Bloomberg Audio Studios, podcasts, radio news.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple Car, playing Android Otto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
One of the movers today is Salesforce dot Com. I thought it was just one of those stocks that can do no wrong. But the stock's down twenty percent last this morning kind of reported some numbers so disappointing to the street, so I wanted to break it down and al so we can do that with the on Rock from Chicago on rog Rana. He's a senior tech analyst for Bloomberg Intelligence. Honorrock Mark Bennioff here, I thought everything
he touches turns of gold. What happened to Salesforce and the results last night?
Yeah, the macro spending is not good right now, and we saw that good work day a week ago. People are push out contracts so large deals. They're not signing at the same pace they did before. So a little bit of you know, tale of two tech stories. One is companies are spending more on AI, but then they're taking spending away from other areas such as, you know.
Buying new software or consulting and things like that.
Does Salesforce not have an AI product yet? And why.
No?
They have one particular productl data cloud and that twenty five percent.
But frankly speaking, remember, if you have a revenue based this size, you know, thirty five forty billion dollars.
You know that a few million is not going to move the needle if all the other spending starts to slow down.
All right, here's Alex, here's the group.
An example, just a great Wall Street inefficiency, one of the reasons that many firms on Wall Street just can't generate decent returns. There are fifty six analysts covering Salesforce dot com. I'm going to say a lot. I'm thinking five get paid, five make aprofit off of bride and read research on that name.
You know, just absolutely crazy.
Forty buys, fifteen holds one cell, forty buys yep. So what's the the forty buys out there?
Anna Rod?
Did they fundamentally change their view of Salesforce dot Com after these results?
No, no, no, there's no reason to do that, because this is just elongation of the sales cycle. It's not that people aren't buying cloud products. It's just a matter of there not signing large deals. People are basically saying, you know, I can live with what I have right now, and I'll wait for next year to go back and buy this stuff. It's not that it's not things are not that horrible. I mean, they're still growing at ten percent or so. It's not the end of the world.
But what really happened is three quarters ago their new bookings rate was slowing down and started to take a u turn, so they went from eleven percent to thirteen percent, and they were at thirteen percent for two quarters in a row.
This quarter, we were.
Expecting it to be around twelve percent or so, twelve to thirteen percent, and they came at ten. So these deals being pushed out, it's it's just a matter of time, whether it's.
Two quarters away, whether it's three, but they will close.
People are looking to move more things to the cloud on the application side also, so it's just I would say a little bit of delay, but that delay is now takes you into twenty twenty five rather than being a middle of the you know, this year's story. So that's partially the reason of people are saying, you know, well, we'll come back to the story six months from now.
Are you surprised at the severity of this dock drop though, based on this because this is also just a law of large numbers, right, You're growing at double digits and then eventually that double digits slows. That's like life, right.
Yeah, Alex, absolutely right.
I mean, if you look at salesforce on the on the rosy side, their free cash flow this year is going to grow twenty percent, with the likelihood of another fifteen to twenty percent growing next year. This company has now changed the narrative from high sales growth or growth at any cost, to growing with a lot of margin expansion.
This company has a long.
Way to go before the margins reach I would call maturity. They still tend turn to a twelve percent away from that stage. So there is a lot of free cash flow that needs to come out of this company. So, you know, I think I am surprised about the severity of their reaction.
You know, an, I guess this kind of goes to a question I've been asking since this whole AI scam, I mean discussion began eighteen months ago. How much of this is really incremental new spending for this new thing called AI versus just taking some tech spending from other parts of the stack, whether it's software or hardware applications.
And does I talked to us about that.
Yeah, I completely agree with you.
This has been our case because one of the things we saw was one of the most important companies in the space for leading indicators is Accenture, and their consulting revenue has been declining for the last three quarters because of exactly what you said.
People are not.
You know, if you have a consulting project, you put that on hold and you use that money to buy you know, few chips new servers trying to figure out if your infrastructure is.
Ready for the next phase of AI development.
You're actually experimenting with new products and trying to figure out and the big question for a lot of them is do I really need to buy a brand new software product where my next generation CRM product could look a little bit different or some other product could look at a little bit different.
What we are.
Seeing right now is text spending flat from last year, no new increment, but we're hopeful that you know, the typical waterfall is you have hardware semiconductor spending first, then it trickles down to software, then it trickled downs to services.
So we are optimistic that.
Next year we should see some improvement in software spending, and perhaps the second half of next year into the year after something on the consulting and then the services side.
Do we learn anything from Dell in terms of AI and spend from Salesforce?
Yeah, but that's the same exact thing that they are buying more AI servers, but at the expense of some thing perhaps like a salesforce or for that matter, workday.
Okay, so a woe for salesforce is good for Dell.
Yeah, it's good for all the semiconductor names and the GPO players. People are basically saying, Okay, if I have to go experiment on AI, I gotta find that money somewhere. Net Net, I'm still spending the same amount on technology that I did last year. It's a question of reallocation
of those resources. Another place where seeing an improvement in spending is companies outsourcing a lot more work because that they're saying is I got to find cost savings in order to deploy it into these AI products.
So just stepping back even further for tech spending. What are the likes of IDC saying about tech spending over the next couple three years on RUG?
So the next three is I think almost everybody unanimously believes that it is going to be a good number because frankly speaking, and I've said this a number of times, when you look at it is as a percentage of GDP, tech spending is still a small portion.
When I look at just the US alone, and we.
Have somewhere around enterprise technology spending, you know, excluding smartphones, somewhere around one and a half trillion or so. When you look at healthcare spending, it's not a four trillion.
So we we.
Talk a lot about tech, but as a percentage of total GDP in the US, it's still a small number. And software is even a smaller portion of that. So you know, we are I'm pretty optimistic to bullish that in the long run, I'm happy with, you know, with the tech space in you know, in terms of growth rate, in terms of profitability, in terms of sustainability compared to other sectors.
What else? What else is on your radar right now on our AGAs we're almost done with all the big tech guys.
Yeah.
So now when you look at it, Workday and Salesforce are the first companies to report in the next cycle of earning. So when you look at, you know, results that coming out in July, we're going to head a lot of the same what we have heard from these two companies. Now, the two exceptions from that in our view would could be Microsoft and perhaps even SAP. But other than that, every other you know, software company we anticipate, and even services companies we anticipate, we'll talk about the
same thing. Deal delays elongation of that, and this is partially the reason. You know, if you look at somebody like a service now he's getting really hammered today, or article getting hammered, and then that makes sense because this is a leading indicator that things are not going to be good when results come out come out in July.
Great stuff, I likes the best of course, right, thanks a lot on a rock run a Bloomberg Intelligence a senior technology analyst. Salesforce is getting totally creamed. I mean it's down like twenty percent. It's a raise in like three hundred and seventy points from the now like this serious decliner here today.
And Mark Pennioff. You know he's the before today. The net worth of according to Rich Gover, about ten billion dollars to take a little.
Bit of it, a little bit of a head there.
Today you're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple car Play and Android Auto with the Bloomberg Business. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa playing Bloomberg eleven thirty.
Cole's Way, The stock is down the most on record, huge miss on earnings, cut the guidance, and the street sending this stock down twenty seven percent, the most on records is extraordinary. Let's check in with the Bloomberg Intelligence analyst that covers this stock in this sector. Mary Ross Gilbert, Senior Equity analyst for Retail for Bloomberg Intelligence, joining us from La via zoom So, Mary, thanks so much for
joining us here. Twenty seven percent reduction in this stock price. Here, what does a market not like from the earnings?
Yeah, so we sort of knew going into earnings that they have a wonderful data measure that we use called Bloomberg's Second Measure. And it basically tracks consumer transactions ATM and credit card transactions, and so based on that data, we had a feeling that they might miss by two hundred to three hundred basis points, which they did. Comp sales fell four point four percent. That was below analysts
one point seven percent estimate. And really what was happening there for the company is that they were going against a significant clearance activity in the first quarter of twenty three. Now they knew that going into the quarter, and that's why they expected sales to be flat. But they expected their new category initiatives. This means like Home de Corps of course so Fa, which continues to do really well.
The key was so FORA bringing in all the customers and generating real sales and very profitable sales is the fact that those customers are not buying enough of the adjacent categories. So that's where they sort of came up short.
So they did show that their initiatives are working, but just not enough and it's not across the whole store, and that's what they need to do, and so this is going to take some time for them to really get category mixed throughout the store and really be executing so it just delays this potential turnaround for the company.
Okay, so let me just break that down. So, one, you got tough comps because it was really promotional last year, so that was stressful. But all the stuff that they're doing to entice people to buy stuff also isn't working in the way that they thought. Is that a consumer problem or is that a Coohle's execution problem.
Yeah, so actually I'm going to reword what you just said there because it is working those new categories. So for example, their home seasonal and eight Everyday Decore, those sales were up thirty percent, Impulse items were up sixty percent, women's full price sales were up three percent, gifting of thirty percent. So we're seeing that they're working, but it's just not enough up to offset, you know, the weakness
that they're experiencing. For example, in active wear, even though they're private brand, private brands within active are doing well. They need to have a better mix of some of some national brands in there to really rejuvenate the sales in that category. Also, when they brought in so far As shops, they got rid of jewelry and so they sort of missed out on gifting in the jewelry area,
so they're planning to bring that back. They're also hoping to boost conversion of those so for a shoppers by bringing in more relevant junior brands, and that's going to come later this year, and that includes Aero Coal, Stall, Roxy, Madden World, Quicksilver for example. And then of course they're going to be adding babies shops, which could also help
them later in the year. So we do expect to see some improvement and these categories are working, it's just going to take a lot longer to get the overall mix right, That's what we think is happening.
Mary Again, a twenty seven percent decline in the stock press on a piece of news like this, to me, it calls into question how investors are viewing this management team. I look on the MGMT function on the Bloomberg terminal and I see most of the senior managers are only there less than a couple of years.
So this is a relatively new management team.
Is this Wall Street saying we don't have much confidence in you guys?
It could be temporary, That's the way I look at it, because frankly, Tom Kingsbury, who's the CEO here, he is the one responsible for turning Burlington Stores into the successful, fast growing off price retailer that it is. It's very focused on the low end consumer. So he, I think is the right person and all of the initiatives that he's been doing. We've noticed the changes dramatically since he came on board in the stores. In fact, even the culture of the environment you go in there and you
talk to the salespeople. Year over year, once he came on board, we observed a huge change, a huge lift in the culture where everyone is more excited about the business. So, you know, it's the first quarter. They had tough comparisons, and we'll have to see as more and more of
these initiatives come into play. We think it's really just going to be a delay in the turnaround rather than hey, this is a failure for management, because these things, when you're doing a complete redo of a business, it really takes time to gain traction, especially in an intense segment which they play in.
We also get Nordstrom's gap costco out after the closing bell that that's a pretty random mix. It's going to be interesting to see the macro read for that. What are you going to be paying most attention.
To well, a lot of exciting things happening with Gap, and we're expecting to, you know, hear some pot of positive results coming out of Gap. Nordstrom. I think they're seeing an improvement overall in the business, but most of it is being driven on the rack side, so again that's their off price model and that's really sort of the big story for Nordstrom. But we think the full
line store is seeing some improvement as well. And if you look at other retailers that are really executing well like Abercrombie, which their numbers are out yesterday and just bluep same with urban outfitters with their free people and anthropology brands once again just blew past estimates. So it's really a case where if you're really executing, then you're coming out and head of plan and then of course the shares react accordingly.
So, Mary, what are you hearing from your companies, your contexts. How about the health of the consumer these days?
What are we seeing?
You know, it's a good question. I would say overall, the consumer is very resilient, so of course, you know, within off price or value, the low end consumer is still being challenged with inflation. But the good news is they're employed, and so being employed I think is one
of the biggest factors out there. And of course we just saw so that all bodes well for retail generally, but again it's really going to be segmented, with those earning a higher income being able to spend more and those with lower income being even more discerning.
When I find so interesting and you bought up Abercrombie,
is it and we're talking to the Red Robin CEO. Also, if you know your customer and I want to say niche, because like Gap is a niche, but like you know who you're designing for and that's the business that you're doing, and you're not going to try and chase all the things you can actually outperform in this market across the board, whether you're super high end to take a look at LVMH, whether you're looking at Swiss Watches, or whether you're looking
at Gap, or whether you're looking say ad best Buy, and I find that to be a really striking difference maybe than what we've seen before.
I would agree with you. So if Abercrombie, you raised a good point, they're sort of poor millennial customer with the Abercrombi brand will continuing to introduce new categories. So for example, they brought out, you know, the wedding shop and that was sort of an add on to the best Dressed Guests, and it was just so well received because they were listening to their customer and they're giving
them more and more of what that customer wants. And it's also extending the age range sort of beyond the millennial poor consumer that they go after, and so that's also helping to bring in new customers. And then they're starting to look at the adjacent categories and buying there. So they're really showing how they can continue to execute against very difficult comparisons where they're already showing double digit lifts in comp sales. So that's a sign of great execution right there.
All right, Mary, thanks so much for joining us.
Mary Ross Gilbert, she's a senior Ecadannaals covering the retail space for Bloomberg Intelligence, joining us from Los Angeles via zoom Here looking at Coles again, that's stock down twenty five percent plus on some week numbers.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Apple Card Playing Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
I'm Alex the alongside Paul Sweeny. This is Bloomberg Intelligence Radio. We bring you all the top news and economics and finance through our lens of Bloomberg Intelligence analysts. They cover two thousand companies and one hundred and thirty industries all around the world. We're also taking a look here at some stocks really on the move after earnings, and one is Red Robin Gourmet Bergers. That stock is up a
whopping twenty percent. If you look inside the numbers, you're looking to adjusted loss per share at eighty cents, revenue down seven point one percent year on year, comm sales down six point five percent, average check is a little higher by about three percent, and mark operating margin was eleven percent. But the street loves it. Let's get a read on why. GJ. Hart is president's CEO and director of Red Robin Gormet Berger's and he joins us now DJ great to get
your perspective. What do you think the street is loving so much about these earnings when the numbers and the comps feel a little weak on the numbers.
Well, I think what they like is our strategic plan to move this company forward. We call it the North Star Plan. And we reported that in the first five weeks of the second quarter that our comps that turned positive, and I think that that surprised them a bit because I think they all had us slightly negative. And I think we're making great progress. Our teams have done amazing work and we're really proud of where we are today. And we sequentially really proved in the first quarter in
spite of a very tough start. So we feel great about where we're going. And I think they see that, and it's great to see.
GJ talk to us about your consumer, your customer, Who is your customer and kind What are you seeing from your customer's behavior these days?
Sure, well, our customer is basically Middle America and families and all over the United States. And what we're seeing, interestingly enough, is in our premium burgers, in our premium gourmet burgers that we promote, we're seeing a real high take rate.
We're also seeing that on the value in the.
Tavern burgers are actually having a high take grade as well. And so what we are seeing is some trade down from some of our guests, but then it's still surprising to see that our gourmet lines are still doing as well as they are. The other indicator is that things like add ons, appetizers, desserts, those take grates are about the same. So net we're feeling relatively about the consumer when you.
Take a look at who is coming through your doors. Has that changed at all as the economic environment has become more challenging.
Well, you know, put aside to the economy for a minute. Our comeback plan in the North Star plan is all about engagement with our guests, bringing back fun value and really taking this ic, iconic brand back to where it was. And so we're seeing a lot of laps guests come back in. We're seeing a lot of new guests. Our loyalty platform that we just relaunched, we're seeing numbers like
we've never seen before in terms of sign up. So we're getting a good base of people and we're doing exactly what we wanted to do is just send a message, Hey, come back into Red Robin, give us a try, and I think you'll be pleased. And we're seeing that so that feels great.
Inflation, how does that impact your business to what extent can you pass along to your customer base.
How are you guys dealing with that?
So, as we've said, inflation for us is sort of in that three to five percent for the for the year, and we're staying true to that. So certainly it's still there in terms of pricing power. You know, we've lagged others in the industry over the last couple of years, but we still feel like, you know, pricing is going to be tough, and we have a great value compared to pretty much everybody out there with a seventeen dollars check average in a full service experience. So you know,
again we're positioned well. We are trying to screen value with our thirty bottomless sides and our tavern Berger lineup, and I think that's starting to resonate with the guests that were everyday value and hey, you can come in and have a lot.
Of fun at Red Route.
What about labor.
Labor is always a challenge right around the around the United States.
It's we're seeing increases all over the place.
But you know, the good news is there's more labor available, So our our team member base is strong at this point, and certainly it's a challenge. We have to be as efficient as possible. We've invested a lot back into the
overall experience by putting labor back into the restaurants. Management teams are appropriate now and so yes, it's going to be an ongoing challenge, but we're not alone in that and we're going to continue to stay the course because we believe long term it's the right thing to do for the brand, to bring it back to the iconic brand and it's been for almost fifty years.
So GJ kind of on that front, give us a sense of the history of Red Robin, you know, kind of where, how did it get started, what's the where do you guys kind of find yourself in the competitive landscape.
And where do you need to get to.
Sure well, Red Robin started up in the state of Washington outside of Seattle, and it really started as a tavern and it's and it's humble beginnings have gone to over five hundred restaurants all over the United States. We have fit fit a really nice niche within casual dining. We are family friendly, we are a bunch of fun in the restaurant.
We have great value, great.
Hospitality, and great food and that niche sort of has been one that when Red Robin really started to go a little bit astray, that no one's really filled that gap. So we're really believed that debt positioning still holds true today. We just need to bring things relevant. So whether it's the food offerings or the hospitality or the fun environment, we need to bring it relevant, which is what we're doing, which is why we're investing so much into this plan.
But if we do that well, we think there's plenty of room for us to continue to grow and we're going to continue to work hard to make that happen.
And your resume is quite long, right, you're the former CEO of California Pizza Kitchen Texas Roadhouse. I love KPC no CPKA.
Well, if you're in Monterey, California, there ain't no pizza and so CPK is it. So it's not bad, the kids are happy, it's all good.
No, it's good. And the barbecue chicken part of it it was really good too. I mean, yeah, I do.
I'm sorry.
You've done a lot and you've seen a lot, and you've operated these kind of restaurants through many different environments. Can you just give me your sort of career perspective on what you see now and trends developing and how things have changed.
Well, sure, I'll be happy to look.
I think at the end of the day, in this restaurant business, you have to stay the course and really know who you are and who you are trying to be. And as long as you do that day in and debt execute at a very high level.
You're going to be successful. It's going to ebb and flow.
The ups and downs are going to be there, and you need to stay true to who you want to be. And I think that's that's the big opportunity for us here. You know, in spite of a tougher economic backdrop, if you will, we're starting to see good success and great momentum for a plan that we put in place. So what I've seen over the years, you know, Texas Roadhouse, we grew, it was a real high growth company.
Still loved the company.
CPK was a turnaround and we had a lot of great success there as well. But again, you know, it's really staying true to who you are and making sure you align every single team member in the organization around your mission, vision and values.
Where it is you want to get to.
And so as long as you do that, stay the course, and you provide the leadership that's steadfast in that commitment, you'll be okay. And that's what my experience of almost forty years now gosh, getting old, you know, that's what it tells me.
So, GJA, talk to us about the footprint for Red Robin. How many units do you have now? How many restaurants have now? And maybe where do you want to go?
Sure, well, we have five hundred and ten restaurants and you know, look at this point, we like to say, first things first, we need to get this North Star plan in place and start to have growth within our existing restaurant base. It's a little too early to talk about growth.
Again. There is plenty of white space in America.
For more Red Robins, but we need to do first things first, and that's what we're doing. And you know, it's a couple of years away in terms of thinking about growth.
Really interesting stuff. When you're gonna get him in New York. I've never been to one. Are you thinking about it?
Well, you probably in Manhattan right so, no, we're not thinking about Manhattan right now, but we certainly would love to host you in.
Any one of our restaurants.
I know there's one.
I know something you said, there's one field trip there than John Tucker's Beach Club. Of course, make the rounds and this all makes GJ. Thanks a lot. We really appreciate it, really good perspective. Congrats on the good outlook and the stock pop today. J. J. Hart, President and
CEO and director of Red Robin Gourmet Burgers. I mean, you know, we've been eating out a lot more and as the weather got nicer and a man, you see that on your credit card bill, so I can definitely see how sort of a different kind of place would be really helpful to go to and still be able to have fun and eat good food and also not pay three hundred dollars for three people.
But you had a glass of prosecco.
Yeah, but just one androun like Panda and back like before. It's very different.
Where did you do that was three hundred dollars for three people?
Brooklyn?
Really?
Yes?
And one of those three people is nine and a half, so anyway a half people, yeah, exactly two and a half people.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Applecar Play and Android Auto with a Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just say Alexa, Play Bloomberg eleven thirty.
Him Alex see you alongside Paul Sweeney. Not only do we cover all the news and finance with our great analysts of Bloomberg Intelligence, we also tap our huge amount of reporters over at Bloomberg News and every day they have a Big Take, and it really delves into the topics that we're talking about every day and is an amazing deep dive to get a true sense of what's
going on out there. And today's big takes about none other an Elon Musk, and it talks about Elon's orbit, that Musk's galaxy of companies is basically under threat as Tesla continues to spiral, and it takes a look at the people in his orbit that try and keep things running, even though many accuse him of being distracted by all of his ventures. One of the writers is Kurt Wagner, Bloomberg Tech reporter, and he joins us. Now, Kurt, does walk us through what you learned in this piece.
I mean a big part of what you know, working for Elon is all about, is sort of working for Elon everywhere he needs you, right, So you might be employed technically by Tesla, but you might show up on you know, a SpaceX project or an X project. And I think, you know, not only are the people that he works with sort of hovering around and all these various roles, but I think his companies are becoming closer
and closer together. And that's why it's so important that you know, when Tesla is struggling, it has this trickle effect because that's where he gets his wealth to fund XAI, to to you know, deal with X, to deal with SpaceX. And so, you know, what we wanted to sort of do is show people that all of these different companies and all the people who work them are interconnected. And we try to do that with a pretty cool visual graphic that folks can see on the on the website today.
Kurt, what is the musconomy to find that?
Yeah, it's a term that represents or reflects these six different businesses that he's running at any given time, and again sort of this idea that they all work together. They you know, in X's case, the data from X, which used to be called Twitter, is now sort of powering XAI his startup.
Right.
The money from Tesla has historically been used to help fund SpaceX and his purchase of X. And again you see the musconomy as this collection of businesses that Elon runs and how they are all intertwined with one another.
Do the people in his orbit do they like this? Like that to me sounds terrible, Like I like predictability, which I know as funny as I work in news. I like predictability. I like to know what I'm doing. I do not want to be pulled in seventeen thousand directions. Do people in his orbit like that?
Well?
I think the people at the very you know, center of this universe, the people who are closest to Elon. Whether they like it or not, it's sort of a necessity, right, because that's what it takes to be close to that center of power. And so we've seen, for example, his business manager Jared Birchall shows up pretty much across all these different companies. His lawyer, Alex Spiro shows up across all of these companies. So if you want to be at the center of this universe, you have to be
willing to go where Elon goes. And as we know, he not only has these six companies, but he's doing a million other things as well. And so whether they like it or not, I'm not sure if it really matters, because that's just what it takes to work for Elon.
Musk and Kurt the center at all.
As you mentioned, from an economic financial perspective, is Tesla stocks off twenty eight percent year to date? Is that exerting any pressure on musconomy.
Well, it is because we've started to hear rumblings that Tesla's board is, you know, on happy with Elon being distracted with these other companies, right, And so I think when things are going well, when the stock is up, when business is booming, you know, the idea of him spending you know, several hours a day over at Twitter or now X is not as big of a deal, right, But when suddenly the stock is down, when business is struggling, those hours feel like a huge distraction and it feels
like he's not plugged into the money making part of this machine, which is Tesla. And so I think the business there is a huge indicator of what he's able to do with his time. Elsewhere, and that's what we're seeing right now. I think that tension is as Tesla's business is struggling, is creating pressure on him to focus more of his time at the carmaker.
How do they all? How do all the businesses though intersect? Because from a broad look they don't. But then if you dive a little deeper, like they do, like X you can use all that stuff for large language models for his AI stuff, and the AI stuff goes into the car stuff, and the car stuff, I guess goes into the rocket ship stuff.
Yeah, I mean you kind of hit on it.
Like the connective tissue between these companies can be somewhat small. In X's case, as you pointed out, the data there is being used to train a chatbot called Grock within XAI. We know that, for example, the corporate plane, like small things, the corporate plane that Elon uses that Tesla is the
same one that's used at SpaceX. We know that they share certain employees, so you know, I mentioned Jared Burchell, his business manager, Alex Biro, his lawyer, Like these are the types of connective things that bring these companies together. Is the people and and sort of you know, the smaller parts of their business that are intertwined. And I feel like, again I already talked about it, but Tesla
is sort of the engine behind this whole thing. If Tesla is humming and doing well, it kind of enables everything else to grow too.
How about Twitter?
You bought that for forty four billion dollars. Kurt and a lot of analysts says the value of Twitter's declined dramatically as advertisers have Is there any pushback from anybody or folks just saying, hey, it was his money, you can do.
With it what he wants.
Yeah. I mean, I do think it poses a challenge because of this distraction I was talking about with Elon's time, right, I think, especially if you're a Tesla investor, you have to be scratching your head and saying, what are you doing? You know, why are you spending money on this, on this or excuse me, spending time on this money losing business when you could be sort of you know, making money for shareholders over here. And I think it's, you know,
becoming a bit of a problem. I think what will be interesting is to see whether x sort of gets folded into x AI at some point, I could see those two companies sort of emerging so that you know, again X provides the data for these large language models, but it sort of gives him some cover to spend time in X because now it's part of the AI business, which is much more exciting, I think, for people than the free speech business, which hasn't been very lucrative for him.
The free speech business. Wo's in the free speech business? Like, what is that mental wires?
That is Elon?
Elon is the is in the free speech business.
I guess.
So what do you think the biggest question then is going in your reporting? What emerges the biggest problem or the biggest question?
Yeah, I think really it comes down to kind of this. We haven't really talked much about this yet, but Elon's pay package at Tesla is sort of up for debate.
Right.
You may remember he was supposed to be paid I believe it was fifty six billion dollars and that pay package was I believe set up in twenty eighteen. It's been challenged in court and a judge basically said this isn't a fair compensation, and Elon is fighting this in court. But it's a huge deal, not only because it's you know, his own net worth, but because that money is then
used to fund so many of these other projects. So if he's not able to secure this this pay package that he thought he had, it impacts the loans that he takes out and impacts his liquidity to be able to use on these other companies. And I do wonder if he starts to lose a lot of his net worth, his value, if that's going to have an impact on Xai, Twitter, SpaceX and others.
All Right, thanks so much, Kret. We really appreciate it's a great read. You guys. You should definitely check it out. Kurt Wagner, Bloomberg type reporter standing by there for us.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecard Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg eleven thirty.
Let's check in on these markets. I get a little bit of a sell off here today. Anna Rothbund joins us. She is the chief investment Officer SEBIZ Investment Advisory Services, joining us from Cleveland Ohio via zoom here on a You know, it seems like we've kind of cycled through these earnings. Although we've got some retailers this week, the earnings framework seems pretty solid out there for the market. I think we've got a FED that's going to be
on the margin cutting rates going forward. Does that set us up for pretty constructive outlook here?
For risk assets? How do you guys think about it?
Well, good morning. The valuations are still high.
I mean from an entry point, it isn't that attractive. I mean, it's been exciting, and if you've been holding stocks, it has been exciting. But if you're trying to put cash to work, it is kind of a nervous environment. So earnings great, is about six percent year over year? Guidance not so great, And underlying that guidance really is the economic activity. The GDP number came in this morning.
Forget the first quarter, because if we want to compare it to earnings, which is year over year, you have to compare the GDP year over year, and that number is two point nine percent better than one point three but two point nine percent GDP growth to six percent earnings growth year over year, that basically tells you the stock market isn't the economy, but that is the economic backdrop, and those are the fundamentals that the companies have to
work with support guidance. Weaker growth prospects, these don't really excite us at this point, especially when the valuations are high.
You had Bill Dudley writing a column for Bloomberg today that you know, it was fun. I was talking about the neutral rate. Maybe the neutral rate is a lot higher. So it's not sort of higher for longer, it's higher like forever. Now we're going to be in a totally different kind of normalized environment. What do you think about that?
Well, so I do think that neutral rate is probably higher. It doesn't mean that the rate right now isn't restrictive enough. Right so, right now, I do think that it is restrictive because the rate sensitive areas of the economy and the markets they have responded.
It's the not so rate sensitive areas that have been really booming.
If you think about the sixty six percent of Americans that have that own home, most of which grand majority of which have locked in low rates. That's not rate sensitive, right So in thirty four percent of Americans who are renting their rents are super high because there are that many homes out there for them to buy, so the rent keeps going up.
So from that.
Perspective, the majority of Americans actually are not rate sensitive, right, So to me, raising rates from this point on, or keeping rates super high for indefinitely isn't really going to help us with the inflation, bringing inflation down to what I think.
Is an arbitrary two percent, because it's.
Not going to affect those people who have low rates, right. So I think thinking about neutral where the neutral rate might might be, which, by the way, nobody really knows, and thinking that the air on the side of higher forever or higher indefinitely, I think is a little bit too restrictive.
I do think that we need to be on the path for normalization.
So on a given it sounds a little bit more of a conservative bent for you kind of how do you guys think about asset allocation these days?
A little bit more defensive?
Yeah, I mean, so we're long term investors and we're diversified investors, and for.
A lot of us, it's it hasn't been easy for a while now. For about two years.
Stocks and bonds have not been correlated. I mean, they have been highly correlated. Maybe not today because of tech, but the correlation has been really high. And that environment diversified portfolios are really difficult to manage. So a lot of our investors have gone into alternative investments. So here we're talking about absolute return type of strategies like hedge funds.
Hedge funds run the gamut, so you really have to be not careful, but very selective and.
What you choose, and certainly managers matter, and a lot of people have gone into private credit and private equity.
But I will remind people.
That despite the fact that you don't experience that day to day intra day volatility in those instruments because they are not marked to market more frequently as frequently as the public markets, the underlying exposure to the economy is exactly the same. So you're either going to feel it now or you're going to feel it later.
So you really have to be choosy.
But certainly diversifying away from stocks and bonds, we've seen a lot of that happening.
What should your allocation be to bonds? The narrative of the last couple of days is higher rates herting stocks, and then today it's like, Okay, maybe we've seen the run up and yields, go ahead and buy some bonds, but stocks are still training heavy. What do you make all that?
Yeah, so if you're investing in bonds, certainly bonds.
If you lose bonds and stocks, stocks are going to lose more, right, I mean, it's just a more volatile asset class and it's lower.
On the capstack. Right.
If you own bonds, yes, we're in a very difficult environment.
But you have to own it for income. If you own it for total.
Return, or if you own it your price sensitive, it's not going to be a fun ride for you.
So if you're.
Owning it for income, and if let's say credit for example, investment, great credit spreads are super tight, but underneath that the total income is very high because underneath that the risk free rate is very high.
That's the treasury rate.
So if you own it for income, then I think it's it's it could be lucrative for you if you're owning it for income. Now with stocks, earlier, I said valuations are high, stocks are irrational. You're just going to
end You're going to encounter irrationality in the markets. The best practice here really is to rebalance regularly, so you're taking advantage of the irrationality of the stock market when it goes up, take the gains and rebalance your portfolio, and if you have that discipline, over the long run, you can have much better risk adjusted returns.
So, you know, a lot of folks are kind of feeling like if they're long tech, they're in a good place because tech is going to lead this market. Do you share that view or do you feel like you need to be more diversifiedquities.
We're very diversified, but we do have.
We do have exposure to tech. I think that tech is exciting.
I mean there's a little bit of push toward AI and AI exuberance and a little bit of it being punished today.
But I think AI is a real deal. Right now we have proof of concept.
We have to see how it actually manifests itself in different areas of the economy. We're not there yet, but it is going to be a real deal. And a lot of these companies, especially in the S and P five hundred and large companies, they're not betting.
The farm on AI.
They have an actual business with a lot of cash flow and frankly, very little debt. So when they're actually incubating AI and see how they can be incorporated into the rest of the business. I think that is actually a worthy venture and if you're a long term investors, it actually will pay off to hold onto tech.
All right, thank you so much. We really appreciate Anna. Thank you Anna Rathburn see iow of it cebiz Investment Advisory Services giving us her perspective on the market. I do not envy being a money manager at this time.
This is the Bloomberg Intelligence podcast, available on apples, Spotify, and anywhere else you get your podcasts. Listen live each weekday ten am to noon Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.