ahenomenal amount because it's sort of like a utility, right, Like you can only raise it a certain amount. Even if you put a certain amount of work in then

That was nice.

I had a lot of classt space. So when they talk about this, you know it for a diversification, right, they want to be a diversified bank. What does that mean for them?

Yeah?

What that means is they want to tilt more towards business lending, commercial lending. They talked about their business portfolio is about twenty billion dollars. They want to grow it over time to be thirty billion. And the CEO, the new CEO who came from One West, who was former head of the OCC, he alluded to the fact that they're going to hire more folks that he used to work with in the past to really build this commercial

All right, let's step back and take a look at your coverage in general, the regional bank coverage. I'm looking at the spider s andp regional banking EKF. What's the call out there and you talk to institutional investors, is it can we buy these things?

Yeah?

The dip was the low was in October and you've seen banks come back a little bit. What's helpful is that the banks are talking about troughing margins and then interest income, so that's good to see, and they expect a improvement and growth in the back half of the year. Really, to us, it really hinges on what the rate backdrop is and if rates are going to be higher for longer. The optimism that bank management teams are talking about for a back half return of loan growth maybe just won't

Remains to be seeing.

If things really do to deteriorate, then then you're going to see a pickup in charge offs as well.

Are deposits moving anywhere? So I have a citizen's bank a couple of blocks from my house and I'm seeing a five percent CD Man, I'm not getting that at city. Are we seeing deposits move?

We have seen stability, so in the first half of last year when we went through the regional banking turmoil, there was a lot of deposits that were leaving to go to the Bank of Americas and the JP Morgans of the world, especially the large corporate deposits, where they thought it would be much safer to be in a two big to fail bank. Banks have recalibrated their pricing, like you talked about the five percent CDs, So that's helped a stabilizer a deposit base, and.

That's a large payout, like that's not going to be nothing, right.

That's not going to be nothing. The good thing is that overall, with short term rates now pretty much stable for the passive recorders, the banks have been keeping their deposit costs fairly manageable, so we're not seeing that big jump in costs that we saw last year after seb's failure.

All Right, my personal proxy for equality regional bank is M and T Bank, You're former employer up there in Buffalo.

In order for that.

Name to really work is loan growth.

The thing I need to focus on. I need to see loan growth for this one.

In work.

You need to see more confidence in loan growth and also their their asset quality. So the potential knock on them is they tilt more towards commercial real estate exposure just because of their historical leanings. They've been trying to reduce that over time, but they do screen higher on commercial real estate.

So if we get more stabilitia.

There and less loss content, then that's not going to really work, even though the valuation is still higher than your typical regional bank.

Our thanks to Herman Chan Bloomberg Intelligence, senior analysts for US regional banks.

Coming up on the program, a look at why US solar makers are seeking more tariffs and important equipment from Southeast Asia.

You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies and one hundred and thirty industries. You can access Bloomberg Intelligence via bi go on the terminal.

I'm Paul Sweeney and a Malex Steel and this is Bloomberg.

You're listening to Bloomberg Intelligence with Alex Steele and Paul Sweeney on Bloomberg Radio.

We move now to Intel. The stagnating chip maker is committing twenty eight billion dollars to build a factory in Ohio called Ohio One, and it all goes well, Intel, we'll be able to credibly compete for contracts to manufacture state of the art chips.

This is a subject of the Bloomberg Big Take story entitled Intel is betting twenty eight billion dollars on making Ohio a global chips capital for where we were joined by one of the story's co authors, Max Chafkin, Bloomberg BusinessWeek Senior reporter. We first asked Max for more context on his story.

So, Intel at one time was one of the world's largest companies. It is essentially the one of the founding parts of Silicon Valley. It's the reason it's called Silicon Valley in fact. But over the last decade Intel has really suffered. You know, they've they've sort of fallen behind both the big chip makers in the un U, Nvidia, AMD, and they've fallen way behind on manufacturing, behind TSMC and Samsung.

And that's a big problem for Intel.

This you know, large important American company, but of course is also a problem for the United States because Intel at this point is the only company making state of the art ships or even trying to make state of the art ships in the US. And over the last few years they've pursued basically a turnaround, and that turnaround is betting entirely on manufacturing.

You mentioned the project in Ohio.

President Biden has talked about that a fair number of times, including bringing it up in the State of the Union address.

They're also major, you know, tens of.

Billions of dollars projects in Arizona and Oregon. This work is being backed with a lot of money from Washington, nineteen point five billion in grants and loans from the Biden administration. So it's this big, ambitious attempt to turn around, you know, a really important company that's fallen on some hard times. It's also a big part of the White House's geopolitical strategy.

The build a megafab? What is a megafab? And are they going to get it done here? Because this is the big numbers.

Intel's put twenty eight billion into this Ohio site so far. The site is it's about forty five minutes north of Columbus.

You know, it's in a bunch of farmland. It's really muddy.

You go there now and what you really see is just a ton of construction. The idea of a megafab would be to have multiple chip factories each one of these things. You know, you're talking on the order of ten billion dollars.

They're going to.

Build two to start, and it sounds like a crazy amount of money, but at this point, that is what you need if you want to be able to compete to make chips, say for the iPhone or for AI chips, you know, to try to compete with Nvidia, which Intel you know, really desperately would like to do, but it just isn't quite there yet.

On the manufacturing side yet.

We have heard though of a lot of companies announcing projects and manufacturing facilities and don't get done or the timeline's pushed out or gets paired back.

Where's inteling, Yeah, yeah, we saw this of course during the Trumpet minute. You know, there has been like a political shift over the last i'd say decade where there's a lot more enthusiasm both from Republicans and Democrats for sort of state backed industrial projects.

Not all those have gone great.

You know, I mentioned this story that one of the sites that Intel was looking at was this Wisconsin sight outside of Racine.

People will remember.

That because Donald Trump called it the eighth Wonder of the World. These eight or nine years ago talking about Fox Cohn. You know, Fox Haunt opened there, but it hasn't proven to be the job creator they want. And there's a risk with this project as well. I will say these semiconductor factories, they are like some of the biggest and most ambitious kinds of factories you can build.

There are already It's like I said, it's muddy. There's not a lot going on.

There right now, and there are Figura there are already you know, fourteen hundred construction workers working on that site today. Long run, they're saying it's going to employ something like seven thousand. And you hear that, you think, okay, seven thousand construction workers like that.

That's as a temporary job, not a full time job.

But the thing is with these sites, construction could go on for decades. You know, it's conceivable if they really built this thing out, that many of these construction workers could work like their entire career building these things. Because the nature of the business is you have to keep

Avoid reading your story and in king story here. You know, this is a great example or just certainly an expensive example of onshoing the money for Intel in Ohio. But then you guys also report twelve billion dollars for plant being built in Arizona by Taiwan Semiconductor, six billion dollars for one in Texas being built by South Korea Samsung Electronics. So the money and is coming into the US for to ensure this chip business.

Yeah, I think this.

May turn out to be, you know, a thing that people are talking about in the next few months as we get closer to November. You know, this has been a big part of the Biden administrations industrial policy. It has components of sort of a jobs program because like as I was saying, you know, these are construction sites, you know, potential good jobs for people. Even even in these plants which are run by robots, the people still work there.

And the other thing.

You have is this kind of competition with China and the Biden administration really seeing you know, post COVID, post chips shortage that the United States needs to sort of be able to produce at least some of its own high end chips, because right now that is not the case. Now, the interesting thing is that idea, the sort of China competition idea has devotees in both parties. You know, in Ohio, Ohio is a state dominated by Republicans. The Republicans have

Things might change with Trump.

But right now it really seems like, you know, the US is all in on investing in chip factories. There's even talk of a second chip sack, you know, the idea that we might even appropriate more money for this stuff.

Not to talk about energy, but let's talk about energy. How are they going to power these this kind of fab excellent?

Yeah, I mean that is a huge issue.

And talking to Intel, that is like one of the main issues in terms of where where you're going to cite one of these things. So when you're talking about building a fab, you're talking about essentially you need a lot of space, you need energy, and you also need water. Semiconductors use tons and tons of water. Now, Intel, what they say is they are really mindful of their environmental stuff.

Thanks to Max Chafkin Bloomberg, a BusinessWeek senior.

Reporter on Bloomberg Intelligence Radio, we bring you all the top annulets, providing in depth research and data on two thousand companies and one hundred and thirty industries.

We also have something here at Bloomberg called Bloomberg New Energy Finance or BNF. The idea behind it is to provide data on commodities and power, transport industries, buildings and agriculture and also new technology.

This week we looked into US solar manufacturers and several of them asking the US government to slap tariffs on twelve point five billion dollars of imported equipment from Southeast Asia. This is to help counteract what they say are unfair practices by oversea rivals, but it also.

Sets the stage for a sweeping trade probe that threatens to make power projects more expensive for more. We were joined by Paul as Kano Bloomberg, an e f A senior associate. We first asked Paul, if we can impose tariffs on the stuff we need to decarbonize.

We should not.

And the US has been doing it for a while, actually very quietly since twenty twelve, so it's not a new thing, and it's really made solar more expensive in the US and everywhere else in the world. So the difference is the US has very generous has had very generous subsidies for solar for a long time, and that upsets some of those higher input costs. But is it the most efficient way if you're trying to decarbonize quickly and grow a sector quickly. Probably not.

So what are we.

Talking about here? The panels the more than the panels. What are we talking about here?

Yeah, we're talking mostly cells and panels.

So the panel gets the sun. Where's it go from there?

Correct, it goes into an inverter, which is the brains of the system, and the inverter translates that direct current power that the panels produce into alternating current power.

Which is the one that we use thank you for because I represent like ninety nine percent of our listeners.

It's true, Sorry about that. Yes, so what part of that would be taxed with the teraroff the panels?

But what typically those tariffs target are the cells, which is the cells is essentially what composes those panels. You stack them together and you assemble them because the cells is really the true, the true technological component of the panel.

Why can't these companies, like at First Solar or something make these panels themselves.

They do, so First Solar sits in a different league. First Solar has a different technology this we're talking about crystalin silicon technology. First Solo uses a different type of technology called thin film, and they for Sola has been producing their own panels for a long time and they have really ambitious plans in the US.

But I guess that's the point, right, because they don't want the cheaper ones coming in and diluting what they're able to sell. So why can't I guess the better question I should have is why can't they make it for as cheap is the ones that Southeast Asia is selling for.

Yeah, the question is probably the answer is not going to surprise you. Just higher input costs, higher production costs, higher labor costs. You cannot really reach the same scale that you can in the Asian countries. In the US. It's not just about the factory that you have that you're where your assemble or making the cells or making the panels. It's about all of the adjacent supply chain.

It doesn't seem high tech to me.

Why would I care if China is producing them other than if at any time they could stop producing them.

Because you're saying that there's no like cybersecurity or security measure for that.

Don't I just want the cheapest panel.

That's That's correct, And that's exactly what we've been trying to say for a long time. Solar manufacturing is a terrible business to be in competition is really fears where typically go through all these swings of over capacity, a bunch of bankruptcies, and then new companies arise from from nowhere and there's again over capacity. The IP and really that the technological know how there is really not that difficult.

What kind of let's say that these tariffs do go through. So this request could raise the prospect of tariffs as high as two hundred and seventy one point five percent later this year. Let's just pretend that that happens. Yeah, and I want to install a solar panel on my house in Massachusetts. What's that going to cost me?

Now, it's going to cost you a ton more money? A ton I don't like a ton No, I mean, the two hundred and seventy one percent is very unrealistic. So what's happened Typically in these petitions, this is a little bit of boring stuff, But what happens is what happens is they file this petition and then if the US agrees to investigate these companies, they have to prove that the amount of subsidies that they receive is not as high as what that country wide tariff would look like.

To Paul as Kano, Bloomberg NEF Senior Associate.

That's this week's edition of Bloomberg Intelligence on Bloomberg Radio, providing in depth research and data on two thousand companies and one of thirty industries.

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