Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, flying snakes, and whatever else made me think last week. Please grab me on Twitter with any thoughts or feedback.

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In today’s post: dark stores and Catch-22s; the paradox of Eggo waffles; the grocery store magazine rack; connected fitness; open-source semis; lift and shift to the cloud accelerates; cloud M&A storm; adaptability and DCFs; mid-year update from NZS Capital and lots more below...

Stuff about Innovation and Technology
Smelling Hot and Cold
The trigeminal nerve endings in your nose send temperature signals to your brain using transient receptor potential (TRP) ion channels, which can be triggered by either specific temperature ranges or, importantly, certain chemicals. As a result, some smell molecules are perceived by the brain as temperature changes. For example, smelling peppermint can make you feel cold because it triggers TRPM8, which happens to be correlated with both menthol and temperatures below 77 °F (25 °C). Hot peppers contain capsaicin, which triggers TRPV1, signaling temperatures above 108 °F (42 °C). Some of the isolated chemical triggers (eucalyptol for cold, capsaicin for hot) don’t have much inherent odor, and so their presence can signal temperature without an overly distracting smell. And, that’s what researchers at the University of Chicago are using to make you feel hot or cold while immersed in virtual reality via a modified headset. The sensation isn’t as strong as direct heating/cooling of your skin, but it still might be a more energy efficient way to cool off this summer rather than cranking down the air conditioner. 

Alexa Increasingly Lending an Ear
Amazon’s Alexa chief told GeekWire that voice usage for Alexa apps is up 65% over the past two months. Voice search is up as well – one week in April, people asked Alexa for more cooking tips than they did during Thanksgiving week 2019. Amazon also launched the Alexa Agencies Curriculum: “a set of Alexa skill-building resources specially designed for agencies, brands working with agencies, studios, and tool providers who are building voice strategies and go-to-market campaigns for brands”.

IRS Purchased Marketing Data to Track Suspected Fraudsters
The IRS Criminal Investigation unit purchased commercially available data from Venntel, which takes data from the digital advertising industry and repurposes it to map cell phone locations, according to the WSJ. The data, which costs only $20,000, starts out ‘anonymized’, but can easily locate real people in the real world without difficulty. Accessing the data would appear to be a glaring violation of the 4th Amendment, as it normally requires a court order (based on reasonable grounds) to obtain the equivalent location data from a phone company. Venntel’s parent company, Gravy Analytics, also sells the data to advertisers to enable consumer targeting. Various law enforcement agencies are using similar data, which has resulted in false arrests in recent years.

Disney’s Face Swapping AI
Disney has developed cutting-edge, face-swapping AI to help offset the costs of reshoots or other minor edits once filming is complete. The innovative algorithm allows for much higher resolution, movie-quality face swaps that can be trained on footage from the original shoot. The downside is that the technological leap will make deepfakes much harder to ascertain.

DoorDash Goes Dark
DoorDash is using “dark stores” – locations serving delivery drivers only – to support a new effort called DoorDash Essentials. The goal is to offer a selection of convenience store items to customers with free delivery in under 30 minutes, which would be a real feather in their cap. Three weeks ago, I talked about Instacart’s Catch-22 (suggesting that – to avoid an existential middle-man crisis – they should vertically integrate with their own dark grocery stores, with the caveat that the move may curtail their current access to traditional shops). And, two weeks ago, I sensed the same Catch-22 at play when Uber decided to exit the cloud kitchen market (which would likely compete with the Uber Eats’ restaurant base). To really transform the food delivery market – whether grocery, convenience, or restaurant – vertical integration is likely to be the most durable business model. It’s a recurring theme we see as analog businesses go digital (see SITALWeek #219 for examples). DoorDash is also testing cloud kitchens in several cities, according to the HNGRY article. 

Fitness Mirror on the Wall
Lululemon announced the acquisition of Mirror – the maker of a connected, in-home, fitness interface – for $500M. In the past, I’ve briefly discussed the potential for Peloton (who is rumored to be coming out with a strength-training device to complement their connected bike and treadmill) to become a full-fledged lifestyle brand as it sells apparel and builds out the ‘Netflix’ of exercise classes. Depending on how long it takes for the world to get back to ‘normal’, the demand for exercise-focused lifestyle apparel could be depressed for quite some time, while the demand for home-gym options should continue to increase. So, this acquisition by Lululemon seems well intentioned; however, building a scale hardware, software, and content platform seems harder for Lululemon than it would be for Peloton to design and sell clothing. Nike and Under Armour have tried to extend into the tech world over the last decade with mixed results.  

Netflix Uses YouTube
Netflix is increasingly using rival YouTube to drive engagement with its content. The reversal comes as Netflix sees YouTube as a way to sustain interest in its comedy and made-for-kids originals. According to Bloomberg, toy makers believe engagement with YouTube may help offset the one-and-done nature of Netflix title binging by keeping the content in front of people more continuously. The company’s “Netflix is a Joke” YouTube channel has over 1M subscribers. 

Selection Freeze Sees Mild Thaw
There are currently 16 different types of Eggo frozen waffles: Homestyle, Buttermilk, Blueberry, Strawberry, Homestyle Mini, Cinnamon Toast, Brown Sugar Cinnamon Roll, Whole Grain, Whole Wheat, Nutri-Grain Blueberry, Mickey, Paw Patrol, Frozen, Spiderman Mixed Berry, Apple Cinnamon, and Chocolatey Chip. Following a similar taste explosion, Lays has gone from four to 60 types of chips over the last 45 years, while Campbell's has gone from 150 to 600 types of canned soup in the last 36 years. From 1975 to 2018, the average grocery store went from 9,000 items to 33,000. A 2004 book titled “The Paradox of Choice” described how modern consumers are so overwhelmed with selection that they become paralyzed and anxious with indecision. However, help may be on the way, with the WSJ reporting that the number of unique items sold at grocery stores is down 7.3% from last year. A similar percentage drop has occurred at both fast-food and full-service restaurants. The effort is driven more by manufacturers’ desire to focus supply chains amid changing demand rather than a sign that consumers want fewer choices. I wonder if the rise of dark stores and vertically-integrated food and grocery delivery will help streamline choice, or perhaps instead it will give us even more items to decide between? Will the marketing costs to put products and menus in front of consumers become even more competitive in the auction-based, digital ad platforms that will drive profits for delivery platforms? A suggestion: if anyone wants to create a healthy, delicious, curated sustenance delivery service that requires virtually no choice or effort on the part of consumers, I’ll be the first to sign up. 

What’s the Magazine Rack Worth?
I covered the existential business model transition underway at Facebook in SITALWeek #250 before the advertiser boycott escalated, so I won’t rehash that. I’ve seen a lot of cynical takes that the boycott is just virtue signaling by brands who aren’t meaningful to Facebook’s revenue. Maybe that’s true; but, in my experience, cynics sound smart, yet are never right over the long run. Ultimately, Facebook’s content needs to create value for both users and advertisers to sustain its advertising business, which represents the vast majority of its current revenue. The negative-sum value proposition of the news feed is based on content that largely represents the digital incarnation of the grocery store magazine rack (People Magazine and National Enquirer come to mind), but on a bigger scale, with personal data that can be used to sell ads, and risks being weaponized. How much is that magazine rack worth?

Processors Go Open Source 
Open-source processors are the next big thing to impact the market for semiconductors. I first wrote about RISC-V back in February 2019 and, since then, the movement has gained a lot of momentum. For example, there’s a 3-penny microcontroller based on RISC-V from China’s Padauk. IBM continues to open source aspects of its Power processor architecture and, recently, opened up their Power-A2 core. The Next Platform quotes the president of OpenPower: “the Power-EN and the Power-A2 that followed it were developed to be optimized for throughout but also for customization. The design has auxiliary units that can be tightly coupled to the core. We were almost ahead of our time a decade ago, since this is exactly what everybody is doing with their special purpose designs and we were also creating an edge of network chip. And on top of that, the Power-A2 design has the ability to balance performance and power.” For a good overview of the processor market, I recommend this recent Lex Fridman podcast with Berkeley professor David Patterson, one of the original creators of the now-dominant RISC architecture. RISC has beat Intel (CISC) in large part because it’s parallel instead of serial. This is also why GPUs are the new leader in AI and machine learning – Nvidia is in 8 of the top 10 supercomputers (and, its increasingly important network provider, Mellanox, is in 333 of the top-500 fastest systems).

Bull Market in China's Semi Stocks
The rising trade tensions between the US and China, increasingly centered on semiconductor technology access, has caused a bull market to form for the 45 Chinese-listed chip startups, which now trade at over 100x earnings – living up to expectations is going to require the sale of a lot of 3-penny chips! VC investments in China’s chip market doubled from 2017 to over $3B in 2019, according to Reuters. We covered the history and future of the chip market, including the China situation, in last week’s SITALWeek and accompanying podcast (Spotify) for those who missed it. 

Ant Rebrands and Refocuses
Alibaba’s successful banking subsidiary, Ant Financial, changed its name to Ant Group and embarked on a new mission to provide a broad array of services to consumers and businesses under the new leadership of CEO Simon Hu. Bloomberg reports on the company’s new strategy, which is meant to counteract payments share loss to Tencent and Meituan-Dianping. Hu’s goal is to “digitize the service industry” more broadly with payments and demand generation. Tencent has taken share with its innovative mini-apps in WeChat over the last three years – a strategy now being copied by Snap in the US. 

Accelerated Cloud Adoption
Data and research provider IHS Markit will move all of its on-premises and co-located workloads to AWS over the next three years, leveraging VMware Cloud for the migration. This is a notable, data-intensive cloud migration that signals more to come as the pandemic has accelerated many IT transitions.

Multi-Cloud Serverless Workloads
Tim Wagner presented some interesting slides – for the AWS Serverless Community Day keynote – that describe how serverless workloads can be inherently multi-cloud. Wagner was head of serverless (Lambda) at AWS from 2013 to 2018, and his new company, Vendia, aims to create serverless, distributed apps using a cross-cloud, decentralized database as a service for developers. 

Will Clouds Merge into Perfect Storm?
One broad way to conceptualize enterprise IT is four horizontal clouds: 1) customer cloud, 2) employee cloud, 3) finance cloud, 4) IT cloud (here, I mean products like ServiceNow, not tools for developers like AWS, Atlassian, and GitHub). The leaders of these clouds today are Salesforce (#1), Workday (#2 and #3), and ServiceNow (#4). Each focuses on a key decision maker: CMO, head of HR, CFO, and CTO, respectively, but it’s increasingly important to connect dots across all of these clouds. For example, you might need identity and security software like Okta for your IT department to manage internal employees (#4) and your external customers (#1). I suspect we are going to see a wave of software M&A similar to the ERP consolidation of the 1990s and 2000s. There are some obvious deals, some obvious empire-building CEOs, and some salivating bankers ready to make it happen. Related, Salesforce recently invested $100M in endpoint security company Tanium (that’s a leap from Cloud #1 to Cloud #4) as it launches a new “work-from-anywhere employee experience” for IT help desks.

Miscellaneous Stuff
Airborne Serpents Slither for Stability  
To determine whether flying snakes undulate their bodies to further their glide or simply out of reflex (like when dogs “air paddle” when held above water), researchers at Virginia Tech affixed snakes with reflective tape and let them glide around “The Cube”, a cavernous room outfitted with high-tech motion capture equipment (complete with padded floor and alert snake handlers). Turns out, mid-air undulations are complex, involving “horizontal and vertical waves, whose phases differ by 90° and whose frequencies differ by a factor of two”, but for a discrete purpose: to keep the snake stable – like a “morphing wing” – and extend its glide.    

Uh huh huh huh...Cool
ViacomCBS is working with Mike Judge to bring the 1990’s favorite deviants Beavis and Butt-Head back to TV. Judge is also well known for “King of the Hill” and the movie “Office Space”, though perhaps his 2006 movie “Idiocracy” is the most relevant work for the times in which we now find ourselves.

Navy: Just Say No
US Navy personnel have been asked to stop buying LSD off the dark web by the Naval Criminal Investigative Services. We might have a lot less war if soldiers (and their commanders) around the world had access to LSD🤷‍♂️. As Kurt Vonnegut said: “Our government's got a war on drugs. That's certainly better than no drugs at all”. (Michael Pollan’s Book “How to Change your Mind” has a good perspective on psychedelics.)

Sled Dogs: Oldest Dog Breed?
An archeological site in Siberia from 9,500 years ago demonstrates the long relationship between humans and sled dogs. The finding pushes back the timeline for domestication of Eurasian wolves to at least 15,000 years ago.

Stuff about Geopolitics, Economics, and the Finance Industry
Australia, India Wary of China
Australia will spend $185B over the next decade in defense capability, up 38% from the previously announced budget only four years ago. The main driver is risk associated with the “increasingly assertive China in an Indo-Pacific region”. That assertiveness has been on full display in Hong Kong and the Chinese-Indian border in recent weeks. India’s government has banned 59 apps, including TikTok, and is also looking to ban telecom equipment makers Huawei and ZTE. Notably, Reliance Jio, the largest wireless operator in the country, built its network without Chinese equipment. Biden’s campaign advisor on foreign policy, Eli Ratner, writes in the WaPo that we should not characterize tensions with China as similar to the cold war, but instead deploy “multiple strategies aimed at decreasing interdependence and competing effectively where necessary, and conserving energy and resources where not.”

Flexibility? Close Enough
NZS Capital’s investing philosophy in one sentence is: the earth is dominated by complex adaptive systems; therefore, adaptability is the most important aspect of any business. This leads to important conclusions, such as, discounted cash flow (DCF) analysis is of very little use. How many investors accounted for a pandemic in their 2020 DCF column back in 2019 when they analyzed a stock? We covered the problems with DCFs, including the serious math error they are based on, back in SITALWeek #229 (at the end, under the heading “Non-Ergodic Systems Bury the DCF”). We poked a little fun at DCF-champion Damodaran, so I was pleasantly surprised to see him realize the importance of adaptability in his latest post:
“Simply put, the flexibility of an organization measures the speed and cost with which it responds to changed circumstances, with more flexible firms adjusting faster and at lower cost than less flexible firms. That definition, though, encompasses a range of actions that stretch across every aspect of business, covering everything from how investments are made, to how the business is operated, to how it is funded, and finally to how much cash is returned to owners (in the form of dividends and buybacks).”
Damodaran’s focus is largely on quantifiable measures of flexibility, which don’t typically reveal the real drivers of adaptability related to corporate culture, long-term thinking, innovation, decentralized/empowered employee base, etc. (we cover all that in more detail in our 2014 paper Complexity Investing.) It’s not possible to put a meaningful “flexibility” row into a DCF or a financial model, and it's surprisingly hard to glean adaptability from numbers. Letting go of your desire to build detailed models and accurately predict the future is the most uncomfortable enlightenment you will face as an investor. It’s essential, yet very difficult to come to grips with.
[Answers to FAQ from last time I posted on DCFs: yes, I understand the value of an implied DCF; yes, I have read Damodaran’s work; yes, I have attended Damodaran’s seminars in person (over 15 years ago); no, I still do not think DCFs are going to help anyone identify long-term winning companies; and no, I don’t think DCFs are useful when thinking about Margin of Safety 😜.] 

NZS Capital's mid-year update letter can be read here.

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Disclaimers:

The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  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. Often I try to make jokes, and they aren’t very funny – sorry. 

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