Equity investors love stories. Fixed income investors care about math. CoreWeave has shown that the environment for raising capital for AI has worsened. The cost to SpaceX to raise this capital has just gotten more expensive, and that could be a big future problem. Tesla reported Wednesday night, total revenues grew 0%. Tesla, the growth company, grew revenue 0%. Netflix reported, and as expected, the results were not great. This company is in the process of going X growth, and that is why the market is so volatile and down this week. Let me elaborate.
Hi, this is Steve Eisman, and welcome to another episode of The Real Eisman Playbook. This is for the week ending Friday, October 23rd, but recorded Thursday night, October 22nd, for Substack Premium. This past Wednesday, we had returning guest Dwight Collins, head of sales at Autonomous Research, for his thoughts and insights on the impact of AI on financial companies. And next Wednesday, we release our interview with the Substack newsletter writer and podcaster, Doomberg. The global energy markets are in a chronic period of undersupply, driven primarily by the hot wars around the world that are often deeply intertwined with energy production. You know, we believe World War III started in 2014 for reasons we can talk about, focusing on oil, the war, and the economy. We hope you tune in. If you like the work we are doing, please subscribe to your favorite audio channel, YouTube, and Substack. On this week's wrap, we will discuss: one, French sovereign bonds are in trouble; two, the AI narrative has changed; three, a whole bunch of earnings and what they mean; and four, one mailbag.
Before we get to earnings, let's focus on France. French sovereign bonds are in big trouble, and it's not just because of the riots. France's debt to GDP is at 120%, and that, in my view, is too high. As a result, this week, the premium on French 10-year bonds over Germany increased by 16 basis points to 175 basis points, the highest level since 2011 when Europe had a sovereign bond crisis. Some of you will immediately point out that US debt to GDP is also 120%. So why isn't the US in trouble, too? Of course, it would be better if US debt levels were lower, but the US has advantages that France does not. The dollar is the reserve currency of the world, and the entire global financial system, and I can't emphasize this enough, functions on treasuries. That means that many large investors all over the world must own treasuries. No one, and I mean no one, has to own French sovereign bonds.
Moving on to the shift in the AI narrative. Prior to this week, the big news was CoreWeave, the neocloud company. The cost of CoreWeave's debt climbed from 9% to 15%. And that change in CoreWeave's debt took down the entire AI complex both last week and this week. Unless the AI fixed income environment improves, the cost to build data centers, at least by some, will be prohibitive. That is more important than the earnings results we are about to discuss. And in fact, that change in the AI narrative is overwhelming the impact of earnings results. And that is why the market is so volatile and down this week. As we will discuss, Meta's results were quite good. Tesla's were not. And with respect to IBM, nobody cares. However, again, as we have all learned in the stock market, narrative matters more than anything, and the AI narrative has now switched to the fixed income markets. Let me elaborate.
The AI story cannot work unless, obviously, AI data centers are built. Yet, the enormous cost of building out AI data centers has changed much of the tech sector from a capital-light to a capital-heavy business model. Now, some companies like the large hyperscalers, Google, for example, are able to bear that burden. They have to raise debt and sometimes equity, but they can do it. The neocloud companies like CoreWeave and Nebius do not have strong balance sheets. Thus, when the price of CoreWeave's debt climbs to a yield of 15%, that means that when it raises future debt, it will raise it, if it can, at 15%. At a debt cost of 15%, I believe the economics of an AI data center don't work. That is what the market is focused on. The narrative of the fixed income markets has now overwhelmed the equity markets. Keep looking at the price of CoreWeave debt to see if this narrative changes.
One more point about narratives. Equity investors love stories. Fixed income investors care about math. You are not going to convince fixed income investors that CoreWeave is a great story because they don't care so much about stories. Show me the math, they say. We shall see if CoreWeave can change its current bad fixed income narrative, but that's going to be tough.
Last week, earning season began with the banks. This week, earnings reports were from a much broader group of companies. Now, one thing I like about earnings season is that sometimes you find out what metrics investors really care about, and sometimes you can be surprised. Take GM and GE Aerospace. Both stocks were down when they reported Tuesday morning, despite beating on revenue and earnings per share. Why? Well, let's start with General Motors. Yes, revenue beat, but it was only up 2.9% versus last year. But earnings per share was up a nice 32% as the company continues to cut costs. Despite the beat, the company did not raise full-year guidance. It narrowed it, and that's probably why the stock was down.
GE's results were impressive. It is riding an upcycle in aerospace. Revenue was up 18%, earnings per share was up 36%, total orders were up a whopping 49%, and yet the stock was down. Why? Free cash flow was $2 billion, which was below expectations. Not by much, but still below. On such small data points, stocks move.
Moving on, Equifax, the credit bureau, reported, and its results teach a different lesson. The stock is down 19% this year as Bill Pulte, the head of FHFA, the regulator of Fannie Mae and Freddie Mac, has attacked the entire mortgage credit scoring system from FICO to all three credit bureaus. Between the three credit bureaus, Equifax has the largest percentage of its business coming from mortgage scoring. I would call Equifax's results not great, but not a disaster. Revenue was up 10%. US mortgage revenue was up 15%. Earnings per share was a beat. However, fourth-quarter EPS guidance was 3% below consensus. But the stock was up on earnings day because after being down so much this year, the results just were not that bad.
SpaceX reported Tuesday night, and the results were quite good. But let's break the company down. SpaceX is composed of three major divisions: Starlink, which is a satellite cellular company; Space, which is the rocket company that puts satellites into space; and the AI division, now called Super Intelligence, or the SI division. The SI business includes the company's X social media, its Grok AI platform, and a cloud infrastructure service it started to rent out to outsiders like Anthropic. The results overall were quite impressive, with revenue up 161% versus last year.
Let's start with the smallest division. Space revenue reached $1.8 billion versus $962 million last year. This division, which has always lost money, almost broke even. Starlink, or otherwise known as Connectivity, saw revenue jump to $5.2 billion versus $4.3 billion last year. Profitability reached $2.4 billion versus $1.7 billion. But the most impressive results, I admit, were in SI. Revenue jumped to $7.66 billion versus $2.5 billion, and profitability was a positive $431 million versus a loss of $1.4 billion. I have to admit, nothing that much to nitpick other than perhaps the SI division's reliance on Anthropic continuing to rent compute from SI.
But more importantly, after the close on Tuesday night, Elon Musk disclosed that a committee was formed to discuss merging Tesla with SpaceX. Now, I think this is a very bad idea. SpaceX is already complicated enough. Now it will merge with a company, Tesla, that has an electronic vehicle business that has lost massive market share to the Chinese, an autonomous vehicle division that is questionable, and a solar business that is just not that great a business. The combined company would be incredibly complex and difficult to manage, and very hard for investors to understand as well.
My concerns about SpaceX are not this quarter's results. It's the capex. Total capex for the quarter was $29.6 billion, up 185% quarter over quarter. But even that number is not the issue. If you listen to SpaceX closely, they are telling you that they have massive capex plans. In the space segment, Starbase Louisiana has a $100 billion price budget. Then add all the capex for Grok models and building data centers. Then consider that Starlink was once a cash cow, but now that it is going to compete with the likes of T-Mobile and what that entails means that it is becoming a cash drain. For all these plans, SpaceX is going to have to raise multibillions in capital. How much? I don't know yet, but it's a huge number.
CoreWeave has shown that the environment for raising capital for AI has worsened. The cost to SpaceX to raise this capital has just gotten more expensive, and that could be a big future problem.
Tesla reported Wednesday night, and the results, while important to analyze, obviously pale in comparison to the SpaceX potential Tesla merger, but we will analyze them anyway. The results were not great. Total revenues grew 0%. That's right. Tesla, the growth company, grew revenue 0%. Automotive revenue, the biggest division, posted revenue of $20.5 billion, down 1% versus last year. Energy generation and storage revenue reached $2.9 billion, down 16%. The one bright spot was services revenue of $4.6 billion, up 33%. Earnings per share was 48 cents, down 4% versus last year. The future of Tesla hinges on the success of autonomous driving, and I have to say there is no real indication that Tesla is really succeeding here.
Moving on, Netflix reported, and as expected, the results were not great. This company is in the process of going X growth. With respect to results, Netflix earnings per share beat by a bit, but revenue only met expectations at 11.8% growth. It guided fourth quarter to revenue and earnings per share metrics that are below the street. Netflix is going through wrenching changes. It just laid off employees and got rid of its chief content officer and chief film officer. So, what's the nature of the problem? I think there are several issues. Streaming was revolutionary, and now it's mature. New media is no longer just about films and series. There are short-form films, there are podcasts, etc. YouTube has conquered these newer aspects of media, and Netflix has been slow and stubborn. Moving on.
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We've talked about the SaaS apocalypse, and then I'm proud to say I coined the term the Telepocalypse. The Telepocalypse stands for SpaceX's Starlink division becoming a much more viable competitor to existing wireless carriers. AT&T reported Wednesday morning, and the results are okay. Earnings per share was 65 cents, up 20% versus last year, which is good. Revenue was up 5.3%, which is fine. New subscribers were up a touch, but only a touch. The stock had the misfortune of reporting the morning after SpaceX reported its very powerful results. On the conference call Tuesday night, Elon Musk reaffirmed his intentions to establish a fourth major mobile operator in the US. Now, creating such a carrier will be unbelievably expensive, but no one wants to spoil a good narrative. And that's why T-Mobile, Verizon, and AT&T were down 2 to 6% on Wednesday.
Moody's reported. Full disclosure: I've owned the stock for a long time because Moody's and S&P occupy a powerful oligopoly, but that does not mean that they are immune to market forces, especially interest rates. When rates rise, it has a chilling effect on bond issuance. This quarter, Moody's reported $4.14 versus $3.60, which on the surface looks fine until you realize they missed the estimate of $4.27. The problem was that the revenue in the company's Moody's Investors Service, its ratings business, declined by 1% because of slower bond issuance.
Moving on, Meta reported Wednesday night, and the results were quite strong. The key thing here is to see whether anything related to AI is improving Meta's results. Meta beat on revenue and earnings per share. Revenue of $64.6 billion was up 26%. So that's pretty powerful. Earnings per share also beat. I think the key metric for the bulls is that the average price per ad was up 14%, which seems to indicate that Meta's AI products are helping its advertising revenue, and yet the stock was down significantly Thursday. Why? Well, I would only criticize the results on two fronts. First, while revenue did grow 26%, costs increased 68%. Also, Meta has momentum because of the early success of its Agentic AI Muse. I am of the view, though, that LLM and Agentic AI apps have no moats, and it will be interesting to see how well Meta does when Muse is challenged.
There was one additional and very important negative data point from Meta, and I think that's what the markets focused on on Thursday. It has agreed to spend about $825 billion in the future on leases and contracts mostly related to computing power and infrastructure for artificial intelligence. Now that is a huge commitment from a company that no longer has any positive cash flow.
Moving on, IBM reported Wednesday night. This used to be an important company. In fact, it was once the most important tech company in the world. No longer. With a market cap of $240 billion, it is just too small to challenge the large tech companies in any meaningful way. Most people don't even care when IBM reports. It's now mostly a software and tech consulting company, and both of these divisions run the risk of being disintermediated by AI. IBM beat on revenue and earnings per share, but so what? Revenue grew a paltry 5%. This is no longer an important company.
Blackstone reported, and its results show that higher interest rates can hurt. The company reported earnings per share of $1.32, down 13% versus last year. On the positive side, inflows were $63 billion, which shows that despite the bad publicity around private equity and private credit, investors still want to invest with Blackstone. But on the negative side, higher rates cause a write-down of real estate property valuations, and higher rates are curbing dealmaking.
Comcast, the cable company, reported, and nothing to really like here. The company beat on earnings per share, driven by media, Peacock, and good free cash flow. But, and this is an important but, the thing investors care the most about is broadband subscribers. And here Comcast lost 144,000 customers, which means that competition remains intense. And it's why Comcast is down over 20% this year.
NVR reported. This is a homebuilder located in the Mid-Atlantic states. It is a very good operator, but even good operators cannot withstand higher mortgage rates. The company reported earnings per share of $89.45, down 20% versus last year, and a miss versus consensus. More importantly, new orders were 4,391, which was also a miss versus a consensus of 5,043.
And now for the mailbag, one mailbag. At a speech I recently gave, I got a question from an audience member who wanted to know whether now is a good time to buy a house. Before I answer the question, let me quickly review the state of the current housing market. To put it bluntly, it is not good. In fact, it's locked. During COVID, interest rates collapsed and everyone could refinance into a 3% to 3.5% mortgage. Today, as we all know, mortgage rates exceed 7%. And that means for a buyer to have the same monthly payment as the seller, the price of the house has to be somewhere around half of the seller's original purchase price. As long as the seller is employed, nothing like that is even close to going to happen. That is why existing home sales are at multi-decade lows. But in some ways, it's even worse than that. The cost to insure a home is significantly higher. So are property taxes, and localities impose fees on land waiting to be developed. Housing is just unaffordable for most Americans, even if mortgage rates were lower.
However, what if you can afford it? What if you can afford all the payments and the mortgage? Is buying a house a good investment? I think not. I think the days of people buying a home and creating wealth are over. In fact, I think it is more likely than not that housing prices will go down in most parts of the country for the next several years. And I will be exploring this topic in depth on my premium subscription service on November 11th with Melody Wright of Unicus Research, who is a true housing expert. As for the viewer's question, I would only buy a home under the assumption that at best, at best, I will get my money out when I sell. Buy a home you love and plan to stay in. It's not going to build a nest egg for a long time, if ever, if rates come down and supply constraints relax due to the aging of the homeowner population. Demand and buyers will increase. I feel for people who feel priced out, but let's be clear: renting is no longer a waste of money. Buying is probably now a waste of money.
This week on November 19th on our free service, we posted an interview with recurring guest Danny Moses, my former partner from my Big Short days. Danny now runs his own podcast called On the Tape. We had a broad-ranging discussion about the deficit, the Fed, and the controversies surrounding AI. Next week on October 26 on our free service, we will release an interview with Ben Steele, economist at the Council on Foreign Relations. We discuss inflation, the Fed, the deficit, and what is happening in France. Ben is also an author of several books, which we also discussed. The book we focused the most on was his book on Henry Wallace, who was vice president under Franklin Delano Roosevelt and almost became president of the United States, and how that would have dramatically changed US history because, get this, Henry Wallace was a Soviet fellow traveler.
The best way to support The Real Eisman Playbook is to subscribe to Substack through steveisman.com and to YouTube. And we greatly appreciate your support. And that's the wrap.
This podcast is for informational purposes only and does not constitute investment advice. The host and guests may hold positions in stocks discussed. Opinions expressed are their own and not recommendations. Please do your own due diligence and consult a licensed financial adviser before making any investment decisions.
