Broadband Challenges and Future Conglomerates

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There's no place like Chrome. Check resespons is set up required compatibility and availability varies eighteen plus This episode is brought to you by Street Easy. You gota ask yourself, W to talk about the time you lived in the greatest city on Eth or still live in it? In the city where a matinee leads to two AM tacos. Your New York era can last a lifetime. With twenty years of NYC know how, StreetEasy can help you become a forever New Yorker. Visit streeteasy dot com to buy or rent in NYC Street Easy is an assumed name of Zillow Inc, which has licenses in all fifty states If money is evil, then that building is held.. Welcome to Profty Markets. I'm Ed Elson. It is july first. Let's check in on yesterday's market vitals. The major indices climbed as stocks closed out their best quarter in six years. The Dow finished its best first half since twenty twenty one. and the Russell two thousand wrapped have its best first half since nineteen ninety one Meanwhile, Brent Crude was roughly flat on the day as investors awaited news from talks in Iran The yield on tenure treasuries climbed as job openings data showed a stable labor market. and finally, Bitcoin dipped below sixty thousand dollars once again Okay What else is happening? Semiconductors just posted their best quarter ever Philelphia Stock Exchange semiconductor Index rose eighty two percent in the second quarter and is up ninety four percent so far this year Western Digital is up two hundred and forty percent. Ye to date, Micron is up three hundred and ten percent. Sandisk is up more than seven hundred percent The rally hasn't been entirely smooth. Last week, chip stocks fell eight percent in their worst week since april twenty twenty five isn't saying that much. still the stunning run up and the turbulence along the way leaves investors with one big question, and that is how long and this semiconductor boom actually lost Joining us to help answer that question, we are speaking with Stacy Razgon, senior analyst at Bernstein Stacey, thank you so much for joining us on the show This has been just a crazy run up that Not many people predicted. I mean AI is winning, but not everyone in AI is winning. Big tech certainly isn't The semiconductor stocks are We'll get into how sustainable this actually is, but first just your reflections on what's been a crazy quarter. You bet. And I mean, Sem's have been the primary beneficiary here and As you said, the stocks index is up almost one hundred percent, actually, may even be one hundred percent after today's close year to date And AI has just gotten so big it's dragging everything along in the space. You could have almost owned anything, you would have been just fine. It's interesting, though some of the divergences we've seen this way, so that the traditional sort of like like blind AI winners you would think the Nvidiaas and the broadcomes of the world that are doing, you know, the actual AI accelerators. They've actually had the worst performance. you know, they're up but they're up not anywhere near as much as the sector And the reason is people have been playing that the so called bottlenecks Again, as AI has grown, like sort of one area of the space at a time followed by the next, you've been sort of hitting the limits of what they can supply and then prices go up. And you know, semi investors love to play bottlenecks. and so the stocks have gone up and You know, we went from the accelerators to the memory to the semicpp to the optical to the networking to the power semies to the CPUs now now people are playing discrees and other things It's really been kind of remarkable Overall, though you could have owned almost almost anything in the space year to. you would have been sitting pretty pretty. Yeah. seemiconductors now make up A fifth of the S and P. Is that much? which I just find stunning Um twenty percent of the entire market. I mean, when you look at that divergence between sort of the obvious AI names and the less obvious AI names, and I think that is a pretty good distinction as to who's been winning in this market and who hasn't, at least in twenty twenty six I mean, is that just investors speculating, having a lot of fun with these more obscure names. I mean, why are they so excited about A random name in a in a bottlenecked up sector versus like, you know, Nvidia. You know, it really has been about earnings and frank even with the space up a hundred percent year to date You sort of like decompile it into the drivers, probably seventy percent plus of that performance. has actually been earnings growth. So like multiples in the space are up and I won't say that like the space overall is expensive, but it's not egregious. By far and away, the earnings so far year have grown much more than the valuations have. And some of these bottlenecks we've just seen massive revisions. I mean, takeake memory for example. I don't cover the memory space by the way to colleague of mine. to talk about the industry rather than the stocks I we've just seen some phenomenal positive revisions in the earnings powers you know, memory prices have just gone through the roof through the roof as supply has gotten really tight as AI has grown. and It's just driving massive revisions in the earnings. and we're seeing that among a number of the bottlenecks I think for some of the other ones There's the hope or the strong belief that numbers as strong as they are right now are just too low G given where I demand is growg. And again, you can look at semic Cap or maybe some of the optical names or You know, some of the other other ones that are that are playing out right now. you can sort look out at where peopleople are forecasting demand to be, and you can see where the numbers are sitting right now and it's clear that one of those things is wrong. like either the demand is not going to be there or numbers broadly probably still need to come up. And in many cases across the board. And that's why you've seen some of these other names respond. And so I don't know that it's necessarily unjustified. Again. I wonder why Some of the other compute names haven't performed as well because again, numbers there I think are going up too. but I think maybe they're more well known or more like heavily anticipated that you will see that kind of performance. And again There was only so much money to go around, right? invvestors have to invest in somethingomet I think there's been a belief ammong the more traditional guys that you know, they're they're safer. You can use them as a source of funds in some some sense to play some of these more other like esoteric names. because you know like numbers at least for the big guys are going to go up anyways, there's less risk from from from doing that. And so we've just some of the fund shift into other areas, I think It seems like one of the most important questions for semis and therefore for the entire market because they make up a fifth of the entire market is Will this last? spepecifically these incredible earnings, which are largely a result of huge demand leading to huge prices And the question then becomes is this A one off. Is this cyclical, which is a big question in the semis business? Or has something fundamentally changed and are earnings just going to skyrocket or at least be at this level forever? What do you think? Probably there's some elements of truth from all of those things. L Semis, I think are cyclical and they always have been. They probably always will be, but there's a variety of different types of cycles in different durations. and like you could argue that this cycle has duration. And let's take the memory space, for example. And that's probably one of the areas where we've seen the biggest price increases as well, which is driving all this. But the reason is Dmand, As you said, demand is very strong and supply is very tight. and You know, this time is different is always sort of a dangerous statement, but there are some things that are different. Takeake the DRAM space, for example. likeike D RAM is Like in your PC, it's like a system memory that's running things as you're working. and AI uses a specific type of DRM memory. they call it HBM or it' called standams for H bandwid memory And it sits on the AI chips that are get sold and But to make say a gigabyte of high bandwidth memory takes four times as much capacity versus making a gigabyte of like the standard what would be called DDR five DRM that would go into your PC or smartphone So you're a scenario where you could be adding waight for capacity to make DRAM for AI and actually, even though you're adding a lot of waes, you're not necessarily adding as many bits as you ordinarily would because of this this differential in how many wafers an ex. call it a trade ratio. right now it's like four to one between AI memory and traditional memory for TRM. And so because of those dynamics, I mean, the other thing I should say is It takes time to add supplies. and one of the issues right now is we're short on what's called clean rooms So to add supply like there's a whole industry, it's called semiconductor capital equipment. They make the tools that make semiconductors, but before I can seell those tools and add capacity. I need to have somewhere to put them You need what are called clean rooms. These are the buildings, right that the factories that make up the factories. And we're short clean rooms right now. So they have to build the clean rooms first. And then you can add the tools and add the capacity and it just takes time. I mean, like this year For total semiconductor manufacturing, equipment will probably do one hundred forty five billion dollars, which is up twenty percent year year. it's a strong year But as strong as it is it's a constrained year. The cleanrooms don't come online until you know well into next year and beyond In the meantime, demand is still growing. And so it's entirely plausible that this cycle, this upcyycle could last quite a while Are there any names? It sounds like you think that ultimately the growth is pretty justified given the fact that the earnings have been Pretty styging so far. So far A, I would say as long as AI demand continues, and I would say if AI demand does not continue, we're probably screwed We'll put that aside All the signs right now seem to be pointing you to continued strong demand at least for now. It's a very interesting question. it seems like the biggest question for investors, can you put that aside Is it is I I mean Do you build that into your model? Do you ignore it and assume that this continues. How do you even grapple with that very big question? I'll say the same thing I've said since this started. at some point will you see an air pocket? I mean, presumably you will. I mean, this is what always happens eventually. On thing I can say is it's not now. it's certainly not this year It really does not look like it's next year. on twenty twenty eight, I don't know You know, we'll have supply starting to come online in a bigger way in twenty eight and then it will be a question of demand. Why not this year or next year? Because some investors are concerned There's no incremental capacity Supply is tighten, demand is very strong. That's that's not slowing down. You probably don't have to worry at all until Supply starts to come on like in a big way And then you'll see, you know, the title go up, We'll see if everybody's naked or not, right? And this actually happened, you know, it wasn't that long ago a year or two years ago when the actual accelerators, the GPUs were in very tight supply And by the way. I would say seming uss is always worryed because there's a phenomenon that happens In many cases, when supplies tighten, customers can't get what they want on the time frrame that they want is that they order more. It's called double ordering, right And so the question is always like when supplyies tighten, demand is strong and you're adding capacity, is that demand you're adding for real or is it phantom This happened during COVID. you know, we had big shortages and lead times stretched out and You know, they added a bunch of supply and as it turns out like it wasn't needed, and it took three or four years to actually work off that oversupply. On the other hand, you go back a year or two when the GPU's and the accelerators were in tight supply And that supply came online in a bigger way. And actually demand as the supply came on and demand got stronger rather than weaker, that demand was real. Right. So that will be the question. We probably won't know the answer for a couple of years In the meantime for the next year, certainly for this year, like I said and almost certainly for next year, supply is going to remain tight. And in that environment, you know, the people will act like the demand is going to be sustainable So far though everything we've seen just points to everybody's short compute that that seems to be the case. And again, it's not like People are reserving compute and just sitting on it. like they're reserving the compute and using it. The computer is getting used We can have a discussion on what's the RI and return on that. I think that's a valid discussion that we can have, but the compute is getting used. and in fact, they want far more they want to be able to utilize far more compute right now than they current than isrently available. Well, the ROI discussion is very interesting. I assume maybe your view is that discussion won't happen It's already happening. or at least for the among the people who matter In this case, the hyerscalers. I mean, it sounds like your view is good but it is happening No, no, I'm sorry.'s Investors are worried, right? because these the hyperscalers are investing a lot of money and they've sort of reached the limit of what their free cash flow can currently support So they' they're top in the debt market and they're starting to raise some equity and like that kind of stuff. They still got plenty of capacity, but There is a worry that oh, they're just investing. and people for some reason think that they're idot. like I actually don't know why. These are some of the smartest and certainly most largest and most profitable companies in the history of mankind They can see things that we cannot presume that they are not idiots, like that they have line of sight to return. I think that they're already seeing returns on some of the things that they're doing. You can look at some of the other things like I mean, you could look at, for example, GPU rental prices. You have like companies that are called Neoc cllouds Their business model is simibil and we have compute and we're running it out We're seeing those road prices going up We're seeing five year agreements on that capacity that are coming to an end And that existing capacity, which at this point is fully depreciated is out getting rented out at even higher prices Right? So those returns look just fine. You can look at other companies like Anthropic, for example who actually like has an agentic they do agentic coding of a product called Claud that people are willing to play pay for. theirir revenues have gone vertical. E they're doing, I can't remember what the number is now sixty two billion dollars in annualized revenue, somethingomet like that in a month ago. it was like forty four billion Before that, it was thirty billion doll. and in January, it was like fourteen billionll. and in December it was nine billion doars and a year ago it was a billion dollars. and the res have gone like this? I think the question for the ROI people are concerned about the ROI though is that are the businesses that are using paying all that money for Claud, are they seeing ROI on their investment into Claud? It seems as though it goes one step Father Presumably they are. right Like I said, it's there more and more companies are doing it. again it's hard this is this is the problem. It's hard to know on an individual basis at the end customer level, like what kind of a return they're seeing and what kind of return they're not. All I can tell is that the supply of that compute, like the anthropics of the world They The demands on their capacity that they are seeing right now have gone vertical So that is strongly suggestive that somebody is seeing a return on this someplace Stacy Razgon, senioralyst at Berurnsteen Stacy. really appreciate your time. Thank you. Al that my pleasure After the break The Pomcast is breaking up And for even more markets insights, you can subscribe to my weekly newsletter simply put at simply putut. profgmedia. com This episode is brought to you by Palmlive. Family time isn't just the big moments, it's weeknight dinners. sitting around the table, everyone talking all at once. So when the plates are empty and the sink is full, use Pommalive Ultra. Palmalive's most powerful formula removes up to ninety nine point nine percent of grease, leaving your dishes sparkling clean. And the new convenient pump makes cleaning even easier, so you can spend less time tackling dishes and more time together. Shop now at Palmalive dot com d Tomorrow morning is knocking. Stock your fridge now. How about a creamy moocha raappuccino drink? or a sweet vanilla? Smooth caramel, maybe, orr white chocolate mocha. Whichever you choose, delicious coffee awaits. Find Starbucks Rappuccino drinks wherever you buy your groceries This episode is brought to you by State Farm. Listening to this podcast instead of doom scrolling? Smart move Another smart move getting help from one of state Farm's nineteen thousand local agents when you choose to bundle H and auto. Bundling, J another way to save with the personal price plan. Prices are based on rating plans that vary by state. Coverage options are selected by the customer. Availability, amount of discounts and savings, and eligibility vary by state prorofty markets One of the world's largest media conglomerates is officially splitting up. On Monday, Comcast announced plans to complete a spino of its media properties The newly formed company will include Universal's film and television studios, its theme parks division, its broadcast networks, and its streaming business. As left behind, the broadband, the WiFi, and the cable connectivity businesses will continue to operate under the Ccast umbrella The stock is up more than five percent on this announcement. So to break down this decision from Comcast and why they're doing this, We are speaking with Rohan Gaswami, business reporter at Samaphor. Rohan, good to see you This is a development from a previous spinoff that we also saw. so it all gets a little confusing because yeah last year they spun off U Let's see MSNBC CNBC, the Gulf channel, all of these cable networks, which werere under the company Versant Now they're doing it again but with more of their media assets Why are they doing this? What is going on here? The uncharitable view, which Comcast would disagree with is that they tried to take a baby step, getting rid of those cable assets, and the market just didn't care Because if you think about what the fast growing businesses were fifteen years ago, they were cable assets. When When Comcast picked up NBCU from General Electric back in I want to say twenty fourteen, twenty fifteen for around thirty billion dollars It was byy some accounts the deal of a lifetime. It was one of the greatest MA deals ever struck because Comcast just knew how to run these businesses better than GE did. And for a long time, they were the engine behind Comcast's sort of meteoric Certainly stock price growth And as we know that that has stalled, Ed you and I like to go on TV, but I don't think either us would ever make our living going on TV because it's a declining business. It just no one watches TV anymore. It's true They tried to spin off first that obviously worked for a bit Right? But now they've taken this much more dramatic step And it's seen in a lot of quarters, if you look at the stock price performance of Charter, right Comcast's chief broadband rival, it's seen in a lot of quarters as a prelude to more M andA, NBCU buying or being bought Comcast similarly is widely expected to go after charter communications, which itself is trying to buy or has bought Cx communications. We are in what John Waldrin told us was sort of an era of end game consolidation where everyone is just buying everyone in an effort to get as big as possible before they're stopped by the next administration. Just looking at how these stocks have performed since the Baby step spino, e Verscent media Yeah Comcast itself is down nearly fifteen percent since that happened And Verscent is down nearly twenty five percent. Now my understanding was the idea is that when when you're sort of conglomeratized, you pay this what we kind of call the conglomerate tax, which is all of the sexier ties get lumped in with the unsexy properties. and if you can separate those out then maybe you get a more attractive multiple on one of the other stocks The stocks have both gone down So I guess my question is Why do they think This will work, or are they just sort of crossing their fingers? It's a complicated question. So to go back to sort of the prototypical the archetypal conglomerate, it was General Electric. And Jack Welch's argument and Jeff his successor's argument was that the size and scope of these business creates a smoothing effect. If say your engine manufacturing business isn't doing well inccreased ad sales from an NBC Universal make up for that gap. It allows what Jack Welch called predictable earnings, what some called earnings manipulation, but generally was seen as a more consistent, reliable producer of cash flow But investors kind of realized in recent years, they can do that themselves. They can build their own conglomerates, using index funds, using any number of ETFs, or they didn't need a corporate back office to be architecting it. That's generally the argument for why conglomerates have almost uniformly broken up. There are very few true historic conglomerates left What's happening with Comcast is a little bit different. So to rewind the clock, Broadband was seen as sort of the fastest growing backbone of a lot of these companies. If you recall, Time Warner Cable was a massive deal for Comcast itself, Charter, Cox, Altis, all of these businesses took on a lot of debt to build out the fiber optics that actually power the internet that allows you and I to talk to each other from across Manhattan. And in doing so, they were making a bet that growth would continue to be sort of unflappable, right? Everyone needs to be on the internet More and more people want faster and faster internet. That was why you saw Comcast and Charters share surge during the pandemic as obviously more and more people flocked to upgrade their internet speeds, to rely on the interternet more. And then what changed was the mobile companies started to step in. So the AT andTs, the Verizons, but really the T mobiles R? They really started to compete aggressively for home internet using these five G networks that of course are ubiquitous and we rely on for our phones. That led to slowing growth in what was the growth engine for Comcast after linear started decline. c or the broadband business itself And so earlier this year, Charter and then Comcast both warned that they were seeing slowing growth, outright declines in customer acquisition and revenue in their core engine. And investors just freaked out Right The stock rerated, I want to say double digit drop for Chter and Comcast in the course of a week And so you have two businesses here that are fundamentally challenged right now. You obviously have the studio business, which will be significantly smaller than what they paid for NBCU by any metric, but you also have a really challenged broadband business that is sort of fighting to keep and retain customers by any means possible. Yes, while there is sort of a conglomerate tax that you pay and unstructuring that conglomerate should theoretically lead to more a better multiple to multiple expansion, what's happened here is you can't really put lipstick on a pig when the pig is drowning in mud and that's both of these businesses here. It's a really interesting point. I mean, you've got broadband, which is you're saying is struggling itself. You've got the cable channels, which are obviously struggling over adverscent, you've got some of the more traditional media production studios like know Universal Pictures, Dreamworks, etceter, which I don't think people are feeling very bullish on. I mean, I don't think anyone's very unless you're David Ellison cock maybe, but we also know that it's still losing money itself. I mean, are there any assets in this business that Wall Street looks at and goes, I want a piece of it. Not the way that investors are looking at assets right now. We have gone from sort of a very conservative Shepherd Y cash mentality coming out of the tech boom. into a we are once again rewarding growth And neither of these businesses are fast growing or predictably growing businesses. Now Comcast for years has said that profitability for Pacock is just around the corner. That of course, has not materialized. Mike Kavanaugh, the now CC of Comcast who will lead NBC Universal the spinoff, again reiterated that on the call with investors earlier this week It's really hard to make a streamer profitable. Basically nobody but Netflix has done it, not Disney HBO, it's hard. It's very hard to compete here. What is the saving grace for Comcast, however, is that they've got two folks who are stepping into respective leadership roles at these positions who know the businesses really well. On the one hand, you have As I just said, Mike Kavanaugh who's CEO of Comcast with Brian Roberts right now. this is a guy, an inveterate banker, spent a little bit of Carla, maybe a year, but a longime banker at JP Morgan and has been in and around Comcast for years, knows this business intimately well, Not a Hollywood guy, but a great finance guy. And then you have Comcast former CFO Mike Angelakis who left in twenty fifteen to run a Ccast back investment firm. He is coming back to run the broadband business. For M andA practitioners and viewers, they will know him from the actual acquisition of NBCU. He was the guy as Comcast CFO who kept it all together. He's widely respected. He's seen as a steady operator. And with Brian Roberts having his hand in both of these businesses, there is actually a decent amount of long term hope for both of these assets in as much as you can have hope in either of these troubled sectors. What is the future of these conglomerates, do you think? I think it was an interesting point It used to be considered a good thing Jack Welch kind of led the charge and then investors woke up one day and said, hold on. I already own lots of different stocks. I don't need the operators to diversify. I can diversify myself are conglomerates onn the way out Yes and no. I mean, if you look at GE, right broke up several years ago now and has created staggering multiples of value for shareholders. The three split companies are worth, I think, four or five times what GE was when they split, it's been remarkable That being said. So that model of conglomerates, the industrial engine being the sort of the engine that allowed conglomerates to exist, that's dead My colleague Lis Hoffan and I have written about a lot. AI companies are conglomerates by any other name. Google is a prototypical conglomerate. Amazon is a conglomerate. I mean, they make anything from doorbell cameras to Wiifi routers, to, you know, logistics provider, they're obviously a huge tech company. These are conglomerates that have a new engine fueling them. That engine is too a certain extent, web host and web services, but also AI now And AI, arguably, if you look at Nvidia, which has taken stakes in dozens of companies, large, large stakes, a Google and Microsoft, all these companies are turning into holding vehicles. What's allowing them to do this, other than Google's case, which is still largely advertising is being a hypersaler is being an AI compute provider That allows these companies to sort of become the new conglomerates and allow them to dabble in self driving cars. or yes, run a media company. I mean, Google just cut a deal with eight twenty four. Amazon obviously is getting into sports and dipping its toe in news There are new conglomerates around the corner and investors just don't care. The expected upside from AI, which you I and many other people have questions about But largely the street thinks is unlimited allows them to sort of paper over the lower multiple businesses that are Re a few basis points compared to the massive amounts of money they're taking in It does seem that this is just a natural part of the corporate life cycle and I know you've written about this. You conglomeratize As you grow, and then suddenly you wake up one day and you realize things aren't the way they were. And then you decongglomerateize and of course this is the old adage of bundling and unbundling The the only two things that really happen in business. and it is sort of happening right before our eyes. I think you may very good point Roan Giswani is business reporter at Senor Roan. Thank you so much. And always a pleasure. Thankks for having me The president has a new strategy to get gas prices to come down Tell them to Yes, earlier this week on Truth Social, Trump demanded gas retailers to quote get their prices down immediately as they are quote too high No shit This is probably the lowest of the low. when it comes to economic policy. You break something in this case, global oil supply. And then instead of cleaning up your own mess, you go out and blame other people for doing it in this case gas companies, but let's be very clear The reason gas prices are high is because of Trump and the mess he made in Iran And despite his attempts to convince us that the problem is now solved via this memorandum of understanding, the reality on the ground is quite clear. it is still a fucking mess. The U. S. and Iran both traded strikes at each other over the weekend And if you' wondering if that memorandum of understanding still holds, well, look no further than the U. S. and Iranian governments both of which have accused each other of violating the memorandum Now supposedly ese strikes have been halted And supposedly the strait is back in business, but A boy can only cry wolf so many times. The only way to bring inflation back down, including gas prices is to actually resolve the conflict in Iran Until you do that Prices won't fall And they certainly won't fall if you simply tell them to Okay, that's it for today. This episode was produced by Claire Miller and Allison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams, our research team is Dan Salon, Isabella Kinsel, Kristen O'Donahghue and Mia Silverio, and our social producer is Jake McPerson Thank you for listening to Property Markets from Property Media If you liked what you heard, give us a follow I'm Ed Elson. I'll see you tomorrow