Stuff I thought about last week 3-3-19
Greetings – This week’s topics include: why Warren Buffett should have taken his own advice and indexed Berkshire’s cash, semiconductors are going open source with big ramifications, the ‘Fantasyland’ of America, and more...enjoy and reply back with any comments or questions.
[Please read important disclaimers at the bottom of this note]
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Stuff about Innovation and Technology
Open source is now coming to semiconductors like Linux came to operating systems 20 years ago. This shift is starting with general purpose processors because Intel’s CISC-based x86, as well as RISC-based processors like ARM, are now legacy architectures with seemingly insurmountable security problems designed for homogeneous workloads of the past. Information processing workloads today – in the cloud and smart devices – are increasingly heterogeneous and require significant customizations and increased levels of security. On Tuesday, I attended the RISC-V summit in Mountain View to learn more about this important sea-change for the semi industry. (I have also written about this phenomena related to ARM Semiconductor here.) The CTO of Western Digital discussed, along with other key partners, building out a new open-source ecosystem for processing based on the RISC-V instructions. The new existential challenge for incumbent fabless semiconductor companies (these are companies that design standard chips to be made by others like Taiwan Semiconductor) is that increasingly their customers can make their own chips! In my note on ARM I sourced this quote from Western Digital:
“...we announced our first RISC-V processor core. And we announced that it would be completely open source. So in effect, think about this as doing to the processor world what Linux did to operating systems...Now let me give you a little interesting data point. When we started this with RISC-V and developing our own cores rather than acquiring them from the outside, we said, "Okay, we're on a marathon. We're not on a sprint. And so we need to have modest goals to get going." Right? So we said, "Let's just try to achieve parity with the cores we're using today." Right? So we shipped 1 billion cores a year. And so our first modest goal say, "We're learning something new by putting this together. Let's just basically achieve parity to what we have." That was essentially the goal we set for ourselves. Here's what happened: 30% improvement in power consumption, 40% improvement in performance and 25% reduction in footprint. Version 1.0. Not bad, right?”
This trend of insourcing semi design is happening in the cloud at companies like Google, Microsoft, Amazon, and Alibaba as they work on custom chips (e.g., Google’s TPU for search and machine learning workloads). Long term, this strikes me as bad for Intel, ARM, and other companies that make general purpose digital processors and standard digital chips like Marvel and Broadcom. Marvel currently supplies the chips to Western Digital that WD is working to design themselves. Conversely, it strikes me as very positive for companies like Cadence Design that makes software tools to design chips, as they will likely see growth in their potential number of customers designing chips. NVIDIA is one example of a general purpose processor company that is embracing RISC-V, and they have said they will integrate the cores onto their SOCs (system on chip) in the future. Programmable chips like FPGAs from Xilinx are more insulated from some of the early trends here, but it’s worth pointing out there are RISC-V-based FPGAs available today from companies like Microchip. It’s going to be a decade of winners and losers in semis while the tide rises dramatically for all companies from the tsunami of demand for cloud computing and connected, smart devices. Why should people care about this open-source movement in chips? The cloud, AI, and connected devices will generate demand for trillions of new semis, and this change in the way semis are designed should allow for cheaper and more custom chips. Investors in general seem oblivious to the trends in semis that will occur over the next couple of decades.
“Women’s viewership of esports grew from 23.9 percent of all watchers in 2016 to 30.4 percent in the fourth quarter of 2018.”
Google boosts output of wind power by 20% with new machine learning: “Using a neural network trained on widely available weather forecasts and historical turbine data, we configured the DeepMind system to predict wind power output 36 hours ahead of actual generation. Based on these predictions, our model recommends how to make optimal hourly delivery commitments to the power grid a full day in advance. This is important, because energy sources that can be scheduled (i.e. can deliver a set amount of electricity at a set time) are often more valuable to the grid.”
Will the FTC force unwinding of mega tech acquisitions like YouTube and Instagram? What would that look like? Spin offs to existing shareholders?
I am thrilled for the team at Lyft and so grateful they allowed me to play a tiny investor role over the last few years of their journey. I invested in Lyft because the drivers were happier, and happier drivers means happier customers. The drivers were happier because of the culture and management of Lyft. And, to the Lyft management team, I’d like to apologize in advance for the questions they will get from the buy-side investors on their IPO roadshow trying to compare and contrast Uber vs. Lyft while ignoring the bigger transportation revolution underway! My key IPO question: it seems like prices need to go up and drivers need to make more, but it also seems like there is good elasticity across a range of demand for various transportation solutions the two companies are providing...how will the ROI of ditching car ownership evolve for consumers as prices rise across existing and new transportation options?
China’s AI chip maker Horizon Robotics raises $600M at a $3B valuation.
One of my favorite megatrends is the potential for plastic containers to shift to aluminum. Last week at the Bank of America agriculture conference the head of metal beverage packaging for Ball, the largest maker of cans in the world, indicated that a 1% shift from plastic to aluminum in the markets Ball serves would be an incremental 18B cans (Ball presently makes around 105B cans a year). The company also discussed this opportunity in depth in their 2018 analyst day presentation (PDF link) starting on slide 17. From the conference last week: “the intensity of the conversations we're having with our customers I am emboldened by the number specific to the U.S. and to Europe in and around that. And the reality is if this thing moves appreciably, it won't be a 1% shift. And so that is the question that we're waking up and trying to ask every day, how big it could be. And that's why we're looking, at in much longer time frames, in terms of what the supply chain needs to look like and what do we need to do as the market leader to continue to activate this shift.”
“Kalashnikov, which is most famous for its AK-47 assault rifle, is moving into new territory with a drone that can carry up to three kilograms of explosives and detonate on impact. The KUB-UAV can travel at up to 130 kilometers per hour (78 mph) and stay in the air for 30 minutes.”
There appears to be three new IT infrastructure stacks that will now run in the cloud and in your own data centers with Amazon’s AWS, Microsoft’s Azure, and Google’s new CSP. These have displaced prior industry open-source efforts, like Open Stack or proprietary ones like VMWare, and continue to create a tough road for commodity hardware companies like Dell, etc. As these three platforms gain share, I expect Google, Microsoft and Amazon to increasingly take over the security vendor market as well, yielding three winning solutions for compute, storage, management, and security all-in-one.
The value destruction from the AT&T/WarnerMedia merger continues with departures of key execs this week – great news for Netflix, Amazon, and Disney.
A record number of robots were deployed in the US in 2018, with 41% growth in non-auto sectors (offset by a 12% drop in auto which accounts for half of the market). Semis and connectors are a good way to play robotics trends along with machine vision companies, but this could be tempered by the shifting trends in transportation as demand slows globally for autos.
Tesla going direct and closing their stores (many of which are mall-based) comes as other mall anchors, like Gap and Victoria’s Secret, announce more closures. It is shaping up to be a bad year for malls.
American cities are run on 30-40 year old software held together by metaphorical duct tape.
Two quick follow up points on my Zillow piece: 1) Why would Zillow be the winner of the “winner-takes-most” iBuying transformation of buying and selling houses? I see two possible answers, both speculative: first, brand and aggregation of users (Zillow is the top real estate portal by far), and, second, culture and execution (Zillow has a great culture of innovation, execution, and listening to customers). These are its advantages over challengers, like Open Door, in my opinion. It’s possible, however, that some other advantage, like access to capital or ability to sustain long-term loses, will be the winning determination – it’s up in the air. 2) I wanted to make another point regarding Redfin, which I think is taking an approach with a narrower range of outcomes and increased chance of success in the segments of the market they shine in: by providing an iBuyer offer to interested customers (but then having the option to instead sell that customer’s house with varying degrees of assistance for a range of fees) an integrated-technology brokerage model like Redfin seems to me to have the best consumer value proposition today. Redfin’s CFO described this in part at a conference this week:
“So where I think it fits in really is this set of 3 choices for the consumer. For some people, 1% pricing or 1% listing fee will make the most sense. Their home looks great. They can put it on the market today. They can pay the lowest possible fee. For other people, there's some work that needs to be done on the home, but the customer is willing to take some of the pricing risk associated with that, and that's how I think about Concierge Service. And then RedfinNow is the service that provides the most convenience for the customer, but we're taking the economic risk as the company, and so as a result, the customer likely receives fewer dollars than he or she would on that transaction. And so I really do think of these 3 services as being across the spectrum of the risk the customer is taking and the risk that the company is taking.”
Joe Rogan did a 5 hour podcast with a controversial guest this week. This might seem unbelievable, but I had no exposure to this guest prior to this podcast beyond reading last year when the large tech companies “de-platformed” the person. I’ve made my views clear several times in the past about the dangers of centralized determination of “borderline” content, so I won’t go back into that now. What I thought was interesting in my first exposure to this guest is how what he said embodies the rising fear of uselessness in an age of technology and AI. There was a good op-ed in late 2016 on this concept: Dalai Lama: Behind Our Anxiety, the Fear of Being Unneeded, and the topic is covered extensively by many people smarter than me, in particular, by the author Yuval Noah Harari. With the transition from the Industrial Age of capitalism to the Information age, power Law math, network effects, platforms, and data are creating a new digital operating system for the economy. It’s an OS dominated by difficult-to-understand concepts like AI and algorithms. Much of it is, by definition, mind control and influence, be it intentional or unintentional. I think it’s a fairly short leap for people to connect their fear of uselessness with a fear of technology and control, and, in many ways, it’s rational. Over thousands of years, humans have increasingly mastered things previously attributed only to gods. Going forward, perhaps people are afraid technology will displace the role of the remaining gods. Indeed, the challenge of keeping pace with the every-accelerating rate of change can be frightening in and of itself. I don’t agree with Rogan’s guest (and certainly do not condone violence in any way), but I think borderline views should not be silenced – I think we want them out in the open where people can evaluate them and be provided with alternate views and facts. However, rather than tackling difficult social/philosophical questions or attempting to improve their algorithms, big tech have apparently chosen the route of censorship, which I think is the route of fear and cowardice on the part of Apple, Google, Facebook, and Twitter that will do more harm than good long term. Lastly, the podcast reminded me of Kurt Anderson’s wonderful American history book Fantasyland – I highly recommend reading it for a window into the unique elements of America’s psychosis.
It’s going to be a good year to own real estate or provide a variety of services and goods in the Bay Area with a possible $250B in IPOs (obviously much of that belongs to institutional investors and will be subject to lockups, but lots of coin will be raining down on Northern California).
Stuff about Geopolitics, Economics, and the Finance Industry
Buffett’s two internal portfolio managers haven’t beat the SP500 for the last 7-8 years – Buffett indicated they were ahead the first few years, but “Overall, they are a tiny bit behind the S&P each by just almost the same margin over the same time” and had their comp clawed back as part of their incentive deal. I’m going to make an unfair comment, but it has a decent probability of being true: Berkshire’s investment philosophy lagely believes value is determined by legacy constructs honed in the 1900s – in particular, they seem to rely on an outdated view of what underpins competitive moats. It’s a view that ignores the power of platforms and the force of network effects, and over-emphasizes obfuscation as a competitive advantage when transparency is now what creates value. In general, their model ignores the fact that technology is re-writing a new digital operating system for the entire global economy. In other words, the definition of what creates long-term value shifted in the transition from the Industrial Age to the Information Age, and Berkshire is investing in the rear view mirror – Buffett should have taken his own advice and put Berkshire’s cash in a Vanguard SP500 index fund. On a related note, Buffett made a few more comments that I found disappointing. First on Oracle:
"[Cofounder and CTO] Larry Ellison's done a fantastic job with Oracle. I mean I've followed it from the standpoint of reading about it. But I felt like I didn't understand the business,"
"Then, after I started buying it, I felt I still didn't understand the business. I actually changed my mind in terms of understand and not in terms of evaluating it. I think, I mean, Oracle is a great business. But I don't think, particularly after my experience with IBM, I don't think I understand exactly where the cloud is going.
"You know, I've been amazed at what Amazon has done there. And now Microsoft is doing it as well. So I don't know where that game is going."
And then he gave this self-contradictory statement on Kraft Heinz: “We don’t pull the plug…It isn’t our style,” he said. But he said he also wouldn’t buy more Kraft Heinz, even after its share prices slumped last week, because “it isn’t worth as much.”
Most economists see a recession coming, which is the best economic news I’ve seen in a while since we know economists have never been intentionally correct, especially when they all agree on something.
Jeff Skilling is out of prison after his 12 year Enron sentence.
As soon I praised the business model transition of Fidelity, it turns out they have been charging potentially unscrupulous fees for distributing funds on their platform. While it’s unclear if this opacity is their fault or outside the industry norm, it’s clear there remains a huge problem in the investment industry of middlemen that don’t earn their keep, and too many hands in the pot damaging returns for investors.
“China bars millions from travel for ‘social credit’ offenses.”
“Waves of U.S. and international universities have closed down Chinese government-funded Confucius Institutes due to academic freedom concerns. Now, after determining that Beijing has been using them to downplay Chinese economic and security threats, the Senate Permanent Subcommittee on Investigations has recommended ending over 600 such programs at U.S. schools and universities.”
Nothing in this newsletter should be construed as investment advice. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. I may own long or short positions in stocks discussed in this newsletter. This newsletter is simply an informal gathering of topics I’ve recently read and thought about. It generally covers topics related to the digitization of the global economy, technology and innovation, macro and geopolitics, as well as scientific progress especially in the fields of cosmology and the brain. I will frequently state things in the newsletter that contradict my own views in order to be provocative. I may change my opinions without updating them in the newsletter. Lastly, often I try to make jokes, and they aren’t very funny – sorry.
I was the portfolio manager of the Janus Henderson Global Technology products (ticker: JAGTX) from May 2011 to November 2018. Prior to that I held various roles as an analyst and portfolio manager at Janus Henderson Investors for most of the period starting as a summer intern in 1998 up until the end of 2018. I graduated from Williams College in 2000 with BAs in Economics and Astrophysics. A complete resume can be found at www.linkedin.com/in/bradsling
Investment framework co-authored with Brinton Johns “Complexity Investing” can be found here: http://www.evolusophy.com/complexityinvesting/
If you have any articles of interest, comments or questions please send them by responding to this email. I will generally try to read and respond to your comments or questions, but may not always be able to in a timely manner, for which I apologize in advance.