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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferro, along with Lisa Abramowicz and Amory Hoenert. Join us each day for insight from the best in markets, economics, and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6:00 to 9:00 a.m. Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with tech steadying following its worst day since June. Lisanne Sanders of Schwab writing, 'The AI story isn't over, but it's moving from who spends the most to who can afford to stay up in quality with focus on balance sheet strength.' Lisanne joins us now for more. Lisanne, welcome. How much pushback are you seeing to this buildout?
You mean in terms of investors and how they're approaching their portfolios? It is absolutely the number one question. I just did a number of client events this week around the country, and angst about AI, but really broad questions, not a lot of questions with specificity. Just, what do you think here? Is it a bubble? Is the financing piece of this really being called into question? Circularity of financing. So the interest is heightened, and that, you know, John, another part of the reason for that is if we just lapped the start of the current bull market, October 12th was the end of the 2022 bear market, and during that span of time, that four, slightly more than four years, only tech and com services outperformed the index itself, the remaining nine sectors underperformed. So just from that, we know there's been concentrated positions, and that's why I think you've seen this shift toward more defense in the last couple of weeks.
Supporting that concentration, as you know, Lisanne, you've got the numbers. It's been massive earnings, fantastic figures, particularly for this year, for the big tech players. Dan Ives was on the program a little bit earlier on this morning. He tried to make the case that next week, when we get numbers from Google, Microsoft, Amazon, it'll calm things down. Do you see it the same way?
Well, I'm not an analyst covering the stock, so I think for things to come down, those earnings collectively would have to be better than expected. And these days, companies need to beat both topline and bottom line on the sell-side consensus published numbers. But what we've also learned with the action of certain stocks is you can outperform the published sell-side consensus, still underperform the unpublished buy-side expectation. We used to think of that as the whisper number. So that to me is really the key: is how wide a spread is there between the sell-side and the buy-side estimates, and that's when you get stocks that in some cases get taken out to the woodshed. You just think about a few months ago when Samsung had the same problem. They reported better than the sell-side consensus, but they arguably undershot the buy-side expectation, ultimately took the stock down 40% along with it, subsequently rebounding, of course.
Yeah, there's a real question though, and just to build on what John was talking about next week, what the hyperscalers are going to announce with respect to capex plans. Will bigger-than-expected capex plans be a positive for the market or a negative for the market? Given either, you could read it two ways, right? On one hand, their ambitions are increasing and so are their capex. Yay. On the other hand, they're being fiscally disciplined. Which is the story that the market wants to hear?
I think an undershooting of capex would be a bigger negative story than reinforcing what are pretty healthy capex numbers. So I think it's less about what that dollar spend is and how are we financing it. You know, you have seen a big drop in the cash flows of the hyperscalers. You had significant cash flow to finance the capital spending that has since dropped now, and collectively you've gone into negative territory in terms of the year-over-year growth in cash flows, which is why there is more debt financing. But I think it's a bit bifurcated, and I think it will stay bifurcated down the quality spectrum that you're seeing troubles, especially as you move away from the mega-cap names. I only track it on a weekly basis, so it's a few days old, but as of last week's close, the profitable Russell 2000 stocks were up 18% year-to-date. That's handily outperforming the S&P 500, but the nonprofitable Russell 2000 stocks were in slightly negative territory on a year-to-date performance. So that's a massive 18, 19 percentage point spread just based on are you profitable or not. I think that's the bigger underneath-the-surface story: is what your interest coverage is, are you high or low debt-to-equity, what is the outlook for your profitability and profit margins. This is very much a quality trade, and I think that probably has some persistence.
How big of a signal was Meta's selloff in response to, among other things, issuing more shares that didn't have voting rights? I mean, if some of the biggest, strongest players start to rely more on equity sales to finance some of their ambitions, how is that taken in the stock market?
Well, in the case of Meta, we saw how it was taken with its stock, and Meta is one of the primary reasons why, in an aggregate sense, you saw the hyperscalers' free cash flow numbers drop so precipitously. So I think there's sensitivity to that in the equity market. By the way, there's also sensitivity to that in the fixed income side of things, in investment-grade credit. And that's another important point. You know, in this environment where we think about crowded trades and concentration on the equity side of things, you now have to consider when establishing a diversified portfolio that if a big part of the fixed income sleeve is also corporate credit, that you've got that AI exposure that spans into the fixed income side of the portfolio too. So I think diversification has to be thought of now more from an attribution standpoint as opposed to just purely from an asset class standpoint.
Lisanne, as we are getting closer to the midterms, John made a joke at the top of the show, but honestly, how much is this just anxiety and everyone waiting for that to be a clearing event, or do you not think it will be?
Well, I think it's absolutely part of the anxiety. I don't have to tell anybody that this is an emotional period, and one of our messages is be mindful of not letting the emotions, particularly if they're election-driven emotions, infiltrate your investment decision-making too much. Part of the reason why volatility tends to pick up in advance of elections, particularly even and even more so midterm elections relative to presidential elections, but things do tend to calm down after. So I think it's absolutely a force that is behind some of the skittishness that you're seeing, at least under the surface of the major indexes. Stay with us. More Bloomberg Surveillance coming up after this.
On our radar this morning, SpaceX expanding its infrastructure footprint. Sources telling us here at Bloomberg the company is in talks to secure at least 80,000 cell sites across the US with the help of at least one major cellular infrastructure firm. The name is up 2% so far this morning. Elsewhere, SK Hynix scrapping plans for the US listing of its solid-state unit. The chipmaker facing strong opposition from both regulators and shareholders. The company citing, quote, 'recent capital market conditions' for the decision. There goes another one. And finally, OpenAI lowering its valuation target in its latest funding round. Sources telling us here at Bloomberg the ChatGPT maker has shifted its value by 150 billion in recent talks, bringing its new target to 125, the previous target much higher.
Yeah, $1.4 trillion at a time when this is one of the big kahunas, right? It's the $1.25 trillion now OpenAI versus the $2 trillion Anthropic. And ultimately, that sucking sound you hear is money going toward these players and nobody else potentially. If there is an Anthropic IPO, it comes with nobody else really doing IPOs because the IPO window has essentially come to a shut. And so, to the degree that the IPO window is open to these selective players, the key question is at what valuation and how much do investors welcome it versus fear it at a time of real questions around capital raising. We've got Dan Ives of Wedbush with us around the table. Dan, good morning.
What's breaking in your world?
Look, I think it's a tug of war because on one hand, I was just in Asia last week. The demand has accelerated, I think, about 30% over the last month just in terms of what we see with chips, enterprises going full down the AI stack. We'll see that from hyperscaler earnings next week. But then, like you talked about, I mean, just given, call it 20% of that is going to have to be ultimately financed via debt capital raises, the pressure, the CoreWeave worries. You know, I think the reaction that we saw with Meta, I think, was a head-scratcher to some extent relative to just unbelievable numbers, but yet stock sold off. So I think, look, it is as nervous as I've seen relative to maybe a SaaS apocalypse. If I go back to earlier this year, was a SaaS apocalypse 2.0 on the infrastructure side in terms of what's happening.
You mentioned a couple of companies. Let's divide them and draw a firm distinction between some of the major companies with massive, legit balance sheets and then the more speculative leverage players. You mentioned CoreWeave. This market's starting to reassess and question the business model in NeoCloud firms. If those NeoCloud firms went away, and just do the scenario analysis with me, if that went away, that business disappeared, what would it mean for the marginal demand for, say, chipmakers right now?
Look, that's 50. I mean, if you think about even on an Nvidia core, that's 10%. I mean, we're talking about the NeoClouds play. You almost need more NeoCloud from a capacity perspective than we have today. I would argue the CoreWeaves, the Nebius, they're more consolidators to some extent of what we're ultimately going to see on the NeoCloud side. But today, demand, the supply is 13 to 1. So it comes down to like those that argue that the demand is not there relative to what the capacity buildout will be. I'll argue it's the opposite. So to some extent, when you look at the hyperscalers, they're going to have to continue to ramp up capex. We'll see that next week with the hyperscalers. And I just view this as more of, you call it like a growth scare or credit scare, but I don't think it dents my view that we're in year three of an 8 to 10-year buildout because, like I've said, this is Vegas Strip 1955, the buildout. I'm not saying in 1956 there weren't issues, 1957, but that is how big tech companies are viewing it.
Are you saying it's a casino?
