Bloomberg Audio, Studios, podcasts, radio news. This is Bloomberg Intelligence with Scarletfoo and Paul Sweeney.
How do you think the FED is looking at tariffs? The uncertainty of terriffs.
Let's take a look at the sectors and how they.
Performed a lot of investors getting whipsaled every day by news.
Events, breaking market headlines and corporate news from across the globe.
Could we see a market disruption of market events?
So people just too exuberant out there?
You see some so called low quality stocks driving this short term rally.
Bloomberg Intelligence with Scarletfoo and Paul Sweeney on Bloomberg Radio, YouTube and Bloomberg Originals.
On today's Bloomberg Intelligence Show, we tag inside the big business story is 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 are analysts cover worldwide.
Today, we'll look at why the energy company exon Mobil is cutting three to four percent of its global workforce, us a.
Look at why the AI cloud computing startup core Weave is signing a deal with tech giant Meta platforms.
But first we begin with the news from the athletic footwear company Nike.
This week, the company said that efforts to roll out new products, boost marketing efforts, and clear out old inventory helped ease a long time sales slump.
Nick You said it's sales fell one percent on a currency neutral basis in its most recent quarter, and that was a smaller job that investors anticipated.
For the analysis, we were joined by Punam Goyel, senior US e Commerce and retail analysts at Bloomberg Intelligence.
We first ask Poonam if Nike's turnaround plant is working.
It's working, Nike is able to pick up momentum. Sales on a reported basis were up a one percent, Inventories were down two percent. This is exactly what we wanted to see. We wanted to see inventories aligned with sales. So while the work isn't done and it's not over and it's not a straight lineup, we do see momentum building. What they're doing is working, the new products, the innovation, the focus on wholesale, it's all coming together. There are
still some pitfalls. China is still sluggish and we'll need to wait and see what happens there as well as with its Converse brand.
Okay, so China's definitely an issue. Converse is work in progress. When I look at the revenue line, the top line, what I see is direct revenue fell four percent, wholesale revenue rows seven percent. Just break that down for us in terms of what that means direct revenue versus wholesale revenue.
Sure, so direct revenue composers of stores, which were actually up one percent. So that shows us that the innovation and the new products which are flowing through their own stores is working. What made the DTC revenue go down four percent was that digital was down twelve percent. No surprise here if this is where they're clearing all that access inventory, so this channel will be pressured for a couple of quarters. Still, wholesale up seven percent a great,
great number. I mean, it just shows that coming back into partnerships with folt Locker in a more meaningful way, getting on Amazon dot Com, all these efforts are paying off, and they're where the customer is. They're gaining their shelf space back and the customers that are responding favorably.
You know, the Nike brand is such a powerful brand. I think of it like Coca Cola or Apple. It's so powerful. Yet some of those American brands in China under pressure. And I'm wondering, just with the geopolitics, is Nike a brand where that might be feeling some anti American sentiment from consumers.
Well, that has happened in the past, there have been boycotts against you know, US American brands. We don't think that's the issue yet from what we're hearing, but we do think that the issue is more product at Nike in China, So they do need to ramp a product and they do have a lot of access inventory there, more so than they do in the US today, So that's also a work in progress that they need to get through.
Let's talk about profitability.
Margins declined due to higher discounts and then also the higher tariffs in North America. I look at gross margin forty two point two percent last year. At this time it was more than forty five percent. Now the forty two point two percent was better than estimated. How How long is it going to take for Nike to turn that around.
I think we have quite some time. They said that they do still aspire to reach double digit EBIT margin EBIT margins in the quarter that they just reported was only at seven point one percent, So that's a long runway. We don't think it's any time soon. And the hit from tariffs is building, not reducing. They had expected a billion dollars the last time they spoke to us, and that one to one point five billion dollars and access costs from teriffs.
How much are they passing along to the retailer versus taking it in their margin, because I mean, Nike's probably just a great example of how companies are trying to deal with the tariffs.
Yes, I think they're doing this actually very smartly. They're not increasing prices on products that are under one hundred dollars, but they are taking prices up on sneakers that are above that price point. So if you think about moving prices up, it's very easy to say the price of milk went up from three dollars to three point fifty.
But when you're looking at a pair of sneakers actually a new launch, you have no comparison, So you can go ahead and price up your new innovation and the customer may not even recognize that there was a material price increase, and that customer has a little bit more flexibility to stretch their wallets at that price point.
Pam, if you are heading up on Holdings or Adidas or Sketchers or you know, any of the Hoka, what would you be thinking looking at this set of results.
So Sketchers, I think is in a different league than Nike. It's a little bit different. It's a value play, and I think they don't compete directly like an Adidas or an On or a Hoka would with them. Adidas is doing really well on its franchise lifestyle shoes, and I think Nike, what you've heard, was doing well in performance.
So two still very distinct categories. Though for On and Hoka, I think it's a little bit of a different story because Running was back on It's doing phenomenally well and that is where hogaing On both took share from Nike. So I would be just, you know, a little concerned and just make sure that I keep my game on when it comes to innovation, because at the end of the day, product is what's going to drive how sales momentum will go moving forward.
Our thanks to Punam goy Alva, senior US e Commerce and retail analysts at Bloomberg Intelligence.
We move next to some news in the media and entertainment space. This week, we heard that Spotify CEO Daniel Eck is stepping down after two decades at the company.
Spotify will leave the leadership of the music streaming company in the hands of two trusted executives, their Gustaf Soderstrom, Chief Product and Technology Officer and Alex Norstrom, chief business Officer. This move will go into effect on January first.
For more, we were joined by Githa Rang and Athen, Bloomberg Intelligence analyst on US Media. Well first asked Githa to explain why CEO Daniel Ck stepping down.
Now, this is, you know, one of your classic cases of the founder finally kind of establishing a really good transition plan and handing it off to his you know, to lieutenants here. So we're having a co CEO structure.
And really, I mean the first when I heard this, I mean, this really kind of hearkens back to what Reed Hastings did with Netflix, you know, kind of left right at the peak, right when the companies, you know, everything was kind of you know, all cylinders were firing away and left it to Greg Peters and Ted Sorrandos to kind of take charge, and it seems like Spotify
is in a very similar position. So they had a couple of things that had to get done this year, which was new contracts with all of the music labels. It looks like Daniel Eck has you know, accomplished all of that, and I think he's really kind of left the company in a good position for for its next phase of growth. And this is really, you know, a huge story in the internet space, the possibility to get to a billion users very very quickly. They already have about seven hundred million.
Okay, so there are almost three quarters of the way there. He's leaving on top as George Costanza wood in Seinfeld. But my question, Keita is you talk about the new phase of growth, how much of that will rely on continued price increases. Unlike Paul, I do subscribe, and it's alarming how frequently the price changes come.
Yeah, and it is going to keep coming, Scariot, There's absolutely no doubt about it. I mean, this whole story is kind of predicated on those price increases. Remember though, that they never took up prices for the first ten to twelve years, and then it started coming fast and furious.
Right.
We had one price increase in twenty twenty three, another in twenty twenty four, We're going to have probably another one in twenty twenty six. But if you kind of look at all of the streaming services out there, you know, Spotify is of course the leader in audio streaming. They have a thirty five percent global market share in terms of subscribers. You kind of look at their price, Let's say in the US, it's twelve dollars for an individual plan.
You compare that to let's say the video leader Netflix. Again, I go back to the Netflix example, They're priced at eighteen dollars. So I think Spotify still has quite a lot of runway when you kind of compare it to the rest of the field. And the other thing that I like to point out here is when you're kind of subscribing to an audio service, it's typically only one service that you're subscribing to, as opposed to a video service.
I think people really like their you know, if they like Spotify, they're absolutely going to hold on to it at any cost. And the other thing is, you know, Spotify is adding new features all the time, so they are like really getting down on you know, monetizing more and more, but it's not They are innovating also constantly, so I think I think people don't mind paying for it.
What's the biggest challenge to them on the cost side of the business.
KEITHA music royalty is all. I mean, that's you know, for every dollar that they make, they're paying out about seventy cents in terms of musical royalties back to the labels. So it is definitely a very you know, from that perspective, the model is hard. But one of the things that they've done very well is, you know, they've obviously renegotiated a lot of the deals kind of try to provide investors with a lot more visibility into the cost space.
But more importantly for them, they're really trying to go away from you know, licensed content to more owned content, so kind of going into you know, podcasts, going to more non music content, where again they have a lot more leverage, you know, whether it's audiobooks, whether it's video podcasts, getting away from you know, just being a core music service to more of kind of an global kind of an audio service, and they're doing that really well, and
that's going to help them with their margin expansion story as they get better unit economics right.
And introducing premium tiers on top of that you have to unlock in order to unlock some of the more I don't know, high profile podcasts, you then have to pay extra. Keith talk a little bit about AI because I keep reading about how AI generated music is a challenge, but in what way? And could it actually become an opportunity as well for Spotify?
I think so. I think it is going to become, you know, an opportunity as we go. They're already actually using you know, a lot of AI features when it comes to curation, you know, when it comes to music discovery, when it comes to providing better features, and they're already and you just brought up the super premium tier and a lot of that is actually going to be having like an AIDJ type of a feature there, you know,
for both listeners as well as music creators. So I think it is definitely going to be you know, a good opportunity for them to present a much better product. I mean, we've already seen AI being used by a lot of the other platforms. Again, I go back to Netflix because they've done this really well in terms of you know, having a much better algorithm now to serve up better content. And I think that's exactly what Spotify is doing in terms of its playlists as well.
Where's Apple in this audio game?
So just in terms of subscribers share, Paul, I mean Spotify, as I said, leads with about thirty five percent share of the market. Apple is really far behind. They have about a ten percent share, so very very hard for them to catch up in terms of in terms of subscribers at least.
Are Thanks to Getha Rong and Aathan, Bloomberg Intelligence analysts on US Media coming up a look at why the video game maker Electronic Arts has agreed to sell itself to a group of investors.
You're listening to Bloomberg and 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 Bigo on the terminal. I'm Scarlet Foo and.
I'm Paul Sweeney. This is Bloomberg.
This is Bloomberg Intelligence with Scarlet Foo and Paul Sweeney on Bloomberg Radio.
We move next to the electronic gaming space.
This week, the video game maker Electronic Arts or, EA agreed to sell itself to a group of investors. They include a firm managed by Jared Kushner and Saudi Arabia's Sovereign Wealth Fund.
The deal values EA at about fifty five billion dollars, with the investors agreeing to pay two hundred and ten dollars per share in cash. This makes it the largest leverage buyout on record.
For more, we were joined by Nathan Natu Bloomberg Intelligence Technology Research Analysts.
We first asked Nathan to break down the EA's recent valuation.
The valuation is at a twenty to thirty percent premium versus the last three quorder market cab before this deal was now and it seems like, you know, it is a premium deal, but actually, you know, EA has a lot going for it. It is actually launching a new batterfield game, and there's a strong prospect for this game.
And actually the game is now in prely release, and even then, he has already smashed all prior records set by the biggest game in that genre, and that genre is first person should and that game that's dominated that genre is called Duty from Microsoft. So Betterview six is looking to be a successful launch. And next year we have FIFA and obviously we know that EA has the biggest soccer game in the industry, and that's FIFA. What was called FIFA but now it's called EA Sports FC.
And next year FIFA World Cup will be a special one because it will be hosted across three cities, including the US, and if people don't know, US is actually the biggest market in terms of revenue for all kinds of sports games. So that's the second thing going for EA that I think it's going to lead to at
least two round circumstensus beat on EPs share. So I think for e A, this is a this is actually a good deal, and we can talk about the common struggles faced by you know, game publishers and how these deals would make sense for e A as well as the the investors in this context.
So yeah, let's do that because you mentioned a bunch of the titles and these are you know, very valuable franchises. These this is a top quality ip, whether it's E Sports FC, madd in NFL, the SIMS battlefield. What does ownership by private equity, by private investors allow e A to do that it can't do as a publicly traded company.
I think it's all down to funds. So publishers. Game publishers in general have been have been facing two struggles. First one is gamers attention spend and playtime are increasingly getting limited. The reason is people are sticking to brands or franchises that they have played for a long time. And in fact, new Zoo published data saying that a percent of playtime tend to go back to the sixty or so titles, leaving only eight percent of playtime for brand new IP. And this is actually in favor of
EA because we mentioned those valuable IP. In fact, if we look at global unit sales, EA has topped twenty has four of those top twenty selling IP globally, he has four out of the twenty. So that is actually a pretty enticing deal thing for companies like private equity because you know, profit generation is key, and what this means that is that EA has franchises that can bring
in recurring revenue. We talked about EA Sports FC, we talk about MED and MFL and they actually revived a new franchise, College Football, and you know, it was one of the best selling titles in the US last year. So recurring revenue is key here. And the second struggle that I was going to go into is development cost is really high, especially in the US, So that means that we publishers actually have a cost is advantage when
compared to Eastern developers. For example, you know, salaries for game engineers in China is more than half the level in California, and personnel cost game engineers is a huge part of developing a game. So you know, tens and actually launched a new game in the same genre as Better Few six and that's Deltalk Force is doing really well.
And what that costs disadvantage is stopping EA from is continuously to push out a stronghalence of content to essentially extending the shelf life of any game, and Eastern developers can do that better because of that cost edge.
Our thanks to Nathan Native, Bloomberg Intelligence technology research analyst.
We move next to some news in the energy industry.
This week, the energy company Exon Mobile said it plans to cut about two thousand jobs globally as part of its long term restructuring plan.
The reductions represent about three to four percent of Xcellon's global workforce and are part of the company's ongoing efficiency drive.
For the analysis, we're joined by Vincent Pas, Bloomberg Intelligence, senior equity research analyst of oil and gas.
First ask Vincent for his take on this Exon news.
Well, I think it's part of managing through the cycle. Right in prior cycles, the sector was exposed to more extreme volatility, higher highs, lower lows. The industry is trying to manage through what seems to be a rather clouded backdrop right now. So we're sitting here and you got NAT gas somewhere around three point thirty Henry Hubb. You got WTI in the low sixties. You have OPEC bringing back on capacity and maybe even speeding up that capacity.
Ads.
You have a more clouded, broader economic backdrop across the globe. You have geopolitical issues, so lots of uncertainty, and not only Exon. Exon's probably going to cut somewhere about two three four percent of its global workforce, its affiliate a much more substantial cut, roughly about twenty percent over the next two years or so. You're seeing it at Conico Phillips, You're seeing it at Chevron, even BP, the major European
energy conglomerate. You're seeing it across the board. And so Paul, as you know, when you're not growing revenue, right, you're not getting the revenue increase on price, you're not growing production because your investor base does not want to see that production growth. You are looking at very steady revenue, maybe even declining revenue. You have to manage that netback from the cost perspective, and you have to support that
cash flow stream. And so you're doing it via these cost cuts over a number of years too, maybe even three years, to sort of bring that cost structure in line with a new reality of uncertainty in the marketplace, to reduce that volatility.
Well, there's cost cuts, and then there's exon mobiles cost cuts. Since twenty nineteen, it's trimmed thirteen and a half billion dollars in annual cost That is more than all the other big oil companies combined. How much more room is there for Exxon to slash expenses.
Well, it bought Pioneer, so it has a relatively sizable workforce. In general, it doesn't necessarily mean that those cuts are going to come there, but there are ways you cut you gain efficiency. In this technological era where we have
advancements across the energy value chain. You will consistently and continually seek out ways to get efficiency, to bring down that cost structure and to bring unit costs in line with a very anemic outlook for global energy prices in general, and also a very clouded outlook for the global economy too.
So Vince kind of looking out, you know, one in two years, what is the view of the companies you talk to about energy prices, oil and gas? Is it still going to be a challenge market here?
It looks like it. It looks like it's going to be a very challenge market, especially for the WTI side, for the oil side of the equation. On natural gas, Paul, I know you and I have talked about this numerous times. You have a structural growth trajectory for natural gas here in the US via export LNG, whether it's seaborne energy or whether it's pipeline gas into Mexico to help fuel their economy as well.
You have the AI build out, which will be a which will digest significant amounts of energy, and that's beneficial for natural gas.
But on the oil side, you have very anemic growth. You have your transportation fuels having to compete with alternative and renewable fuels, so there's a greater competition there. The growth trajectory and the outlook for the demand side on the liquid fuels seems to be very clouded and seems to be somewhat less secure relative to the natural gas side of the house.
Our thanks to Vincent Piazza, Bloomberg Intelligence, senior equity research analyst on oil and gas.
Staying with energy, Bloomberg Intelligence recently put out a report on its outlook for nuclear power in twenty twenty six.
It's titled AI driven Power Demand set to spark three hundred and fifty billion dollar build cycle. This deep dive describes why nuclear remains a favorite power source for artificial intelligence.
For more, we were joined by Scott Levine, Bloomberg Intelligence senior Energy Services Analysts. I first asked Scott to talk about what the energy industry is doing to prepare for what seems to be an insatiable need for power.
Nuclear really has two very big positives going for it. Number One, it's a emissions free power source, and the hyperscillers that are really behind the investments care about that deeply, right, and so they've favored, you know more renewable sources heretofore like when in solar, But what those lack are you know, twenty four by seven base load characteristics and for a data center to be up twenty four to seven, that's
not going to do it right. So nuclear checks both of those boxes, and those are two very big positives and the reasons that you're seeing folks like Microsoft and Meta come out in favor of nuclear power.
And yeah, so what's the how much does nuclear provide today in the US versus where you think it might be in twenty five years.
Yeah, so today it's a little bit below twenty percent of the grid, which we're saying we'll return to about in our you know, base case scenario twenty percent of the grid by twenty fifty. That may not seem like much two percentage points, right, but it you know, will equate to or amount to a three hundred and fifty billion dollar investment.
To get there.
So those are big numbers. And in addition that, we're talking about adding sixty some odd gigawatts to the grid, and you can think about each full sized nuke being one gigawatt, so that's basically building sixty generating units as our base case. So those are big numbers to get you from eighteen to twenty percent over a twenty five period of time.
I tell you, I went in this report that you and your team put together Section five Small modular reactors. That's where I wanted to go to because.
I had that.
We've had some people come into the studio over the last few years and just talk to us about the science and engineering and the possibilities to be small modular reactors. Tell us what they are and what role they could play going forward.
Yeah, so really these are and none of these have been built in the US yet, right, So this is very much an emerging technology play. But basically you're talking about is taking a full sized nuke. You're driving down the highway. You see a big, cool tower, a bunch of smoke coming out the top of it. These are much much smaller, right, and so the idea here would be that these are much more flexible, and so if you have more disparate data centers located throughout the country,
you can power these and with these smaller units. Right, And we're talking about you know, some of these are smaller versions of what's already in operation today, which is a light water reactor. And then some of these types of units are different types of technologies. You have gas cooled reactors as opposed to water, you have molten salt cooled reactors as opposed to water, and these use different types of technologies, different types of fuels still remain to be licensed improven.
So a lot of it's very.
Much on the com But the technology in each of those areas holds promise, so we'll see, and each of them has pros and cons right, and so we'll see over the next five years the technology shakeout and see which ones end up being at the top of the stack for the US. But each of them have a lot of money behind them and a lot of support from a lot of depocketed players.
Our thanks to Scott Levine, Bloomberg Intelligence, senior Energy Star VERSUS analyst, coming up a look at why the cruise company Carnival raised its full year earnings forecast.
You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in research and data on two thousand companies and one hundred and thirty industries.
You can access Bloomberg Intelligence via Bigo on the terminal.
I'm Scarlet Foo and I'm Paul Sweeney. This is Bloomberg.
This is Bloomberg Intelligence with Scarlet Foo and Paul Sweeney on Bloomberg Radio.
We moved to some news in the tech space this week.
We heard that the AI cloud computing startup core Weave has signed a deal to supply Meta with as much as fourteen point two billion dollars worth of computing power.
As part of the deal, core Weave will provide Meta with access to Nvidia's latest GB three hundred AI chips.
So for more, we were joined by Honor A. Rana, Bloomberg Intelligence tech analyst. We first asked anaog how this deal benefits core.
Weave corviv is basically is a is a company that takes all these GPUs and rents it out to people
for whatever they want to use. So they do get the dips on the most latest equipment that is sold by Nvidia, and then the clients can And now I did show that Meta is buying directly from Nvidia as well, but in this case they're just going and outsourcing the entire infrastructure for an amount of fourteen billion dollars, which you know may be a very small piece of it has overall capex for AI infrastructure, but it's still a start that they are now leasing capacity rather than building
it in house.
So how should we think about this in the overall growth of AI. I mean, this feels like incremental spending to me, but I'm not sure if it's just shifted somewhere else. Do you when you see announcements like this from core we've how do you kind of welded in or you know, kind of weave it into the larger picture.
So every company, every hyperscale cloud provider right now, you know, whether that's Microsoft or whether that's Meta or any other company that's out there that is spending a lot on capital expenditures, on spending their AI capabilities. They have two options. They can either build it themselves and they can go to a specialized vendor like core Weave and rent it
from them or lease it from them. Microsoft has said that they are really into expanding their leasing capacity or capabilities down the road, which is good for companies like core Weave. Their job is to build this only this infrastructure and rent it out to whoever wants it.
My other question when it comes to core Weave, and you know all this, all these deals it's making with these cloud providers, is that they're also raising a lot of money. Core Weave is tapping the debt market, or there's there's there's expectations that it may tap the debt market. Is there going to be enough demand to meet, you know what, what it wants to sell.
So here is the case. When it comes to a customer like Microsoft or Meta, which all of us know have a lot of cash flow coming in. If they have signed let's say a five year deal, seven a deal, you kind of know that the money is good. It's much easier to raise capital. Then then let's say from a brand new company that may not have that amount of cash flow coming in. So I would say, I mean, you would you know, one should not be concerned that
Meta is not good for that money. I don't think that's going to be, you know a concern for anybody who's giving them the bonds of their debt for that Yeah.
Meta raised twenty nine billion dollars in a financing package for a massive data center in Louisiana. Oracle raise eighteen billion dollars in bonds as it builds infrastructure for Open AI. So the markets are open for this kind of trade.
It seems like yeah, apparently they are.
And the other thing with Corewave, of course is that it has an increased commitment from open AI. It's got this big customer in Microsoft I think makes up seventy one percent of its revenue. How diversified is Corewave's customer base right now?
See when you see the core piece's first biggest customer was Microsoft. Microsoft didn't have the capacity to run a lot of their AI workloads, so they went to Corewave. So, you know, frankly speaking, I understand that's seventy percent. But you know, this is an area where everybody needs capacity, so you know, for us it is an issue, but it's not like, you know, it's not a deal breaker when it comes to the quality or even you look
at the fundamentals of somebody like a Corevieve. Now what's happening is other cloud providers are going to them and say, whatever access capacity that you have, you know, we will take that as well.
Are there other companies that are going to come public here like core weave, these neo cloud companies.
Yeah, I mean, I'm sure a lot of them are caring up for it. Coreweve is probably the biggest one that's out there, you know, We saw Microsoft signing another deal recently with the Nebius, I believe, and you know that was a very similar arrangement where Microsoft is going to them and saying, Okay, for the next several years, this is the kind of money that I or the capacity that I want from you, and this is how I'm going to give you the money to fund it.
Basically, So an RAG when you look at these kinds of deals and you know, fourteen billion dollars here, ten billion dollars somewhere else, what gets your attention in terms of you know, I need to look into this a little bit more versus this is just one in a long string of deals that these companies will continue to sign.
The biggest thing you want to think about is what are these companies doing these deals for. So, say somebody like a Microsoft, are they giving a lot of their inference workloads or the outcome of chart GPT running on Microsoft's cloud workloads, or are they giving model training workloads? Because there is a there is a there is a narrative out there in the market that the long tail of the AI revenue comes from people using apps, which
we you know, think of this as infriance revenue. Compared to the model training revenue, which make ups and down depending on what kind of technological advancement we see in you know, software development.
Our Thanks Dona rod Rana, Bloomberg Intelligence Technology Analysts.
We move next to the cruise industry, the cruise company Carnival this week raising it's full year earnings forecast.
Carnival cited a record pace for forward bookings and improving net yields, but shares of the company felt after the news.
For more on this, we were joined by Brian Egger, Bloomberg Intelligence, Senior Gaming and Lodging Analysts.
First, Brian, why investors see Carnival's earnings forecast as conservative?
I think there are two ways in which maybe they're being perceived as conservative. The one is that their yield growth guidance for the fourth quarter, while it's certainly very solid in there in the mid fores, you know, with a little bit below consensus, maybe the street got a little bit heav itself. The second thing is, for all their optimism about bookings and direction of yields, they are
very conservative and how they're deploying capital. They've only got about one percent annual yield growth for this year in the next two years. So they're growing very effectively, but they are also very measured in how they deploy capacity. So all this is really good, but they do mention that you know, they can afford to they can really be judicious on expense growth because they're only growing capacity at a very modest pace.
Is that a bad thing to be conservative? How does Carnival compare with Norwegian or Royal Caribbean.
Yeah, so if you look at Norwegian World Caribbean, they're anticipating or actually scheduling about a mid single digit, call it five percent ish level of annual capacity growth for twenty twenty six, twenty seven to twenty eight. You know, it's closer to one percent for Carnival, maybe two percent in twenty twenty eight. So they're just taking a more conservative tack. And I think they're equally long term optimistic about their ability to penetrate the vacation market, but they're
going about it in a much more measured way. And then that sense it could strike people as conservative.
Talk to us about capacity. I mean, if they added a couple of ships, would they sell them out?
Yeah?
I mean certainly, their their auquancy is back to pre pandemic levels. Their yell growth against that capacity increase is positive, and we were looking at we've seen steadily increasing yield expectations throughout twenty twenty five and they've got the free cash leot But I think they just want to build this out slowly, you know, and maybe strike people some people as being too slowly.
Hey, not for nothing. The CEO get paid a lot of money here, Josh Weinstein. Fourteen million in cash vitation for Countary. You're twenty four to fourteen million in stock twenty eight million to drive a cruise ship round. That's not too bad.
Nice job if you can get it right.
So here's my question to you, Brian, how do Royal Caribbean or arrange and cruise and Carnival?
How do they grow their market?
Are they stealing from each other or is there still a big base from which to grow.
There's definitely a penetration oportunity. I mean, just back up for a second on Carnival. You know their goal is to become investment grade. So part of the conservativism I think you're seeing, which may be a headscratch, want to get an investment grade, and I think that's probably priority one. Shifting some of the enterprise value from bondholders to equity holders.
That being said, yes, they see opportunity to grow a relatively underpenetrated overall vacation market, but they're going about it with kind of balance sheet being front center if that helps it all.
The only thing I know about the cruise business is what I learned from Disney, who got into the business fifteen twenty years ago, and it's been a great business for them. How do you stratify the cruise market? Now, I'm going to be the very very top, but how does the cruise industry kind of stratify itself?
Yeah, I mean I think they, I think convincingly argue that they are relatively affordable form of vacations, the package product. The value is very good for the consumer, but it runs across different tiers from luxury side you know, Seaborn, wind Star Oceania Region seven Seas to the more mass market like Carnival Cruise Line, So they run the gamut, but the overall spectrum tends to be generally, you know, relatively affordable and part of that package vacation product people
buying cruises beforehand, buying stuff on the cruise. With a good share of wallet left over that works to their favor.
How brand loyal are cruising fans?
I mean, if you are a Carnival person, are you a Carnival person for life?
Yeah, there's certainly some brand loyalty. And remember they've they've got kind of as an industry. They've companies got two goals. One is to drive bookings for their particular brand, and they do that through new hardware with all the bells and whistles. The other is to drive the overall awareness of the value of cruising relative to other forms of vacationing. And so you know, they've kind of got that dual mandate.
So you're sitting on the Jersey Shore Sunday after in around five.
So you're Sweeney's sitting on there. Okay, go ahead, all this.
Every Sunday during the summer, you'd see this massive cruise ship coming out of New York Harbor. I think it's the Star of the Seas.
Yeah, that's a new one.
Yeah, I mean, things massive, and they filled that thing up.
Oh just remember and that's a that's a Royal Caribbean ship. But I will point out that one of the things Carnival's pointing to is, you know they've reached the thirteen percent return on invested capital this year, so they're kind of getting to that double digit return base that they targeted.
So there are Their argument would be that they fill it up, they get good pricing and relative that their investments are getting you know, solid low teens or turns on incremental invested capital with an opportunity to take that higher. So as long as they can get that return, I think they can convincingly say we're getting there. But obviously, in the case of Carnival through relatively conservative capital to point I.
Mean Star of the Sea, Icon of the Seas, they have a massive passenger capacity with the ability to hold over seventy six hundred passengers and a large crew. And for somebody who doesn't like people like me.
That that's a tough it's not the miss anthrop's favorite vacation activity. But you know, they do get good economies by field peoples and.
How big things.
Well, I'm always talking with my friend who suggests that instead of retiring to a nursing home or retirement community, just go on a cruise trip.
I've heard that.
I've heard that too, you know, you know, it's a big cruises Charlie Pellett and he doesn't like cruise the Caribbean.
Hers cruises like adventurous places.
Yeah, like I'm going to I'm cruising to Turkey and I don't know Antarctica. Yes, that's what Charlie.
People pair a premium for those. Yeah.
Thanks sreic to Brian Egger, Bloomberg Intelligence senior Gaming and Lodging analysts.
That's this week's edition of Bloomberg Intelligence on Bloomberg Radio, providing in research and data on two thousand companies in one hundred and thirty industries.
And of course you can access Bloomberg Intelligence via b I go on the terminal.
I'm Scarlet Foo and I'll Paul Sweeney. Stay with us. Today's top stories and global business headlines are coming up right now