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Speaking of technology, piece of news out, I thought it was really interesting Scarlett Microsoft saying, hey, we're not gonna have as much I guess data center capacity as we thought. We're not going to have as much as we need until maybe sometime next year. It's just another data point that, as Jay was just pointing out, there's lots of ways to play AI. Money's being spent all throughout the economy, not just the tech stack.
But there's still logjams nonetheless.
Yeah, still logjams nonetheless. So let's see what's going on with our good friends at Microsoft. On rog Rana joins this technology analyst for Bloomberg Intelligence. Again, what do you make of this Microsoft news anorog that they say, you know, data center crunch is going to persist into twenty twenty six.
Yeah, you know, Microsoft talked about a little bit of this in the earning scoll about let's say twelve months ago and then they said things are easy or things are improving, and it does have an impact on their cloud business growth rate when things are night Now this news, I think it was an excellent article written by Bloomberg News, and you know, it gives us a lot of things to think about as to what's going to happen over
the next twelve to eighteen months. We think capex could go up, we think cloud realization of the rates could go down. And you know, the AI boom is going to continue, or the AI infrastructure boom is going to continue, because if Microsoft needs more capacity, it's going to go to people like Corevive, Nevia's Oracle, They're going to go to their you know, companies that they work with to create the data centers. And then you know the downstream
effect of that. So positive news for the AI infrastructure space, but maybe has an impact on Microsoft's cloud growth rate.
Does it have an impact on Microsoft's well and how will that show up in the earnings when the company reports.
Yeah, I think it can have an impact on their gross margins. You may see it take down. They they have said that, you know that their next financial years, the next fiscal year they're going to spend more on capex than last year, but the rate of growth is going to go down. Now they haven't given any figure, so you can drive a big truck in that particular range because they are giving themselves the flexibility to say that. One could argue that the year after that now they're
you know, maybe they're going to spend even more. So that really, you know, has an impact on the entire cycle. So that means Oracle has to spend more, That means Meta has to spend more, Amazon has to spend more, and that that you know, continues this big boom of all the downstream companies. We have anything from chips to you know, data center cooling and water, et cetera.
What inning on do you think we are in this AI tech build out?
I think we're in a fairly early innings because unlike software coding or you could say, you know, the buildout of a new e commerce website, this one's going to take some time because every data center takes a long time to come up. I mean from breaking ground, getting permits, to getting power to actually building it and putting it together. I mean, it takes a few years for that to build out. So I do not see any reason why in five to seven years we'll still not be talking about this topic.
You know, when we come back to this data center crunch for Microsoft, is this a zero sum game where it's Microsoft's loss for now in the short term as it builds these things out, and it's competitors gain. And if so, what are the names that are likely to be most able to benefit.
No, I don't think it's anybody's gain in this point. So the crunch that they are having, I bet the same thing is happening with Google, same thing is happening with Meta and Amazon. They are all going out to these third party neocloud providers to see wherever they can find capacity, and at the end of the day, whoever has any capacity left, you know they will find a
customer from one of these large vendors. Because what not only what they're doing is selling products to the third parties outside their internal processes, they are actually improving it as well. Somebody like a Meta, They really are improving their ads to add business because of AI, and they need more capacity because of that as well.
Earnings will be kicking off the season next week for the banks, and then we'll get the tech companies a little bit later. What are you going to be listening for anaag during this earning cycle for your tech names.
It's a big tale of two cities. One side, we're going to see actual drop in discretionary spending, so any of the consulting names that they're not going to have a good time. Any of the traditional software names, even SaaS names, they're not going to have a good time because subscription growth is going to slow down. But on the other side, you know, somebody like a code Weave or an Oracle or a Microsoft, they will talk about
more bookings. Oracle is not going to report in this particular running season, but a month after that, I think they will all see a good increase in the backlog or the order book. But the rest of the space, I think is going to struggle.
Once upon a time, a lot of the companies benefited from the end of the year rush to use up the IT budget. You know, every company had a certain amount of money allotted to spending on IT, and a lot of times companies didn't get around using it until the fourth quarter, and then they would do so in a big rush. Do you see that happening this time around?
Yes, it would happen, but only happen on the AI side of things, the non A side of the tech spending. I think that's still going to struggle. We may not have a resolution of that till the global macro environment improves. Still we have a resolution between US China trade war till we know what's happening to interest rate. I think that part of the equation is going to struggle.
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All right, let's turn now to a sector that, of course is affected by tariffs directly, and that is the auto sector. Steve Man is Bloomberg Intelligence Global Autos and Industrials research analysts, and he joins us down to talk about Stilantis Silantis.
It's Chrysler, right, Paul, Jeep, Chrysler, all those good perds.
Okay, I'll just get to us.
Because I see Stilantis, I'm like, what company is this?
I don't get it.
In any case, it's third quarter shipment's climb to thirteen percent, led by rise in North America, so there is a bit of a recovery here after the carmaker has been working down inventory in the US.
Steve, thanks for joining us.
Let's talk a little bit about Stilantis and how sensitive vulnerable it is to President Trump's tariffs.
Yeah.
I think they are very sensitive to tariffs. But I think a lot of the impact on companies like Stillentis and the Detroit Trio is really their operations in Mexico and Canada. I think Trump is looking for them to actually move some of those production back into the US and employing more US workers. So, I mean, there's been a lot of rhetoric and a lot of you know,
potential changes. Changes are impending, but I think for now, auto tariffs has been pretty quiet, and I don't think you know, the Trump you know, the tweets are going to impact the Detroit three.
So where are we in terms of implementing tariffs on Auto's just incoming and outcoming in the US.
We're already actually being loving at the moment.
Yeah, it's it's happening at the moment. We've heard a lot of news on and you know companies moving production back to the US. GM have moved some of their Silverado production, one of the highest profit vehicles, you know, from from Canada back to the US. So we're hearing that from four and some other automakers. You know, Hyundai is investing a lot in the US, you know, likely to move some of the production from South Korea into
the US. So we are already starting to hear and see the effects of those auto tariffs.
See, this might be an unanswerable question, but with companies making the moves to do that, this will take a long time. This is a multi year process, right. You don't just decide that you're going to reshore manufacturing. It happens the next day. Is just saying that you're going to do that enough to appease the administration?
Well, it's it's I look at it as a two phase process. There's what I call low hanging fruits. So you know, for example, I gave earlier on the really Silverado that GYM shifted to back to the US. You know, if they have spare capacity, uh in the US, that's that's a no brainer. They can shift that back quickly. But you're absolutely right. You know, longer term, it's going to take years to kind of unravel, uh, the the North American supply chain chain to focus more in the US.
It's going to take years because you know, plants take years to build, and then you also have to bring back the suppliers. The suppliers rather produce their parts near the manufacturing, near the assembly plants rather than you know other you know, uh in other countries where you know, shipping cross could cost could be very high, so it could take, if not years, a couple of decades to actually turn.
That ship around.
So where is Stillans is just from a positioning perspective right now relative to the other automakers out there.
Yees, stillent Is has been losing quite a bit of market share on their high you know, the higher profit vehicles like the ram trucks, the jeeps, and you know, with the new CEO coming on board, you know, the shift the strategy has shifted from more of achieving cost savings from the mergers that created Silentists back in two
thousand and one to more of an outreach. You know, how are we going to how are they going to answer the demands of the consumer They really want the v eight back, which is what they're doing to bring that vight heav me back, and you know I they'd also bring the mid sized cheep Cherokee back, which has been very popular with consumers.
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Let's talk about the consumer here. How's the consumer doing out there? There's lots of ways you can kind of get a sense for that. We talked to Mike Halen from Bloomberg Intelligence about how the restaurant traffic is doing.
And we also can.
Talk to Lindsay Dutch. She covers the consumer hardlines retail companies. She's a senior analyst of Bloomberg Intelligence.
Lindsay, let's talk like, I know Dick's Sporting goods ALTA. You've got a couple of companies that.
Are going to be reporting earnings coming up, and what do you expect from these companies?
Yeah, thanks Paul for having me. We are taking a look at full year guidance going into the third quarter earnings and of course that important holiday shopping season, and what we've noticed is, you know, the guidance ranges are very, very wide for these retailers. It's baking in a lot
of uncertainty surrounding the consumer. But when we look at the demand trends and sort of first half results, first half results were pretty solid for many of the hardline retailers, and we're seeing better demand in the beauty space, you know, better demand for electronics even and home furnishing, some categories
that have really been struggling. And when I look at this guidance range, I sort of think that we might be able to trend sort of towards the middle upper half of the range if that demand can hang on through the second half into twenty twenty six.
Can that demand hang on if prices increase or the supply is limited. We're hearing again these headlines from President Trump that there could be a massive increase of tariffs on goods from China. Dick Sporting Goods, all to Beauty certainly do rely on China for their supply chain. So I'm curious whether that gets folded in.
So I think when we think about the second half, I think a lot of that inventory is already in place, and there have been price increases that have occurred on that inventory. We're expecting to see that. We do think this shopper is going to come out a lot like they did last year, selective value focused, but they're still
willing to spend, you know, on certain things. And I think that you know, the key draw there is, you know, anything that's new Nintendo switch to, you know, anything exclusive or like a premium type product, you know, which does skew to Addict's sporting goods. I think when I think about the risk, you know, of these headlines that we're seeing, you know, best Buy, you know, is responding to those headlines.
I think if we see a big, much higher levey on goods from China, you know, that's something that they're going to have to address. In the twenty twenty six year, they have significantly reduced their exposure, you know, of those hardlines names we were talking about. Best Buy is probably the most exposed thirty three percent of cogs. But it's all indirect exposure, so it's not stuff that they're directly importing. It's just some of the inventory that they have on hand.
Lindsay, the companies you cover, the hardline retailers, what's their I don't know if they have a collective view of how the consumers doing out there.
What are they telling you guys.
Yeah, again, I think they're what we've seen, and this is sort of going back all the way, you know, to last year's holiday season, is that newness is driving demand and that's no matter what the category. So like beauty electronics, we saw explosive demand for that Nintendo switch to But even in the sporting goods market, you know, new product or a premium type product is really drawing that consumer in, even if it's a higher price point.
So consumers are definitely value focused, but they're making sacrifices. They're choosing to shop value on certain things and then they're splurging on other things. It's really hard to discern. But like I said, we've seen improvement broadly in the home furnishings category, also in electronics, and then beauty, which kind of took a leg down last year, is looking a lot better this year.
We talk a little bit about these companies and their efforts to make sure that the consumer stays with them no matter what happens, even if they can go to say TJ Max and get it for cheaper, because they have these loyalty programs that tie the consumer so closely to their brand. Even as an aggregator, Dick Sporting Goods does not sell its own branded merchandise. It sells Nike, it sells New Balance, but people go back repeatedly to the store.
Right.
Yeah, those loyalty programs, you know, for the retailers are great because that gives them a lot of data on their their customers that shop the most with them. You know, I think this is where, you know, assortment matters and exclusives matter. So, you know, Dick's smaller peer, Academy Sports, they have not seen the growth that Dix is seeing. And it's just because they also carry Nike, but they might not carry the brand new Nike basketball sneakers for
the season whereas Dix does. So the assortment you really have to dive in and look at very specifically. You know what some of these retailers have. They have to have that newest product. They have to have you know, exclusive items where you can't go elsewhere to get it, and that is really key to keeping that customer back.
I also think you know, when you have a positive experience shopping at a retailer, you know you're going to go back to them as well for that customer service or whatever it is that they're providing to you that no one else can give you.
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