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All right, I've been following the railroad stocks, folks. That's where I started my career, covering the railroad stocks. Here's a headline I never thought i'd see, and that's like nineteen eighty six Union Pacific Northern Southern.
In advanced talks. I never thought i'd see that.
Lee Klascow, Senior transport analyst for Bloomberg Intelligence.
Lee putting a.
West western railroad Union Pacific together with a eastern railroad at Norfolk Southern, creating a east to west true railroad.
Can that happen? Will the regulators allow that to happen?
I mean it's possible, given where the surface transport to rules are now as it relates to large acquisitions, you know, we give it a relatively low probability, maybe twenty five thirty five percent chance of happening. The STV is actually in August reviewing some of its rules to streamline some of the processes that it deals with.
But you know, it's not impossible.
But again, you know, we think that the probability is below fifty percent. If it were to happen, it would create the first transcon railroad, and that.
Could be good.
It could be good because a railcar would be touched less because it would wouldn't have to maybe be interchanged with other railroads, and that does you know, the more time a railcar is touched, the more times something could go wrong, and so that would would would probably reduce I would have to say it probably could reduce some accidents. It could also reduce car for the railroads in general.
So it could be a good thing.
You know, shippers might have an issue with it because they might be afraid, you know, even though that Norfolk, Southern Union, Pacific don't necessarily compete, you know, against each other directly, you know, they might be concerned that, you know, losing one of the large Class one rails would result in less competition. And the railroads for the STB hurdle have to prove that this deal is in the public interest.
So you know, you're going to have a lot of constituency and stakeholders voice their opinions both for the deal and against the deal. And again that's all assuming that these two parties can come to an agreement. You know, we put out a note last week where we thought, you know, the enterprise value for that transaction could be in the high eighty eighty billion, So we'll see, you know, what kind of deal the two can hammer out.
All right, But you're kind of going along the track that I was. I was thinking of LA track.
I get it.
I got.
Little railroad humor, railroad humor.
Can you go more into the regulations because you started talking about that, But what are some more of those sticking points that could cause this maybe not to go through?
Well, you know, we've seen a couple large mergers. The last large one was Canadian Pacific and Kansas City Southern. Kansas City Southern was the smallest Class one railroad and they were exempt from these new rules that went to an effect in two thousand and one. And the rules kind of came about because Burlington Northern and Canadian National were looking to merge, and so even though they had a lower bar, it took quite some time for the deal to close.
I think it was about eighteen months.
You know, we suspect that under the current rules, a deal between Union Pacific and Norfolk Southern could take about two years to get STP approval, So it's going to be a long process.
So even if the.
Two come out tomorrow and say hey, we're in a deal and the shareholders approve it, you know, this could be two years until we see an actual trans con railroad.
So Lee, I'm going to go get my floppy disc out circle nineteen eighty eight. I got my Union Pacific and my Norfolk Southern earnings models there. I'm going to put them together like they're merging. What cost do I take out? What are the synergies do you think? What's the reason for doing this deal? So it's pretty interesting.
So, you know, Norfolk Southern went through its own cost cutting process as it started to embrace precision scheduling railroading. For those that aren't familiar with it, it's pretty much six sigma for the rail industry. So it's just about sweating assets and they laid off people and so you know, it's not like there's a lot of fat there.
But you know, what I suspect is that.
They maybe you know, they'll maybe Lean laying off some people in corporate, you know, because you don't need two CEOs, you don't need two CFOs, you don't need necessarily as many salespeople and accountants. So there's the there's that aspect of it. And also, you know, if they are able to provide a lower cost service, they might be able to even though they can raise rates, provided at a
lower costs to shippers. So I think that's going to be the big What can they do for shippers is can they lower the cost curve because of the fact that you know, again the railcar is being touched less, and are they able to pass that on to shippers. I think if they can make a case for that, they'll have an easier time of getting getting a deal done.
All right, Lean the last like twenty seconds. Second quarter results anything stand out.
Pacifics did really well. Their network is operating well. You know, they had some issues during the pandemic that seems well behind it. You know, their goal is to have the lowest operating ratio, which is an inverse to an EBIT margin, to lower the better, and it seems like they're going.
To deliver on that.
Thanks so much for joining us, really appreciate it.
This could be a really cool time in the railroad industry if you can get a East West railroad for the first time in the United States. Lead classical senior transport antls for Bloomberg Intelligence again the news for US railroad geeks, Union, Pacific, Norfolk Southern in advanced talks.
How did they?
I mean, if you're in advanced talks, you must have some layers somewhere telling you, yeah, we can pass this thing.
We can get this past the regulators.
I don't know that, but two years oh yeah, oh boy, this is These are railroad people. They're not like the fastest out there.
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You're listening to Bloomberg Intelligence. I'm Lise Matteo alongside Paul Sweeney, and let's get to Tesla right. It posted one of its worst quarters in years, revenue falling twelve percent, and there could be even more tough times ahead. So let's find out more. Dig into this with Steve Manny's Bloomberg Intelligence Global Autos and Industrials Research Matter.
See why don't you start?
I we're telling us what the biggest portion of that revenue drop? Where did it come from?
Well, the revenue drop drop was mainly from you know, weaker sales in Europe, you know, still the model y ramping up. I think on the call with I think the reason why the stock is down the most is really the outlook. You know, nothing, nothing, you know, earth shattering from the outlook. Uh, you know, and they also kind of be kind of they were kind of cautious about the rest of the year and maybe into the twenty twenty.
Six Steve, what do we know about the the position of the.
Tesla brand right now?
And is it something that can be to the extent it's been harmed, say in Europe where they have seen some weakness, can it be repaired.
What's the feeling.
Uh, it's it's tough. It's gonna take time. I think it's It would be really helpful if Elon must uh kind of walk, uh, stay away from the politics for the moments and really focus on the business and marketing its vehicles. You know, it is a nice vehicle model. Why the man has picked back up after the changeover
earlier this year. The volume is not there yet. But the issue here is, you know, they've just launched a new vehicle, but the seventy five hundred tax credit in the US is going away, So the trajectory, the growth trajectory for that new vehicle and gross margin has been
you know, has been derailed. And look, we're actually looking for twenty twenty five deliveries to be you know, about five percent lower than what consensus is saying at one point five to seven sou and we're probably going to see you know, the revision on consensus deliveries in twenty twenty six by another five percent. So it's going to
be some tough time for the automaker. I mean, the one one couple of bright spot that could offset it's gonna be you know, the extended version of the Model Y in China, you know, no longer vehicles a lot more space in the back seat does help sales over there. And there's you know, there's a new cheaper vehicle that they're supposed to launch in the second half, so hopefully that could offset. But you know, execution is key. Execution is key.
Yeah, people were waiting to hear more about that affordable vehicle. So speaking of which is Tesla? Is it an auto business? Is it an AI robotics company? Is it a tech company?
Like?
What is Tesla? And could we possibly see it maybe even break up like some of these bigger companies have.
Oh, I think as a combination. They I don't think they're going to break that up. You know, you know, Elon Musk and Tesla is very focused on physical AI, you know, very different than the ll ms that you hear from Google. You know, they're actually you know, building robots, robots on wheels and humanoid robots with optimists. So it's it's quite different.
Uh.
You know, for them to actually build out physical AI, they knew they do need the hardware they need to continue to build cars, right, and cars is a critical component of their success, especially even in early days of autonomy. You know, there's still it's still a cash generator for them, you know, even though you know, free cash flow has dropped, but it's still an important business for them to generate cash invest in in physical AI. So I don't see
that breaking apart. It's you know, it's a critical component of their entire business.
I don't know, Steve, I'm putting on my banker hat I said, I spin out that car company.
Who cares.
Let's focus on all the other stuff that he seems to be all fired up about.
But Steve talked to us about tariffs.
Here.
Looks like one of the key aspects of the Japan deal, as we know, is maybe the autos coming in from Japan will have only a fifteen percent tariff on that. What did the US automakers think about that?
Well, I think it's good news. You can see, you know, GM, when they announced their earnings it was down I think eight nine percent, and then it kind of recover a lot of that yesterday on the back of the announcement that US and Japan had come to terms on a trade deal, and what it means is fifteen percent at least fifteen percent tariff. And look, GM has a lot of you know, some of the most popular vehicles coming from Korea, and the hopes is that, you know, Korea
and US can can make the same deal. But look, it's it's far from over.
Okay.
What Tesla talked about yesterday and how the tariffs are going to impact their sales is not the impact not just on them, it's for the whole US auto industry. Don't forget right, next year the USMS, the US, Mexico and Canada trade free trade Agreement comes up for renegotiation, UH in twenty twenty six, and uh, you know, the automakers here depend on that trade agreement significantly to to
to to lower costs. So I wouldn't be surprised if Trump comes in and wants to kind of tear that apart and UH renegratation, you renegotiate the whole thing.
UH.
That that that's there's.
A lot uncertainty around that, and we don't have a lot of visibility. So so the whole tariff story is not over yet.
So Stephen must go so voice some concerns on the call about the size of his stake in the company, suggesting it should be larger. I mean, how did investors take that statement?
Well, you know, there's been a lot of back and forth between uh Tesla and the courts on you know, Elon must pay package. Essentially, he's he's not getting paid, you know, for what he's doing for the company, you know, as much as he deserves. So I think there's a I mean, there's a point, there's a strong argument for him getting paid.
But we'll see.
There's a shareholder meeting coming up and I think I think the shareholders will revote on this issue, and uh, you know, hopefully he gets he gets paid for his contribution for the company.
All right, Steve, thanks so much. Appreciate that.
Steve Man Global Autos Industrials Research Channels for Bloomberg Intelligence joining us from Princeton.
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at ten am Eastern on Applecarplay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
All right, I'm looking at some airline earnings here today and stocks are not reacting well. I'm looking at America Airlines that stock is trading down, love which is Southwest that is also trading down. There definitely some concerns out there about the consumer and flights and demand and all that kind of stuff on the airline front. See Philip joins his deputy team leader for Global Aviation sid What are you seeing from American and south West?
Is their team out there?
The team seems to be that there isn't as much bullishness about the recovery that United Airlines and Delta air Lines pointed out last week, So they're sort of more cautious about the outlook, and they're talking about how they're still like they're still having to discount, they're still having to sort of offer incentives, which is crazy in the
sort of the busy summer season. Summers typically when airlines tend to make most of their money, they're very rarely, if ever discounts on travel, and so it does so seem to be pointing towards a sort of consumer recovery still being in the holding pattern rather than sort of out there and everyone sort of back to spending as much.
Can you talk about the difference with American being more exposed to the domestic.
Market, So American typically has a lot of flights in the US, I mean, they have much larger presence in the US versus Delta and United, which have more international offerings. And also, I mean we heard from American CEO saying that business travel isn't yet backs as much as they expected it to be. And that's in contrast to what Ed Bastian of Delta talked about last week where he said business travel is beginning to take off again. So we're still we're seen contrasting images from the sort of
American and Southwest. I mean, Southwest is a leisure carrier, and they're sort of in the midst of adding more fees. They're adding more in terms of offering basic economy, they're offering check they're starting discharge for check baggage, They've started to sell seats, and so they're in a bit of
a different situation. But American Airlines, I mean, their bread and butter is flying people around the Americas, and that is sort of still a big question mark as to where the recovery is at the moment and whether it'll hold up, especially the green shoots that they've been talking about.
Southwest Airlines, doctor uh seeing some red here at down eleven percent. Here symbol is luv Love for love Field, which was their main airport when they started Southwest they called out a billion dollars from terror fallout.
Where did that number come from? What's that represented?
So they offered a one point seven billion e bit dug it at the start of the year. That's what they expected to make in twenty twenty five. And now they've sort of they reinstated a estimate for the year. They expect between six hundred and eight hundred million in EBIT and they're saying that the decline in that estimate that they had from the start of the year to now, that's the impact of the macro conditions.
And so because I.
Can I'm trying to think terraffs, I guess terrafune repair parts or something like that, or is it just the uncertainly created by teriffs they're describing that.
Exactly that they're talking about the macro environment and buying that.
Do you think, uh, they.
Are to something. I mean, there has been there has been a slump in travel. I mean the immediately after the sort of the tariffs who announced and the whole shade wars and everything else, people did started start pulling back on spending. People stopped buying holidays because they sort
of are more concerned about their economic certainty. And that seems to be the STrenD that continuing at the moment, where people are still not quite sure if they're going to have the money that they need to spend on holidays. And that's really where Southwest Allianes is sort of seeing a big hole in its finances because they need people to go on holiday in order to be able to actually make money.
Yeah, no kidding.
So did they see I'm kind of going through the story. I didn't see anything about them gaining passengers from all those air traffic control issues over with United stub over at Newark. Was there anything that they talked about.
They didn't talk about Newark.
And I mean, obviously United Airlines had a big impact from the Newark fallout, but typically given the fact that Newark's a big international hub for United Airlines and Southwest Allianes typically flies within the US and within the Americas, that business might have gone on to other carriers who operate from Newark as well. New York Airports.
Yeah, I've been finding out of Newark my entire life. And I'll tell you what. It was a dumblem.
But Terminal A that's nice. That renovation is awesome.
I mean, and if they can do to the other terminals what they did to Terminal A, then we're then we got something there. So I'll stick up for Newark Airport at EWR anytime. More or less, it's been generally okay, although they tend to when you land. You tended to sit on the tarmac waiting for a gate. That really bothers me now and I let everybody know about it, all right, Sid, thanks so much for joining U, said Philip, deputy team leader for a global abitation here at Bloomberg News.
Joining us live here in our Bloomberg Interact Approper Studio.
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Least Teo Paul Sweeney live here in our Bloomberg Active Brokeer Studio. Stream live on YouTube as well. Alphabet. I think that's Google. I can't remember. They report us some numbers last night after close. I thought they were really good. Stocks up a couple of percent. Some people are bummed because they took up their CAPEX number a lot. I view that as a positive. I don't know, because I think they're spending money to make money. It's one of
those things, Mandy saying. Joints is here. He covers all the technology stuff for Bloomberg Intelligence. Mandy hope should take away from the Google results.
I mean the fact that they are able to grow their search business double digit at that kind of run rate two hundred ten billion dollar plus. Like, think of how many incremental dollars they added just by virtue of that eleven percent growth in the two hundred ten billion dollar business. And that is where you know, the real strength lies with a company like alphabet They are overlaying
Gemini across their family apps. AI overviews is actually driving ten percent more queries and aioverviews is now used by two billion monthly active users. So Google Search has five billion monthly active users. Imagine aioverviews being used by two billion monthly active users.
So they got the UI part right.
Gemini as a standalone app has got four hundred and fifty million monthly active users. Imagine if everyone started paying a twenty dollars subscription like chatchipt, this could become one hundred billion dollar business. In addition to search and then YouTube I'm not even talking about you know.
All the strengthen YouTube and way more. So this is a powerhouse.
When it comes to four hundred billion dollar run rate, they will be at the end of the year.
So can you explain something to me, because when the shares dropped because they said capex was a little bit more, well ten billion dollars more than expected a little bit, how is that different for an alphabet versus if metaphor to say that?
So that's that's great.
So look, let's frame the capex eighty five billion dollars at potentially a four hundred billion dollar revenue run rate by the end of the year. That's like a twenty five percent CAPEX intensity. Meta on the other hand, is already at a forty percent CAPEX intensity because their CAPEX will be seventy billion at a hundred of.
Close to two hundred billion.
So that just goes to show Alphabet is still far lower than their peer group when it comes to the capex intensity. I mean, that's just the scale of the business that they are operating. And look, I do think the ROI on their capex is higher because Gemini's cost is much lower than all the other large ANGLID models,
including Microsoft, including Meta. They do inferencing at a lower cost, and that's the advantage of having your own chip, having your own large ANGLID model that Microsoft or Meta don't have because they rely on in video chips, whereas Google does most of their inferencing from the TPU chip. So I think that just vertical integration they have Alphabet has gives them such a big cost advantage when it comes to running the AI infrastructure.
Where's the company on the various regulatory issues outstanding? What are the one or two or three ones that we've really got to focus on in what's the market telling us?
So that's the biggest risk with Alphabet.
That has been the biggest drag on their multiple and it remains because we have a catalyst next month where Judge Meta is going to make a decision on the remedies and you know, especially that Chrome split, that's still
an overhang. Now the base case is there won't be any Chrome divestiture, but we still need to learn about what are the remedies that may come about in terms of you know, proposed by the judge, And that is where if they're asked to you know, share search data or some other type of remedy, that's going to hurt their position.
I think that is the big overweight.
This one could be this one.
If you have a firm view on that, you buy the stock here and there there's a ton in this thing. Given when I just saw last night on the Earnings, Are people doing that? Are people making bets here?
Think?
I bit you they have to be.
I mean, the narrative is still no net so negative.
Everyone is fixated on oh Chat, ChiPT my Verse, Bobby Action Rod on billions.
Would somehow figure out where this judge is going to rule, make a bet one way or the other. You know, there's the Bobby Action Rods of the world out.
I agree.
I think if you can figure out decisively what the judge's verdict is going to be the multiple wise, you could see easily a twenty five to thirty percent multiple expansion. Well, and numbers will go up for sure after print last night, but multiple expansion is like twenty five to thirty percent just on and when is that ruling that's coming up in August September time frame.
Yeah, to keep up with these things, I do it.
That's what.
Maggieach got like a huge team, global team behind him. I mean, all he does is come on radio TV and they work. He's got everything.
He's got everything.
So you mentioned YouTube before, Google Video site. How is its advertising still going? It's still going strong.
So look, YouTube subscriptions is what it's really doing well right now. So YouTube subscription growth is north of twenty percent. Imagine, you know, Netflix growing sixteen seventeen percent, YouTube subscriptions actually surpassing Netflix's growth. And then you layer ADS on top of that, which grew at a very healthy thirteen percent.
So ads is a forty billion dollar business. Subscriptions is now close to you know, twenty billion dollars, and that is where you're seeing, you know, combined cloud plus YouTube arr is.
Close to one hundred and fifteen billion.
So imagine when just these two segments growing at north of twenty percent. I mean, it's it's just a phenomenal business these to both cloud and YouTube, and on a standalone basis, there is so much runway for growing these two segments.
And the one thing I will like, one of the initial use cases that made sense to me was advertising for AI. Use case AI just making you could use AI to really make an ad that much more targetable and therefore it's much more valuable to the advertiser. And that's what we're seeing from Meta, from Google, from you know, Amazon, anybody who's selling digital advertising.
We're seeing in the numbers.
Yeah, and at pricing.
I mean again, it came out at eight percent growth, high single digit growth on at pricing, especially when everyone was concerned about Chinese advertisers pulling back in the wake of tariffs. Eight percent at pricing growth is phenomenal And that just goes to show these companies know how to target the ads the right way, and AI is augmenting that.
And I always forget that Weai Moo is a part of al that too. They've got their hand in everything. How have vaporen new because I know they're talking about different partnerships with different ride sharing apps.
Yeah, so look, everyone talked about Capex increase. To me, the kapex dollars don't just flow to cloud, but also they help Weimo expand because you have to remember with alphabet everything is powered by that shared infrastructure. That is what's powering search, that's what's powering cloud, YouTube and now Weimo. And so with Weveimo, they obviously need more fleet. They have a fleet of fifteen hundred right now, so they
want to expand to more cities. But the more Capex you spend right now, it's a land rep and they will they have the best technology when it comes to robotaxis, so CAPEX makes a lot of sense.
All right, men, Deep, thank you so much for joinings. Appreciate that as always, Mandeep saying he's a senior tech industry anal from Bloomberg Intelligence joining us here in our Bloomberg Interactive Brokers studio. People just got a team behind him. I mean, we have tech analysts all over the world covering this thing because it is a global industry. So that's Mendeb's just a pretty face we put up here.
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