Stuff I thought about last week 5-12-19
Greetings – privacy is the new big business for the Internet giants; NVIDIA’s stronghold on machine learning and AI continues in the data center while the IoT remains a wide open market for AI; despite low rates homeowners are stretching to get into houses; meanwhile, large institutional investors are happy to continue their trend of buying illiquid assets such as single family homes. Lots more below, feel free to reply back with any feedback.
[Please read important updated disclaimers at the bottom of this post]
Stuff about Innovation and Technology
North American smartphone shipments hit a 5 year low in Q1 2019 as phones stall out on new features and the replacement cycle continues to lengthen. We are probably in this new reality until the next platform of augmented reality takes off over the coming years – it’s a headwind for phone makers and chip companies until IoT arrives with 5G connectivity.
Google announced this week new Chrome privacy features, including anti-fingerprinting cookie tech, so that you can’t be tracked across devices and sites. If we look at what’s happened with GDPR privacy legislation in Europe (and what’s undoubtedly coming to the US), as well as this broad move to privacy (which really means limiting your data to fewer sources, not actual privacy), you can expect to see advertising market share continue to consolidate at the few companies with large amounts of first-party data: Google, Amazon, Twitter, and Facebook. In other words, privacy is the new big business for Google and these other ad-based companies! The Google CEO made the case this week that tech can do even more for you if you consolidate who has access to your data to one company, like Google. I am not being cynical here, I tend to agree we should have single holders of our data and we should have total control over that data, which should actually improve the benefits of AI in our daily lives.
Microsoft has a new AI-powered editor for Word that will help you write more clearly and concisely, among other features. While this is probably a welcome improvement for most of us (yeah, I get it – you all probably think I need this!), it also feels like a dangerous way to lose diversity of writing and thought, leading to a lot of homogeneous wording. But, that’s the direction professional writing is heading already with AI creating entire stories as OpenAI announced recently. I do wonder what Word’s new AI editor will mean for high school English classes...
Netflix continues to license content made in and for China across its global subscriber base. This week I watched Wandering Earth, based on the short story by the author of the Three-Body Problem, Liu Cixin. It’s an average sci-fi movie, sort of a good plot watered down by a mediocre treatment, but I think it will have clear appeal outside of China. I thought it was interesting how current Beijing agendas were worked into the plot so smoothly. Netflix has proven the universal appeal of content – people tend to like good storytelling no matter which culture it comes from. Netflix will also be distributing a Youku (owned by Alibaba) rom-com: “More than 50 original productions have been distributed overseas in the past two years, as we see growing interest from international distributors,” said Brandy Zhang, chief editor of Youku’s online series division. “We want to create even more quality content that resonates with viewers around the world.”
This week I attended an AI chip conference hosted by the research publication Next Platform. There were a few key takeaways from the companies that are trying to create new architectures in the data center and the edge for machine learning and inferencing (once you build a learning model, inferencing is the mechanism to check an input, like a video or picture, against that model; inferencing often takes place out at the edge in a connected IoT device like a drone, smartwatch, etc.). While many of the startup chip designers are still targeting new data center chips, there was a clear concession that NVIDIA owns the market today for machine learning/training. One VC suggested potential challengers needed to demonstrate a 50-100x improvement to challenge NVIDIA. Also, there was a clear view that we will need acceleration in the data center for a long time, as Intel and AMD chips can’t do learning well, and, for now, FPGAs are still a good choice for those applications. Lastly, in the data center, efforts by Google, Amazon, Alibaba, etc. to create their own specialized ASICs for AI also cap the opportunity for other companies to break into the market, and ultimately take some of the opportunity from NVIDIA. However, out at the connected edge of the network in IoT devices, the story is much different, as this is still a very heterogeneous market for performance/watt, and, frankly, is still wide open with lots of startups and existing chip makers likely to be successful.
In the past I’ve highlighted the autonomous driving debate between Elon Musk (who thinks computer vision can solve the problem and achieve full autonomy) versus everyone else who thinks LIDAR, RADAR, and more is needed. There is a MIT research scientist, Lex Fridman, who seems to agree with Musk on computer vision, but also believes there will always need to be a vigil person present, which would negate a lot of Musk’s predictions for Teslas. This is covered for about an hour starting at minute 38 of a recent Joe Rogan podcast. Also mentioned positively is GM’s Cruise, which was recently valued at a staggering $19B.
Now that Amazon is going into mature growth mode for its core business (which seems to have been largely glossed over by investors lately), margins are rising and the whole company can catch its breath after a crazy run of expanding warehouses and logistics. Growth and profits going forward will come from advertising and AWS while heavy investments are likely to shift to offline retail buildout in order to continue consumer spending share growth. Although the shift to 1-day (and eventually same-day) Prime Delivery will keep Amazon’s share steadily rising, it wouldn’t be surprising for their core retail business in North America to slip into single digit growth in the next 2-3 years. This is the reason Amazon will go after different vertical markets more directly on and offline. Prescriptions are one of these large vertical markets, and, recently, Amazon started advertising its PillPack service on their site; here is a long article this week on the PillPack deal and Amazon’s much more ambitious plans for it. This slower growth phase for Amazon’s core business allows Bezos to start building artificial planets and colonizing the moon! (if you missed the webcast, there are some great recaps of the Bezos event in that link.) Let’s be honest with ourselves and speculate that Jeff probably isn’t spending as much time at Amazon now that growth has slowed down so dramatically. It’s unclear how Wall Street will respond when it recognizes Amazon’s slower growth, given that profits will be concurrently rising on higher margins and the mix shift to ads, AWS, and 3rd-party/same-day lunar delivery – rumored to be called “Lunar Now.”
There’s been a fairly disturbing revelation of the lead levels in kids items sold across Amazon and Amazon’s prior hands-off approach. Recent fines and requirements have turned the marketplace for kids goods on its head, requiring certification of all the items as safe.
Here’s a provocative NYT article on the popular teen app TikTok: “Consider TikTok, a social video-sharing app that last year had more downloads on the Apple app store than Instagram...Users can upload videos of themselves or friends lip-synching the latest pop tunes or decorating or distorting their faces, all easily edited into a clip for other users to “like,” “share” or comment on.
To China’s surveillance state, a video-sharing app offers much more than than your dog dancing to Drake.
...If your face appears in the background of another person’s TikTok video shot in Berlin, will it be logged using facial recognition software running in Shanghai?”
Bullying comes to the popular game Fortnite – kids who cannot afford custom avatars are often ridiculed and bullied on the platform. In other troubling video game news this week, a Senator’s new legislation targeting in-game spending by kids, which is often gambling-like, didn’t seem to get enough attention from investors. The industry did not react quickly enough to the scandals over the last 18 months and now may lose the right to police themselves and this lucrative line of business. Meanwhile, in China, where the government continues to emphasize pro-China game content, Tencent (the largest gaming platform in China) removed the popular foreign game PUBG and replaced it with a near copycat called “Game for Peace”, paying tribute to China’s air force. Rounding out gaming news is this fascinating story about the Niantic (maker of Pokemon Go, funded by Google) game Ingress: How an Augmented Reality Game Escalated into Real-World Spy Warfare.
Real estate technology platform and discount broker Redfin reported earnings this week, and one thing that stood out to me was the repeated notion that consumers are really “stretching” to own homes right now even with lower rates (“Home prices have increased so much faster than wages that you just have a bunch of aspirational people who really want to get into a home. It's our duty to serve them as well as we can but they are stretching.”). One consequence of sustainable low rates (driven by technology-lead deflation), is that large institutional investors have an edge in asset ownership. No longer relegated to commercial buildings or other hard assets, investors are increasingly owning large portfolios of single family rental properties. And, this trend of seeking alpha in private assets could be part of an alarming bubble that could spill over into a public stock market crisis as explained in this article. Perhaps we are seeing a broader shift underway in asset ownership – with low rates and technology, large institutional investors are perhaps better owners of assets than individual consumers. Homes and cars are the obvious examples, but maybe the trend will broaden even further? I also enjoyed this enlightening note from Redfin CEO Glenn Kelman as the company leads the charge in providing a broader set of options to consumers buying and selling homes – worth reading for all real estate industry watchers. Lastly, on the topic of real estate, Zillow had this to say on their earnings call this week: “In Q1, we received more than 35,000 seller requests, and that demand is rapidly accelerating. We now receive one request every 2 minutes, which is nearly $200 million in potential transaction value per day.”
Violent crime is at its lowest rate in a decade, but the rising use of connected cameras and niche social networks focused on crime reporting is taking advantage of a classic cognitive bias in our brain to increase our levels of fear – don’t fall for it.
The twistronics of twisted graphene: “Even without superconductivity, ordinary computers and other electronics could get a huge boost in performance versus cost from twistronics, due to the fact that entire complex electronic circuits could in theory be built into a few sheets of pure carbon, without needing a dozen or more complexly etched layers of challenging materials common to today’s chips. “You could integrate wildly different properties of matter into these circuits right next to one another, and vary them with local electric fields,” said Dean. “I can’t find words to describe how profound that is. I’d have to make something up. Maybe dynamic material engineering?”
Here is a great podcast with Google X consultant and Stanford physics professor Leonard Susskind on quantum gravity. It’s not overly technical, but if you aren’t a black hole geek, you might want to skip it.
Apple released its first iPhone game in a decade last week – Warren Buffett’s Paper Wizard – where you can throw virtual newspapers at houses. It leaves one to wonder what other games they could release depending on which celebrity investor is next to take a big stake in AAPL?
Michael Pollan, the definitive author on modern psychedelic research, reacts to Denver voting to partially legalize magic mushrooms: not so fast, he says.
Weeds and natural selection are fighting back hard against Roundup, which, in some areas, has to be applied in saturating levels right after seed planting to avoid super weeds from taking over. And, sketchy details emerge in Monsanto trials regarding research papers the EPA relied on to declare glyphosate safe: the papers were ghost written by Monsanto and not the product of independent research. Meanwhile, two weeks ago, Scotts Miracle-Gro, which exclusively sells Roundup to consumers in the US and other countries, enjoyed a surprise 20% y/y growth in the US retail channel this spring, attributed to heavy consumer advertising of the product supported by Bayer.
A dinosaur that had bat wings was discovered in China.
Stuff about Geopolitics, Economics, and the Finance Industry
Strange things are still afoot at the Circle K with Terry Guo’s bid for Taiwan’s presidency. This week Guo scolded China to recognize Taiwan’s independence, a seemingly risky move for the founder of iPhone-maker Foxconn given all their factories are still in China. Obviously, this was a coordinated charade. Speaking of China, there was a lot of evidence this week that we should have no expectation of a trade resolution. Negotiations could be a decades-long battle, or at least that’s how investors should be treating the situation in our base-case scenario analysis – it’s not analyzable. While the US economy is strong, China’s economy is also rebounding, driven by fiscal spending. Here is a good trade recap from the US-China Economic and Security Review Commission.
I am a co-founder of NZS Capital, LLC investing alongside Brinton Johns. I was formerly 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/
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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. The content of this newsletter is my personal opinion and may not reflect the opinion of NZS Capital, LLC. 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.