Nvidia Delivers Solid Earnings; Musk Distances Himself From DC
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This is Bloomberg Businessweek Daily, reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy, plus global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily podcast with Carol Masser and Tim Stenevek on Bloomberg Radio.

I want to go to NVIDIA, though, because we are going to see their numbers drop probably any moment now. And we are seeing the stock up about eight tenths of a percent here in the aftermarket. Obviously, a big deal. Biggest semiconductor company.

what they have to say about the AI trade. And it's not just the hyperscalers, but beyond, as we heard from Kunjan Sabani of Bloomberg Intelligence, those second-tier companies, are they also buying into NVIDIA chips? So we'll have to see what they have to say. NVIDIA is out, folks. Let's get to it. First quarter adjusted EPS, 81 cents a share. That's a miss. Street was looking for 93 cents, so 12 cents shy of what the street was expecting. Revenue is expected to be

$45 billion plus or minus 2%. First quarter revenue, $44.1 billion. That was a beat. The street expectations was $43.29 billion. First quarter adjusted gross margin. That was a miss. 61% versus an estimate of 71%. Company, though, saying that the second quarter outlook reflects a loss

an H20 revenue of about $8 billion. Keep in mind that when that ban came from the administration, NVIDIA did do a write-down of about $5.5 billion. And Kunjan said it was a little noisy because not all of the estimates on the street had incorporated that full H20 ban. Yeah, shares bouncing around right now, up about eight-tenths of 1% in the after hours. They were down earlier. The company said that global demand for AI infrastructure is, quote, incredibly strong, also saying that

Blackwell's NVL72 AI supercomputer is in full-scale production. The company also said the second quarter outlook reflects a loss in H20 revenue of about $8 billion. So I wonder if that charge, Carol, that they took was...

conservative. The company also saying it was unable to ship and added $2.5 billion of H20 revenue in the first quarter. The company also saying it will pay a quarterly dividend of one cent per share. That will happen on July 3rd. Shares right now in the after hours are moving higher up

about 2.5%. Yeah, up about 2. Yeah, exactly. The CEO, Jensen Wong, who we're going to hear from, or Ed Ludlow is going to talk with him at 6.30 p.m. Wall Street time on Bloomberg TV and radio. The CEO saying the company stands at the center of transformation. Go back to what he said about global demand for AI infrastructure. Incredibly strong adjectives.

And so we're going to want some more numbers around that. We're getting more in the first quarter. Compute revenue, $34.16 billion, a little light. Street was looking for $35.47 billion. First quarter networking revenue, $4.96 billion. Street estimate was $3.45 billion. So that's a bit of a big beat. But again, the key headlines seem to be what it says about second quarter revenue, $45 billion plus or minus revenue.

The estimate on the street is $45.5 billion. So we could have some upside, Tim, from it, or we could see some downside from it. We're seeing shares right now higher by about 3.2% in the after hours. I want to bring in Jay Goldberg, Senior Analyst, Semiconductors and Electronics at Seaport Research Partners. Jay joins us from San Francisco. Jay, I want to get your reaction to earnings in just a minute. I should note that you are the only analyst listed on the Bloomberg Terminal.

with a sell rating for nvidia does today's result keep you at a sell rating so i have to go through the numbers first but i i would say yes i mean my my take is that uh nvidia the most scrutinized company in the planet we all have a pretty good sense of what their numbers should look like this year what their capacity is working backwards from that there's not a lot of room left for upside

There's a few things here and there, but there's not much upside possible. But on the downside, there's still a lot of risks. There are a lot of things that could go wrong. There's lots of problems with the supply chain. The fact that they keep mentioning that Blackwell is ramping, that was in doubt for a while. There's just a lot of questions. It's a good company. It's well run. It's just gotten so big so quickly. I don't think they can keep the level of...

beating that they've had for the last three years that just can't keep going. And I think the headwinds are continuing to mount. In the earnings statement, NVIDIA CEO Jensen Wang saying global demand for NVIDIA's AI infrastructure is incredibly strong. AI inference token generation has surged tenfold in just one year. And as AI agents become mainstream, the demand for AI computing will accelerate.

accelerate um jay obviously sounds upbeat but again you know this is where we want to have some numbers around things um the cfo saying sales of their h20 products 4.6 billion for the first quarter of 2026 um it continues to cross uh you know is there anything that could kind of make you say well wait a minute maybe i need to say it's not a sell maybe there is something interesting here

So I think the underlying question is what are we going to do with AI? Like there's a lot of excitement around AI, but it's still in very early stages. You know, I like to think of this as the internet in the 1970s. We knew it was something, but we didn't know what it would become. I think that's where we are with AI now. And I think it's going to take a few years for us to really, as an industry, figure out what the actual consumer use cases and applications are. And in that process,

There's going to be some fits and starts. And I just don't think we can keep this momentum going forever. I know demand is good now, but we start to look into next year. I think people are starting to ask good questions about what is the ROI of these massive GPU investments all the hyperscalers and enterprises have made. And I don't think we've seen those yet. I think what would sort of alter my belief is if somebody invents some incredible consumer application for AI that would radically change

Hey, I just want to point out first quarter adjusted EPS, 96 cents a share. That was three pennies better than what the street was expecting. I think we had a number that crossed earlier that was not accurate. So again, they did beat in terms of first quarter adjusted EPS. The second quarter forecast, just to rehash,

Second quarter revenue, $45 billion, plus or minus 2%. The estimate on the street is $45.5 billion. Second quarter forecast also reflects $8 billion in lost sales to China. And we know that that ban that went into effect in April. And just continuing to check, NVIDIA shares right now up about 2.9% in the aftermarket. There's also another correction crossing right now. NVIDIA first quarter adjusted gross margin.

coming in at 71.3% versus estimates of 71%. So I want to make sure that gets there. NVIDIA says the charge relates to H20 excess inventory and buy obligations and first quarter auto revenues driven by self-driving platform sales. I want to get back to Jay Goldberg. Jay, you made an interesting comment that this is like, you know, AI is like the internet in the 1970s. I got to tell you,

Playing around with chat GPT and Anthropix Claude, it blows my mind every single day. Getting in a Waymo blows my mind. I mean, to me, this feels like certainly the new frontier. What's the vision that you have if we're in the early stages, if we're in the early innings of this game? Like, what is the impact going to be and where will NVIDIA be in that?

I think those are two separate questions, right? I think in terms of where NVIDIA is going to be ultimately will depend on what we end up using AI for, right? And like I said, ChatGPT is an incredible technological achievement, but in terms of changing everybody's day-to-day life, it

It's not quite there yet. It's very useful for some people. It's very useful if you're writing web content or if you're coding. But for sort of average day-to-day use, I think of my 90-year-old father or my 25-year-old niece. They don't use ChatGPT. It's just not that useful for what they use data. The 25-year-old is not using ChatGPT?

No. That's shocking. No. I'm basically using it. I'm using it more than I, not more than I use Google, but like I'll go there first. I got to say my household all of a sudden has kind of amped up and you've got a range of ages and using it for different things and things like even grok and you know, yeah, it's happening.

I think it is happening. I think we have a long way to go, though, for the utility is really, really clear. Like if you look at if you look at search, even it's not clear how that's going to monetize. Are we going to start ads there? What's what impact will that have when we start seeing ads and chat GPT search? I'm just making up that example. I have no idea if they're actually going to do that, but that's going to I think that will have an impact. I actually think I'm a big believer.

I think it can be much, much more than what it is today. And I don't think it gets really exciting until we get something along those lines. All right. We are talking with Jay Goldberg, Senior Analyst of Semiconductors and Electronics over at Seaport Research Partners from San Francisco. NVIDIA earnings they have crossed, folks, and we continue to see the stock up about 2.9% in the aftermarket. Ian King with a write-through on the Bloomberg Terminal.

NVIDIA forecasts revenue of about $45 billion in the fiscal second quarter, despite losing $8 billion in revenue from China due to export controls imposed by the Trump administration. The company is ramping up production of its latest semiconductor design,

Blackwell and expect strong demand for its AI infrastructure, which the company believes will transform the economy. NVIDIA's growth is driven by its dominance, as you know, in the AI market or in the market for AI accelerator chips. Companies increasingly offering its chips as part of whole computer systems to speed up the deployment of

complex technology. So Jay, got a little bit of an update there from Carol and from our own Ian King about the right through when it comes to NVIDIA results. Going back to remind everybody, you're the only analyst listed on the Bloomberg terminal with a sell rating on NVIDIA. What would you need to see from the company today to have you reverse course with that decision?

So I think one of the things that stands out for me is a year ago, there was a line out the door for NVIDIA products. Everybody was buying everything they could. And if one company couldn't take its allocation, there was somebody else who was more than willing to step in. I think the same is true of this 820 product. The company wrote it down a couple of months ago.

I kind of wonder why no one else bought that product. It's different. There's all kinds of technical things there, but still, it's compute. At the right price, it would have been attractive to somebody. Yeah, I'm sorry. Please continue. Yeah, so I'm just wondering how much more demand there is right now. Again, I think AI long-term is important. In the near term, though, I think we're sort of running out of steam as people are taking a pause to assess what they want to do with it.

One thing I want to ask you, is it tough to have a sell rating considering the stock? NVIDIA has rallied about 24% since you initiated coverage on April 30th.

Oh, it's fantastic having a cell being the only cell rated analyst on a stock. I like being the sober contrarian. But even with the stock, you know, rallying as much as it did, I understand it's a bounce from being perhaps, you know, taking quite a beating like many names did, courtesy of some of the news coming out of the administration. But I mean, you still kind of conviction you're going to hold to it.

Oh, absolutely. Absolutely. I mean, I have a good sense of, you know, Jensen is going to get on the call and he can drive the stock price higher because he's a fabulous, fabulous marketer. He really knows how to sell his company. He does a great job of that.

But I think the substance there is still, I have lots of questions about it. And I'll say in the two, three months I've had this sell rating out there, I haven't got a lot of pushback from the street. I haven't had investors and clients telling me that I'm crazy. I've had a few people say I'm too soon. I've had a few people say I'm too late. But nobody is sort of questioning my thesis. We're getting some additional details about challenges in China and China restrictions. Ernie and King writing on the live blog that NVIDIA missed out on $2.5 billion of sales in the fiscal first quarter yesterday.

and will not get a projected $8 billion in the fiscal second quarter. It's an amount per quarter roughly equal to its nearest rival, AMD's total sales. You mentioned demand of the H20 specifically. Is that what you see as the biggest risk, China and a lack of demand from China, Jay? I think China is a big X factor just because the U.S. government's China policy is, let's call it dynamic and rapidly changing day to day.

I don't think that's the biggest risk. I think the biggest question I have about NVIDIA is long-term demand for AI, where it's going, what it's going to be like. In the near term, I think when I speak to corporate CIOs, they've all tested AI pilots, they've all demoed it. And what they're finding is that they get sort of 10, 20% cost reductions around their AI deployments. It helps them reduce call center costs, things like that.

which is good, but it's not necessarily enough to justify the massive investments needed to keep Nvidia growing the way it has been growing. Okay. Jay, I want to go to a story. I'm just going through, I was exchanging some texts with some friends earlier, because it doesn't sound like, I have a group of friends and like, some of them are very concerned about AI and about impacts on jobs. And we're watching this really closely. Dario Amadei, the CEO of Anthropic, I've interviewed him before.

Axios out this morning with a story that he basically said that AI could wipe out about half of all entry level white collar jobs. I'm reading from Axios right now and spike unemployment to 10 to 20% in the next one to five years. He said this in an interview to Axios in San Francisco. Do you disagree with that? It sounds like you're not as bullish when it comes to the actual effect of AI on the workforce. Yeah.

I think that, again, I'm a techno-optimist, if anything. I think there will be, absolutely, there will be disruptions to the labor force, but there will also be new opportunities over the long term. So, you know, I think certain low-level coding jobs, certain low-level copyediting jobs, those will start to get pretty tough. Anyone who does image creation,

they're going to be challenged for a while until we find new ways to make use of these tools. So absolutely, you know, in the 1900s, all the buggy whip and, you know, carriage makers and horse trainers, they were very disrupted. And we're going to see something similar, but the economy will still continue to grow. And hopefully we'll find ways to use those people to do new things with the tools we get. I mean, hopefully or else we're in for a real reckoning when it comes to the labor force.

Yeah, and again, I think it's very premature to talk about these sort of massive big-term impacts.

on, on, uh, of AI because the things we actually use day to day aren't, aren't quite there yet. You know, again, a few small categories where there is disruption, but in a broader sense, we haven't really grasped the full potential for AI and what it's going to do. So then it raises the question about other companies than your view that could be beneficiaries of the way that technology is moving. If NVIDIA in your view,

has limited upside right now, where in your view should investors be putting their money? Broadcom, right? I think today, anytime NVIDIA loses share, it's to one of its big customers, the hyperscalers, Intel, Microsoft, Google, not Intel, sorry, Google, Microsoft, Amazon. Those companies are all in various stages of designing their own GPU alternatives. And Broadcom is going to make a lot of money helping those chips come to market. When do you think those chips will be able to hold a candle to what NVIDIA has developed?

I think we're already there today. I think Google has the TPU, their Tensor Processing Unit. They're on their fifth or sixth generation of those. Those are incredibly performative. They work very well for Google and what Google needs to do. And I think other Google's peers are going to start to see the benefits of that and move down that path as well.

All right. You are listening and watching Bloomberg Businessweek Daily. Carol Master along with Tim Stenevik live in our Bloomberg Interactive Broker Studio. We're talking to Jay Goldberg, Senior Analyst of Semiconductors and Electronics over at Seaport Research Partners. As we said, he's the only analyst listed on the Bloomberg with a sell rating on NVIDIA. And yet here in the aftermarket, we are definitely not seeing investors sell shares of NVIDIA. Stock is up about 3.3%.

This as the company did come out and post its latest quarterly update as well as Outlook. And as our Ian King writes, the company, it's the world's largest semiconductor company, giving an upbeat forecast even as China slow down, Mars some of the growth. Slowdown in China weighed on results, but sales will be about $45 billion in the fiscal second quarter. That runs through July. That included the loss of

of roughly $8 billion in revenue from China because of export controls from the United States. The forecast was in line with analyst estimates according to our data. So what's interesting is that even with that loss, we're talking about sales, will be about $45 billion. And as our Ian King writes on our live blog, how many companies could front load their earnings release with details of what they're missing out on and still get a positive reaction from investors? So the stock, as we said,

still holding on to about a 3.5% gain here in the aftermarket.

market. Our colleague Carmen Reineke writing on our live blog that it seems traders are reacting to the company's revenue forecast, which is still basically in line, even with an expected $8 billion loss when it comes to H20 revenue. That signals NVIDIA is making up for the loss elsewhere. Jay, I want to bring you back in with the caveat that you haven't necessarily had the time to comb through these results. But in your view, where do you think NVIDIA could be making up for the loss in H20 revenue?

I think there's still a lot of demand from the hyperscalers. We have a bunch of massive data center build-outs taking place. We had big announcements in Saudi Arabia last week, Stargate earlier this year, UAE, Kuwait. Lots of big Gulf nations are building out data center capacity. The hyperscalers have building these plans, these data centers take multiple years, and so they've had commitments and plans in place for a long time now. So those are going to continue.

right i think i think the question is next year can the capex continue to be at these levels what happens there but a lot of a lot of what we're seeing today is stuff that was planned on and committed to months ago so i i guess it also raises the question about demand from these hyperscalers um which you said continues to remain strong you also said that it does seem like especially when it comes to google that they could have some products that

in your view, at this point, hold a candle to NVIDIA. In terms of where NVIDIA needs to go next, over the last few months, we've talked a little bit about the way, and we're going to hear from Jensen Wong, 6.30 Wall Street time, just in a little under two hours. Ed Ludlow is going to have an NVIDIA earnings special, 6.30 p.m. Wall Street time on Bloomberg TV and radio. But Jay, I'm wondering about where you think the area of growth is for NVIDIA right now in terms of products, right?

We've seen Jensen Wong talk in recent months about humanoid robots, about self-driving cars as areas of potential growth. Where do you see that the company needs to go? I think the two critical areas for them are in inference compute and robots. And inference is the stage of AI computing where it sort of goes into wide adoption when we've built a model and now we need to use it.

How that actually gets deployed, I mentioned earlier, it depends a lot on what we're actually doing with it. Inference is going to be the big battleground. I think NVIDIA has a lock on the training side of the model building, but the inference question is looming large. How we're actually going to deploy this

We as consumers, when we interact with AI, where are those chips? Are they in our phones? Is that where the AI is being done or is it in the data center? And I think that's a big open question. Nobody has a clear answer to that yet. And it's going to matter a lot to, you know, I guarantee they're going to talk about on the call. And the other one is like you mentioned is robots. Jensen has talked a lot about robots. It's a big theme of his. I think it's an area where there's, you know, dozens of companies building humanoid robots that can do all kinds of interesting things.

And I'm just waiting for a robot that can help me fold laundry. Yeah, you and me both, Jay. Hey, Jay, appreciate you joining us. Got to come back soon. Jay Goldberg, Senior Analyst, Semiconductors and Electronics and Seaport Research Partners, joining us from San Francisco. Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill?

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You're listening to the Bloomberg Businessweek Daily Podcast. Catch us live weekday afternoons from 2:00 to 5:00 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Lots happening in the universe of Elon Musk on the ground and up in the sky. Up in the sky, SpaceX's Starship suffering a mid-flight loss, its third consecutive setback, and it raises questions about the company's progress on the project.

Close to earth, though, in an interview to CBS News, Elon Musk expressed dissatisfaction with President Trump's giant tax bill, saying it undercut his effort to slash government spending. I was, like, disappointed to see the massive spending bill, frankly, which increases the budget deficit, not just decrease it.

and that reminds the work that the doge team is doing i actually thought that when this big beautiful bill came along i mean like everything he's done on doge gets wiped out in the first year i think i think a bill can be can be can be big or it could be beautiful so that's a portion of the cbs interview with elon musk it's set to air fully on cbs sunday morning this weekend we should note that just the last couple of hours president trump did dismiss criticism from elon musk

Over the cost of a signature tax bill, he told reporters on Wednesday that compromises were made to secure the necessary votes. We've got Max Chafkin with us, the co-host of the podcast Everybody's Business and Elon Inc. He's also senior reporter for Businessweek. He joins us here in the Bloomberg Interactive Brokers studio. You've got a new story out about Elon and...

and whether or not he actually is leaving politics. - I feel like every time we start to say, "He looks like he's leaving politics," there he is again making news in politics. And you know, kinda here we go again, right? We saw this at the end of last year,

uh, when there was talk of the budget bill of Republican congressional Republicans reaching compromise to fund the government must kind of came out unexpectedly against that. I think we're seeing something similar, right? He's attempting, I think, to influence Congress here to, to at least shape this bill, if not a torpedo it altogether, which of course puts him, uh, at odds, uh,

in some sense with president Trump. Although, as you heard from Trump, right, Trump is also negotiating from con with Congress right now over the exact contents of the bill. So you think he actually has a goal with comments like this? He actually has a goal of shaping policy. And look, this is only, yeah,

I mean, like, I don't know why else he would be saying this. I mean, he seems to be saying that this bill is insufficiently hawkish on the deficit. That's a point of view, you know, that's pretty consistent with Elon Musk. Also, there's a pretty substantial contingent in the Republican Party that agrees with him. I also think it might be worth looking at some of the specific aspects of this bill. You know, this bill has—

implications for the electric vehicle industry. It gets rid of these tax credits that have been very important to Elon Musk and other electric car companies. I don't know to what extent those are still in play, but we don't know what the final bill is going to look like. And you could imagine getting Musk on side would be worth something to supporters of this bill. So I suppose we'll see. As long as

Elon Musk, Max, is a financial supporter of Donald Trump and Republicans. He's going to have a direct line to the president. Is that fair to make that assumption? Yeah, I think it is fair. And I think even in Trump's reaction here, you know, people, it's unclear to me from that clip whether Elon Musk is intending to criticize congressional Republicans or Donald Trump, although he did sort of mock the Trump's big, beautiful bill formulation. Trump responding to it

uh, in a pretty accommodating way. Like he's not, he's not punching back. He's, he's, he's taking it, uh, like a criticism from a friend or something like that. Um,

Elon Musk is still very important to Donald Trump and to Republicans as a potential funder in the midterm elections and as also a very, very visible supporter, right? He's very polarizing now, but he's still a successful business person, an American industrialist.

You know, his support matters beyond money. Carol made an interesting comment. I can't remember if it was this week or last week during one of our editorial calls about the press that Elon Musk has been doing lately. Yeah, it's like the era's tour. Elon Musk version. I think it's notable for a couple of reasons. One, when he bought X, it seemed like he was doing everything directly to his followers and directly to the world through X.

He put his head down and worked a lot with Doge. There were some Fox interviews over that period of time. But as he's moved away from the White House and over the last few weeks, we've heard more and more from him. And especially through like, quote unquote, traditional like legacy media. That's what kills me because you guys make fun of me like my little Sunday morning shows that I watch. But it's Sunday morning. It's a very mass wide audience. So I think what's going on is Musk is suffering a lot of blowback from

from customers right he talks all the time about you know the legacy media and the democrats and and the and his various sort of political adversaries but what's but what's happened when you look at opinion polling is regular people the people who buy musk stuff have turned on him there was a really interesting poll uh published the other day by harris and axios they they asked people uh to rate how they basically how much they trust well-known companies and you look at tesla and spacex

over the last five years, and it is stunning. They went from being some of the companies with the best reputation to some of the companies in this universe of 100 companies with the worst reputation. And I think what he's trying to do is get both investors and consumers to focus on the other stuff, the nonpolitical stuff. So we had this rocket launch yesterday, which, as he said, Tim, did not go well.

very well for SpaceX, but there was a big media rollout. He did a bunch of interviews with various outlets. I assume, although don't know for sure that this CBS interview was part of that. Essentially saying like, look at the space stuff, look at the technology, which I think is smart from a messaging perspective because SpaceX is just inherently going to be less political than, you know,

attacking various parts of the federal government. On the other hand, Musk still needs this relationship with Donald Trump and SpaceX still needs this relationship with Donald Trump. So it's going to be a difficult dance. I think it's going to be very hard for him to undo some of the damage that was caused with certain consumers, especially, you know, left-leaning consumers. You know, I always think about money with everything we do, rightfully so. But there's a story on the Bloomberg about Elon Musk's Neuralink raising $600 million in a deal that values that company more

at $9 billion. This is coming from Semaphore citing unidentified people. So people, it sounds like if this is true, like still committing money to his ventures. I mean, I wonder, Max, we live in a funny world. Could it be six months, 12 months, 18 months where all of a sudden, like everybody's kind of back in on Elon? Because we have brain chips? Because we have brain chips. Is that why? Maybe they're his brain chips. But you know what I mean? Like,

I don't know. Does he do something? I don't know. I think he's in a very difficult political position. I think certainly that is what investors are hoping. You know, he made some comments on the earnings call about a month ago, essentially saying, you know, maybe I'll spend one to two days a week advising President Trump rather than, you know, full time.

Now he's saying 24-7 he's going to be focused on his companies, as you point out in your new piece. Sleeping somewhere on the floors, who knows? I mean, you know, investors like this. The issue is he is now closely tied to Donald Trump. And I don't think short of really like turning critic and saying, OK, now I support a different political party, which could happen. I think it's going to be very hard for him to walk that line because all politicians

All you know, politics is very polarized in this country, and it's going to be hard to avoid, you know, winning back these people he's alienated without in turn alienating, you know, this kind of new cohort or conservatives who still very much support Donald Trump.

Just 20 seconds left on the SpaceX launch that didn't go exactly as planned. Can they still spin it as a win? That's what they're doing. You know, all these launches are experiments. That's what they're going to say. So you shouldn't really focus on the result. That said, a lot has to go right between now and next year for them to hit the timeline. And each time one of these launches does not go right, it gets harder.

Max Chafkin, the co-host of the podcast, Everybody's Business and Elon Inc., also senior reporter for Bloomberg Businessweek. He's joining us here in the Bloomberg Interactive Brokers Studio. Your best restaurant location gets five-star reviews. How do you make every location like your best location? Your best paper mill has been operating at peak productivity. How do you make every mill like your best mill? Your best data center has optimized every drop of water.

How do you make every data center like your best data center? The answer is Ecolab. Better performance, better outcomes, better impact. Ecolab. Now every location is your best location.

When it comes to your oral health, staying ahead of problems is key. That's why Colgate Total has created the Colgate Total Active Prevention System. Built from years of research and clinically proven results, this powerful three-product system combines a reformulated toothpaste, an innovative toothbrush with a carefully crafted amount of bristles, over 5,000 of them to be exact, and a refreshing antibacterial mouthwash that work together to help prevent oral health problems like cavities and gingivitis before they start. Why is prevention important?

Because plaque builds up by feeding on sugars from the foods and drinks you consume. This plaque releases acids that can damage your enamel and lead to cavities and other oral health problems. But the Colgate Total Active Prevention System helps fight the root cause of those problems. In fact, the three products were designed to work together to be 15 times more effective at reducing bacteria buildup in six weeks, starting from week one, compared to a non-antibacterial fluoride toothpaste and flat-trim toothbrush.

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This is the Bloomberg Businessweek Daily Podcast. Listen live each weekday starting at 2 p.m. Eastern on Apple CarPlay 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 1130.

It is one of the most read stories on the Bloomberg terminal right now. ETFs have amassed trillions of dollars by offering investors greater tax efficiency, liquidity, and lower costs than mutual funds. It's why we've seen inflows that are so huge into ETFs and not into mutual funds. Now, a regulatory shift is poised to bring ETFs and mutual funds closer together.

but it also threatens to complicate the very features that fueled the ETF boom. Emily Grafeo and Vildana Hyrik write about the dual share class structures that could be approved as soon as the summer and the warnings about what could transpire if the market becomes stressed. They're both Bloomberg News Crossout reporters, and they join us here in the Bloomberg Interactive Brokers studio.

Emily, I want to start with what this looming shift is, this regulatory shift. Explain what exactly it is and why it's happening. Okay. So right now, when you're an investor and you buy a fund, you buy a mutual fund or you buy an ETF. And ETFs have one share class. It's just an ETF. You get the ticker, you buy it. If you buy a mutual fund, depending on what

Avenue you're buying it through you'll be in a different share class You could be in the institutional one the retail one the advisor friendly one. Sometimes they're priced differently Yeah, I was gonna say sometimes the share class has a different expense ratio or I don't know like that's the difference, right? Yeah, yeah exclusively through your private wealth manager something exactly So maybe you get like a discount because you're using it through like your employer or something but ETFs don't have that and

20 over 20 years ago actually Vanguard made this patent where they could create a dual share class fund where they have a mutual fund and an ETF all in one so you have multiple mutual fund share classes and then one share class of that is exchange traded the reason why they did this and they patented it is because it makes the fund

in total more tax efficient. It basically takes all the tax efficiency of the ETF and puts it onto the mutual fund. So they figured this out. They were like, great idea, let's patent it. Make sure no one else does it. And they saved their clients billions on taxes over the years.

The patent expired two years ago, so now everyone else on Wall Street is trying to get in on it. Can anybody and everybody do it, Vildana? Well, not yet. So we have more than 50 firms that have applied for the dual share class, but we are still waiting from regulators to hear from regulators. We are expecting...

you know, the industry is expecting the SEC to green light this and to actually allow it maybe possibly as soon as this summer. But, you know, right now we're just in wait and see mode to see if we can actually get approval on this. Vildana, what's the concern here if there is stress to the market, if there are liquidity issues? Like, what are the risks that some of your sources are sharing with you? Well, there's a couple of

- There's a couple of different concerns, but one of the main ones is issues related to what Emily was just talking about in terms of the tax efficiency. So if you have a mutual fund and ETF together,

and the mutual fund has to pay out capital gains distributions, then in that new structure, the ETF investors could potentially also be hit. And there is some historical precedent. There actually is a fund

a Vanguard fund that back in 2009 had huge outflows. And so the ETF share class invest, you know, the ETF investors were also hit with a 14% distribution. So there is some precedent. And so a lot of market watchers or, you know, people who are maybe looking at this from a critical angle are, are thinking ahead and saying that potentially this is an issue that could come up. I'm going to age myself, but when I started in this career, about three decades and counting, uh,

one of my first things I did was like a mutual fund show. And it was just like, it was kind of everybody was all of a sudden, you know, getting investment plans at their companies and it was the big thing. And I guess, and then now we've kind of seen the ETF rush over what the last decade or so and counting. Do we need both?

Like, is it just a case, like, as I saw this story, I'm like, okay, here it goes, the merge over to ETFs. Is this a first step of eventually everything being converted? Or there are advantages to having one purebred ETF versus one purebred mutual fund? Well, yeah, I think when we started out writing this story, we wanted to understand. There was this report from Cerulli, and they posed this question of, like,

Why would you buy, if you're an investor in an ETF, why would you buy an ETF attached to a mutual fund if you could just buy a standalone one? Because the SEC, one of their concerns that they flagged, and issuers will say that they've answered them, one of the concerns is, is there going to be this issue of cross-subsidization? One class subsidizing the other. To answer your question, though, there are some advantages to mutual funds. A lot of mutual funds are already in tax-exempt conditions.

So a lot of mutual funds in people's 401Ks

That's probably the 401k technology. It's not really suited to hold ETFs. So most of our sources expect that that's a pretty big part of the market that will stay in mutual funds. This structure is more for maybe if you're an investor that you've been sitting in a mutual fund in like your brokerage account for years and years, and you have all of these embedded capital gains that if you were to sell, you would pay a huge amount.

the capital gains tax on, you could tax-free convert into the ETF with this and maybe wash out at least some of the taxes. That's the idea here. Vildana, are people or firms still launching mutual funds? Are they going all in on ETFs? I mean, we are ETF reporters, so I'm going to say they're all going all in on ETFs. But it does seem like, even over the last few years, it's been like... Confirmation bias. But it has seemed like even some of the huge...

traditional mutual fund companies like a capital group, for example, I think you spoke to them at Milken, Carol. Yeah.

Or MFS. MFS is 101 years old, and they launched five ETFs last year. Exactly. That's a big deal. I think all of them are watching where the money is flowing, and mutual funds as a category are seeing outflows, and ETFs are seeing record inflows every single year. And obviously, we're seeing hundreds of new ETFs every single year, and not all of them are home runs, but...

you just need one if you're a small etf issuer and you have one hit that's it like you're you're set like you know if you have one strategy that that you know maybe a ton of retail investors are attracted to or something new something that truly is innovative

it can work out really well for you. So a lot of people are looking at that and thinking about, well, why not? It's pretty cheap actually to file and a lot of times to launch ETFs. It's a bit, obviously, it's very difficult to attract assets and attention and eyeballs, et cetera. But if you can do it, you know, you can get a home run. I mean, is there something to learn by what Vanguard did and kind of where this then maybe ultimately goes? Yeah, I mean, well, one, using the structure, they were able to save money

clients in mutual funds a lot on taxes, Vanguard gets consistent inflows. So then this concern about the capital gains distributions like bleeding into the ETF,

It's really only concerning if the mutual fund gets a ton of outflows and has to sell shares to meet a redemption. They've been really successful. But, I mean, Carol, they are Vanguard. I know. Well, that's why. They get huge flows. They have a huge audience. I think everyone saw Vanguard's success. I think most fund managers are realistic in that they don't have to sell shares.

They don't have the scale that Vanguard has. Yeah, that's fair, right? But if this is a way to maybe squeeze a little bit out and get a couple more assets through now having an ETF, might as well try, I think is the idea. But if I can add, you know, market watchers, critics, people we've talked to, analysts who are anticipating any of the potential conflicts with this, they say it's not a panacea for mutual fund managers to stench outflows like this.

Mutual funds still are expected to keep seeing outflows. So even if you get this dual share class structure approved, it doesn't mean that your outflows are going to, you know, that you'll be all set in terms of seeing. Especially if the performance is bad. Exactly. Vildana, you mentioned that if you have a successful ETF, it can be game-changing for a firm. A small issue.

It's majority owned by the president of the United States. And you wrote that they're laying the groundwork to come out with some ETFs. They are. It's actually an unusual move to pre-announce that you are planning to launch ETFs. Usually issuers keep their ideas close to their, what's the saying? To their vest, to their heart. Close to the vest. Close to the vest. And so it's very unusual to pre-announce that you're going to be doing something. But Trump media did say that they are planning

on soon filing and launching ETFs and separately managed accounts, SMAs, with three different themes, oil and gas, made in America, and cryptocurrencies. The catch here is obviously all of that is tied to the president's various policies, whether they're tariff-related or cryptocurrency-related. Obviously, oil and gas was a big theme when he was running for re-election. Right. But...

More than 60 oil and gas ETFs already exist. More than 60 Bitcoin focused. There's even a handful of made in America ETFs already. And so what a lot of ETF, you know, analysts, ETF, the industry is looking at this and thinking,

It's, you know, you're adding to the mix of an already saturated, oversaturated market, but it does come with potentially the president being able to, you know, maybe go out and say, you can buy my funds or something along those lines. And that that might, you know, hinder or hurt his position.

competitors, the people who already have these ETFs. - All right, that's a great story that you have on the terminal. We're gonna give you guys equal love 'cause you guys did a story together, that was your story. Emily, you've got another ETF story. We've just got about 40 seconds left here about State Street looking to kind of double down on its bid to bring private assets to a broader spectrum of investors.

This is an ETF? This is an ETF. This is the private market world, right? Yeah, this is a private credit ETF. They have one already. It launched in February. The flows have been very lackluster, especially for State Street. They're a big issuer. They've only seen like 5 million inflows over a couple months, but they are doubling down. This one's going to be a short-duration private asset ETF. The one they have now, it's a little bit longer duration. I thought private markets are longer duration.

Well, they said, yeah, they said this one's one to three years. It's still in the early stages. I don't know. Yeah. I don't know. Or maybe. You guys might, you should do, I know we have an ETF podcast, but you guys should do an ETF podcast. Don't get in trouble. Emily Grafeo, Vildana, Hirik. So appreciate it. Both Bloomberg News cross-asset reporters. Check them out on the Bloomberg and at Bloomberg.com.

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