Episode summary
Cisco Tumbles After Profit-Margin Squeeze Overshadows AI Gains | Bloomberg Intelligence
Bloomberg Intelligence
· · Hosts: Paul Sweeney, Scarlet Fu · Guests: Woo Jin Ho, Jody Lurie, Michael Halen, Nathan Naidu
Summary
Cisco’s selloff was tied to a profitability squeeze, not a collapse in demand. The analyst said higher DRAM and memory-chip costs are creating a “new normal” for hardware makers, with Cisco already absorbing margin pressure in the reported quarter and facing another 200 basis points of gross-margin drag next quarter. He argued the issue is broader than Cisco, extending to Dell, HPE, servers, PCs and smartphones, while AI-related demand is also tightening memory supply and pushing the pricing cycle out by 2 to 3 years.
On travel, Hyatt’s results fit a broader luxury-led K-shaped consumer story. The analyst said high-end demand remains strong, matching what Marriott and Hilton have reported, while lower-end and more concentrated hotel brands may feel more pressure. She said Hyatt still has a debt story because the company has used leverage for acquisitions, but its asset-light model and management-fee structure help support cash flow and deleveraging over time.
In restaurants, McDonald’s was described as reasserting its value leadership in the US, helped by strong marketing and beverage innovation. Restaurant Brands’ results were mixed: Burger King and international operations looked better, while Tim Hortons slowed and Popeyes remained weak. AppLovin sold off on AI-disruption fears, but the analyst said its ad auction business has a strong moat and mature machine-learning models that should take time to displace.
Key takeaways
- Cisco’s weaker outlook was framed as a margin problem from DRAM inflation, not a demand problem, and the analyst expects pricing pressure across hardware makers.
- The analyst said AI demand is worsening the memory-chip shortage and that new capacity takes about 2 to 3 years to build.
- Hyatt’s strength reflects a K-shaped travel market, with luxury demand holding up while lower-end brands are more exposed.
- McDonald’s is being helped by value meals and beverage innovation, which the analyst said could matter more in the second half.
- AppLovin fell on AI fears, but the analyst argued its ad-targeting model and scale give it a durable competitive advantage.
Notable quotes
“it is going to create a new normal. Um quite quite frankly the the magnitude of the uh DRM uh price increases was a bit higher than we had anticipated”
“the AI opportunity which is going to be multi-year for Cisco”
“we're seeing the strength in the luxury market at the moment”
“we think this is um this could be meaningful for them in the second half”
“I believe uh because AppLin's model uh at least in helping advertisers target ads inside of mobile gaming apps that model is mature”
How the episode opens
Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App.
Listen on demand wherever you get your podcasts or watch us live on YouTube. We are still kneedeep in earnings season and even though I keep saying that most of big tech has reported, not all of tech has reported. Cisco was the latest to report.
It's a hardware company. They make the gear for internet networking. Um, and they're benefiting from AI.
They're getting more business from AI like many hardware companies, but they're also seeing a downside to that and that is higher costs. Wuenho is our senior hardware networking analyst uh here now to give us some insight into Cisco. So, Wujun, it sounds like the increasing cost of memory chips is kind of dogging Cisco like we've seen with other hardware companies.
How do you think about the increasing cost of memory chips? Is this kind of a one-time problem, one time adjustment, or is this creating a new normal for hardware companies?
Yeah. Hey, Scarlet. So, um, you know, when we think about it, it is going to create a new normal.
Um quite quite frankly the the magnitude of the uh DRM uh price increases was a bit higher than we had anticipated and it's going to be a drag on margins uh at least uh it already hit uh the current quarter reported quarter and then uh it is going to be another 200 basis points uh gross margin ion next quarter. Uh the one thing that uh we can be assured of is that there's going to be price increases across the board um for a lot of Cisco's products and more importantly a lot of uh uh big tech products uh such as Dell and HPE uh going forward.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- earnings recaps
- profit margins
- ai disruption
- hospitality results
- consumer spending
Companies and tickers mentioned
- CSCO
- H
- HLT
- MAR
- MCD
- QSR
- APP
- Cisco
- Hyatt
- Hilton
- Marriott
- McDonald's
- Restaurant Brands International
- AppLovin
Watch the episode
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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