Welcome to Stuff I Thought About Last Week, a collection of topics on tech, innovation, science, the digital economic transition, the finance industry, lassos, 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: transparent business model coming to prescription drugs; Qualcomm bolsters Arm processor business while Intel finds a new CEO to help them respond to the threat of Arm; increasing risk of cloud concentration; robot sommeliers; what makes a good idea from Nick Cave; the velocity of information and how to fix the Internet; and lots more below...

Stuff about Innovation and Technology
2020 Year-End Letter
NZS Capital’s year-end letter is now available on our website. You can also find part of the market commentary at the end of this email.

Handy Beverage Butler
Samsung debuted a concept robot at the virtual CES this year called Bot Handy. The robot is intended to be a helper around the house anytime you need an extra hand, but I believe its most popular feature is acting as a bartender on wheels. Bot Handy can even pour a glass of wine, leaving me to ask only one question of Samsung: Where were you in March of last year when we needed this most!?

Non-Zero-Sum Prescription
The Mark Cuban Cost Plus Drug Company is a new venture from the prolific entrepreneur to make generic drugs with the following mission: “We will let everyone know what it costs to manufacture, distribute, and market our drugs to pharmacies. We add a flat 15% margin to get our wholesale prices. This makes sure we remain viable and profitable. There are no hidden costs, no middlemen, no rebates only available to insurance companies. Everybody gets the same low price for every drug we make.” We talk a lot about the increasing transparency ushered in by the Information Age and the corresponding need for businesses to focus on non-zero-sum (NZS) – win-win outcomes that maximize benefits for all constituents. The idea of bringing transparency plus lower cost to an established market fits right in with that view of the world. MCCPDC plans to have 100 drugs available by the end of 2021 and will build manufacturing capacity in Dallas.

Virtually Sliming the NFL
CBS Sports teamed up with Nickelodeon and the NFL to project live, augmented-reality graphics and videos onto gameplay for a separate kids version of the Saints vs. Bears. Touchdowns resulted in “virtual geysers of slime bursting from the field”. The rest of the on-field graphics for 1st down markers, etc. all got a Nickelodeon makeover. The game also featured broadcasters focusing on educating kids about the game as the NFL tries to grow their younger fan base.

Qualcomm Leveling Up Processor Power
Qualcomm plans to acquire Nuvia, the Arm processor startup helmed by a team of ex Apple and Google chip designers. In SITALWeek #258, we noted that Nuvia was “blowing the doors off performance-per-watt standards with their new Arm processor with a single core boasting twice the performance for a fraction of the power – only 3 watts”. Nuvia, as of early 2020, was being sued by Apple for conspiring to start a new business while employees were still working at Apple, and Nuvia countersued Apple. Qualcomm is no stranger to lawsuits with Apple, having dropped a high-profile battle in 2019. Nuvia was rumored to be focused on servers, but the announcement sounds like it’s not a data center focus. I’d be surprised though if Qualcomm doesn’t leverage this team to restart their previously failed Arm server efforts and go all in on processors for laptops and PCs. Microsoft, who blurbed the Qualcomm press release on the deal, is playing catchup regarding Arm implementation, for both the data center and portables, compared to Amazon, Google, and Apple. Qualcomm would be a natural partner if Microsoft doesn’t acquire its own chip business first.

Intel’s Step One Rehab Complete
Intel announced that company veteran Pat Gelsinger will return to take on the CEO role. In “Intel’s Paths Forward” in #277, my first recommendation for Intel was to hire an engineering- and product-minded CEO, and Pat is a great choice. Pat will breathe oxygen into the strong engineering culture at Intel and rally the troops, but the next steps ahead of him are daunting in the race to maintain share against the rise of Arm in PCs and Servers. Intel will wait until Pat’s February start to make any manufacturing decisions, but last week outgoing CEO Bob Swan floated the idea of licensing tech from a foundry (presumably TSMC or Samsung) for deployment at Intel fabs rather than fully outsourcing manufacturing. I think this could be a smart win-win if TSMC or Samsung is up for it. Either company could set up shop inside of Intel’s US-based leading-edge fabs and help establish new processes in return for a licensing fee rather than building new capacity. However, TSMC’s big increase in capex guidance leaves open the option that the latter may happen as well.

Chains Vying to Take Share of Takeout
Established restaurant chains are experimenting with virtual brands and virtual kitchens. Denny’s launched The Burger Den and the Melt Down, both of which will feature some popular items cooked up in Denny’s existing kitchens, but only available via delivery with 3rd-party partners such as DoorDash. Other companies experimenting with virtual brands include Brinker, Applebee’s, and Bloomin’ Brands. Meanwhile, Noodles & Company and Fat Brands are opening ghost kitchens this year. Fat Brands plans to use ghost kitchens to grow their recent Johnny Rockets acquisition. The ability to experiment with virtual brands and new menu items could drive a positive feedback loop benefiting existing locations and could favor the big chains taking share of the takeout market. These share gains come at the expense of local restaurants, who struggle to compete with well capitalized, national ghost-kitchen operations, as Portland Eater explains.

ISP AUPs and the Risk of Cloud Saboteurs
As rising global security risks coincide with a shift to more homogenous cloud infrastructure, we may see companies rethink how many of their eggs they put in each basket. Infrastructure analyst Lydia Leong at Gartner penned a helpful recap on anti-spam, ISPs, and ToS takedowns in light of AWS and others shutting down Parler. To be clear, if your company is doing illegal things, as defined by the governments of the countries you operate in, and/or you are in violation of your agreed-upon terms of service, then you have no right to operate on those platforms. The Gartner article made it clear that if you are in violation of your ISP’s acceptable use policy, then you might not have anywhere else to run (except perhaps Russia) due to the near universality of the agreements. Further, security vulnerabilities due to single points of failure are rising – a reality highlighted when BI reported that Amazon was implementing “‘blocked days’ in parts of the US, a designation that prevents employees from making any major updates or changes to services without the approval of the company's most senior leaders” in response to the events of January 6th. Amazon further “warned its data-center employees to be extra cautious about their safety after threats to attack the company”. As the ability to create hybrid cloud and multi-cloud implementations becomes easier, it seems likely that the world may move more toward heterogeneous workload locations, or at least maybe not as fast towards ‘one cloud to rule them all’, in order to reduce the impact of security breaches (perhaps the next iteration of Among Us could be designed around ferreting out the traitors at a cloud-services behemoth).

Walbank
Walmart is partnering with Ribbit Capital to start a fintech company to serve the 16% of US adults that are considered “underbanked” (without a bank account or limited bank account use).

Miscellaneous Stuff
Distinguishing Gems from Frass
Nick Cave discusses how a writer knows when they have written something worthwhile in Red Hand Files #130: “One day, you will write a line that feels wrong, but at the same time provides you with a jolt of dissonance, a quickening of the nervous system. You will shake your head and write on, only to find that you come back to it, shake your head again, and carry on writing — yet back you come, again and again. This is the idea to pay attention to, the difficult idea, the disturbing idea, shimmering softly among all the deficient, dead ideas, gently but persistently tugging at your sleeve...” He also warns against the easy ideas: “Beware, however, of the idea that comes too easily, as this is often a residual idea and only compelling because it reminds us of something we have already done”. At the risk of taking an incredibly beautiful answer from Cave and sullying it, I found his advice very similar to what it’s like when I find a compelling investment idea (sorry Nick!); but, perhaps the similarity just exists because both experiences are rooted in that elusive concept of Quality.

“Lasso Locomotion”
Invasive brown tree snakes brought to Guam from Australia have learned how to move vertically up tall metal poles by forming a lasso and shimmying upwards. The new form of motion for snakes was a fast adaptation to scientists trying to protect nesting birds by mounting their nesting boxes on poles.

Post Truth, WCW, and David Arquette
After finishing the movie, You Cannot Kill David Arquette, I wasn’t sure if it was a documentary, a mockumentary, or my favorite: a perplexing combination of the two. I discussed this latter genre in #207 in reference to the Amazing Jonathan and Bob Dylan ‘documentaries’. Writing about the Arquette movie, which details his attempted return to the world of professional wrestling, Variety drew further post-truth parallels with wrestling and the world at large today: “For decades, wrestling has said to its audience: ‘You love this because you pretend it’s all real! Yet the truth is that most of it is fake! And we let you know it’s fake! But by being so upfront about the fakery, we turn it into its own reality! So it’s not fake after all! It you believe in it enough!’”

Stuff about Geopolitics, Economics, and the Finance Industry
Fiction’s Viral Spread and the Role of “Utili-Publishers”
Truth travels slower than fiction. Tall tales can spread and evolve quickly and with ease. However, the truth requires time for reason and logic to balance the emotions evoked by an idea. The Copernican Revolution, which put the Sun at the center of Earth's solar system, and Darwin’s On the Origin of Species, which put natural selection and evolution at the center of biology, probably would not and should not have traveled through society at the speed of the Internet before ample evidence supporting the theories had been compiled. When fringe ideas prove right, they often become the heart of human innovation and progress – lightning bolts that ignite vast new areas of knowledge and research and bring increased understanding to the world, thus elevating our awareness and humanity. When fringe ideas are based on falsehoods, or come from a point of fear and/or hate, they have as much power to destroy as beautiful ideas have to create.

What seems to be at issue since the invention of today’s market-dominating online social networks (as well as the powerful cloud platforms that host the startup and smaller social networks), is the speed at which different types of information travel. Information not having to do with an immediate threat to safety or need for assistance should percolate slowly. Ideas need time for contemplative thought, reaction, argument, debate, and resolution. The truth is hard to find, and crafting it from the evidence is not a quick process. Our brains are wired to believe, and when the velocity of information is too fast, it hijacks those pathways and the truth becomes even more elusive.

But, we are presented with a problem because the Internet is today’s means of communication. The market-dominating social networks and cloud platforms are a new beast, an emergent hybrid of utility and publisher to which don't fit with the current laws. A combination of the phone company and the newspaper, both vitally important, but very different things. AWS is no longer just a compute utility, it is also a publisher deciding what can and cannot be said online. Apple and Google are both utilities and publishers, and even Internet services providers (i.e., the "phone" companies) could become publishers, deciding what can or cannot pass over their networks. Online social networks and cloud platforms enable people from all over the world to discuss the marketplace of ideas, including fringe ideas, instead of just a small group in one city or an isolated handful of academic experts. They open ideas to much more feedback, cooperation, and collaboration. If we cut idea formation off from the Internet, it’s like cutting people off from pen and paper or the telephone – it’s severing their basic means of communication.

The solution appears to lie in three places. First, over time, humans will get better at understanding and coping with the speed at which information is traveling, but we are in a race against the clock on that front. In the meantime, unvetted ideas need to be intentionally slowed down and isolated in the digital realm. Second, the same rules regarding protected speech that apply to utilities and publishers need to apply to Internet “utili-publishers”. As such, platforms should each adopt a formal policy for what they will and will not allow to be published on their sites (they have all refused to do this out of fear they lose the pretense of being only utilities, and not also publishers). We’ve been through decades of court battles over what is and is not protected speech and discrimination – we don’t need to reinvent the wheel. If someone has a problem with a theoretical platform policy (e.g., should anti-vax propaganda be protected speech?) that’s a question that can and should be resolved via the legal system without the government unilaterally dictating what is and isn’t protected speech. We've also been through centuries of court battles over what is and is not considered incitement. And third, the world needs to do a better job of supporting people displaced by the economic transition from analog to digital. A growing group of folks are increasingly weighed down by forty years of rising inequality and globalization from the Information Age that have left them far worse off than they should be. It is possible to achieve the best of all worlds where fringe ideas that are true and useful can be vetted and proven to help lift everyone up, while those ideas that are destructive wind up in the dustbin of history.

Capital Joins ANT March
Capital Group plans to enter the active ETF market in 2022. Capital joins Fidelity, T. Rowe, Natixis, BlackRock, Invesco, and others in the march to offer active non-transparent ETFs (ANTs) as the legacy mutual fund model continues to offer no better returns, often higher fees, and potential tax liabilities.

2020 Year-End Letter:
NZS Capital’s 2020 year-end letter is available here, and you can read a partial excerpt from it below:

The fourth quarter progressed through a backdrop of uncertainty and volatility toward potential light at the end of the tunnel with the approval of several promising vaccines. A small group of highly valued companies has been leading the market higher since the beginning of the global pandemic. The market dynamics are a striking echo to behavior during the dotcom bubble, with the important exception that, today, companies with ballooning valuations represent a much smaller part of the overall market.

You cannot invoke the term bubble without concurrently discussing time horizons and hurdle rates. The idea of a bubble in the present time implies that valuations will correct down over the short term. High starting points for valuations also imply that long-term returns will be lower. However, if your expectation of equity returns over the next decade is lower than historical figures, then even valuations on some stocks today are not high when measured against a 3-5% hurdle rate. Most of us, however, strive to do much better than single-digit returns on equities, and, therefore, many stocks today become uninvestable even on a five- to ten-year time horizon. Low interest rates are of course at play when any investor considers their hurdle rate for long-term returns. And, the lower rates drop, the more short-term valuations are sensitive to small changes in interest rates.

When we think about valuation and position sizing in the portfolio, especially in the context of an equity bubble, we focus primarily on whether the range of outcomes is widening or narrowing (a concept we covered in more detail in our Third Quarter 2020 Letter: “If you let a winner run even though the range of outcomes is still very wide, then you are explicitly making a large bet on a narrow prediction about the future, which means all you have done is increase the risk in the portfolio. And, in turn, you are starving resources for new Optionality positions.”). To never sell or trim a stock simply due to a high valuation, no matter how large the opportunity might appear, would be a misunderstanding of risk at the portfolio level – at some point that strategy becomes gambling rather than investing. As always, we remain vigilant about the range of outcomes and implied returns across our strategies. With the world still in the early stages of the global economic transition from analog to digital, many sectors are still presenting good investment opportunities for long-term growth.

The research process at NZS Capital is always guided by the unpredictability of the world around us. Our lens on the world, which does not rely on narrow predictions of the future, is ideally suited to the current state of the markets. We believe companies that maximize non-zero-sum outcomes for all of their constituents, including employees, customers, suppliers, society, and the environment, will also maximize long-term outcomes for investors. Our view of the world informs our portfolio construction process, which combines a relatively small number of Resilient companies with a long tail of Optionality companies. Resilient businesses have very few predictions underpinning their success and a narrow range of outcomes, while Optionality businesses have a wider range of outcomes and their success hinges upon a more specific view of the future playing out. This combination of long-duration growth with asymmetric upside is well suited to navigating the increasing pace of change throughout the global economy.
Continued 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. 

I may include links to third-party websites as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by NZS Capital, LLC. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which NZS Capital, LLC has no control. In no event will NZS Capital, LLC be responsible for any information or content within the linked sites or your use of the linked sites.

Nothing in this newsletter should be construed as investment advice. The information contained herein is only as current as of the date indicated and may be superseded by subsequent market events or for other reasons. There is no guarantee that the information supplied is accurate, complete, or timely. Past performance is not a guarantee of future results. 

Investing involves risk, including the possible loss of principal and fluctuation of value. Nothing contained in this newsletter is an offer to sell or solicit any investment services or securities. Initial Public Offerings (IPOs) are highly speculative investments and may be subject to lower liquidity and greater volatility. Special risks associated with IPOs include limited operating history, unseasoned trading, high turnover and non-repeatable performance.