Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, dandelions, and whatever else made me think last week.

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In today’s post: energy harvesting; software and robots don't pay taxes, creating a future retirement funding burden; software stocks can fight inflation, but investors have amnesia; the obviousness of ad-supported bundles for streaming; is it privacy or behavior changes that are causing tumult in content consumption?; making animation less real; overcoming tribalism; what to do when you own a stock that has lost most of its value; and, much more below...

Stuff about Innovation and Technology
Cornucopia of Ambient Energy
Researchers at the University of Washington have created dandelion-inspired floating sensors powered by tiny solar cells to collect environmental information. A single drone could carry a payload of up to 1,000 sensors for release and subsequent atmospheric monitoring. This is an example of how connected devices will increasingly use energy harvesting to replace or augment/recharge batteries. For example, according to this detailed article in Semi Engineering, scavenging ambient electromagnetic waves can provide around 0.5µW of energy, while vibration harvesting gives 5mW. A wireless sensor would typically need around 1mW, while a smartphone in standby requires 15mW. Solar’s inefficiency has traditionally meant it’s not a great source of energy for devices, but Analog Devices has a 1.63x1.23mm device that can take in solar from a single cell at 85% efficiency. There is also focus on continuing to reduce device power consumption, as Semi Engineering notes.

Robots Don’t Pay Taxes
ServiceNow’s CEO Bill McDermott, speaking on CNBC after the company’s earnings report last week, said that software is the most deflationary force in the world. On the surface, it sounds like Bill’s hallmark hyperbole, but it might actually be an understatement. As the economy goes from analog to digital, automation of both physical and virtual tasks will accelerate. While the focus is often on blue collar automation, it’s white collar automation that is likely to have the bigger impact on productivity, providing an ever-growing deflationary force. As you interact with software, it’s also learning how to do your job to ultimately replace you, or, at the very least, make you productive enough that someone else loses their job. Meanwhile, many new types of jobs that we cannot yet imagine will be created. And, automation may also have other far reaching implications. For example, software doesn’t pay into government retirement programs like Social Security in the US, and neither do robots. As the population in developing countries continues to age – with little hope of meaningfully increasing the number of immigrants and/or younger folks entering the workforce and contributing to future savings – the burden of taking care of people, both from a financial and labor perspective, could become a difficult scenario. Bill Gates suggested five years ago that companies should pay robot taxes. It’s possible companies will need to pay a software tax as well as jobs are automated away, offsetting some of the deflationary benefits the digital tools and platforms provide. One existential concern on the horizon is the need to create new meaningful pursuits for humans as technology continues to replace us (a topic I think often about and covered in #315 and #322 in more detail).

Out of Favor Deflation Fighters
Curiously, in the face of rising inflation, the stock market has fallen out of love with software stocks, these all-important deflationary engines of growth. This year, investors have wholesale adopted the popular narrative that companies need to be currently profitable to be good long-term growth investments (with companies investing potential profits in their future lumped into the discard pile; see also Not All Growth Is Equal). Thanks to investors’ amnesia that companies investing in their own growth create more value over time, some higher growth stocks have ended up trading cheaper than their lower growth counterparts. I rarely mention specific stock valuations in this forum, but I thought an example here would be helpful. Using consensus sell-side revenue estimates on Thursday of last week, Salesforce traded at 5.6x enterprise value to next 12-months sales, while its grandfather, Oracle, traded at 5.8x. Consensus topline growth for the next respective fiscal year is high teens for Salesforce and low single digit for Oracle, with Salesforce growing approximately 3-4x faster than Oracle. While Oracle is more profitable today, there are reasons to believe both companies would have roughly similar margin structures at similar growth rates in the future. Salesforce, you might say, is investing for its future growth, while Oracle is harvesting its current profits (please note the preceding is not a commentary on whether either stock is an interesting investment here, I am simply comparing their relative valuations). There are more examples of these odd valuation inversions around the market. I recognize the role that fear of rising rates plays in this peculiar situation, and perhaps it’s happened in the past (though if it has, I don’t recall), but focusing on the future value of engines of deflation might make sense regardless of whether inflation is temporary or ultimately proves to be more structural.

No Openings for ‘Cado-Mashing Bots
Chipotle continues to look for ways to use automation to make its jobs more appealing and safer for workers, but there’s one thing they won’t automate: "We're looking for additional ways to [automate]. How do we eliminate dishwashing? How do we cut and core avocados? Our guys love mashing the avocados into guacamole, so we're not looking to replace that”, the CEO commented last week on CNBC.

Fixing Netflix
I won’t spend too much time reviewing the specifics of the Netflix earnings report that helped send the stock diving nearly 70% so far this year, as I’ve covered many of the forces impacting the video industry in the past. As I noted in #338 (and #287), an ad-supported bundle of streaming apps is the best path forward for the industry. Netflix’s quickest path to solving their desire to offer an ad-supported tier and increase their quality content would be to merge with one of the other studio groups, such as Paramount, NBCUniversal, or Warner Bros. Discovery. If anything, Netflix’s recent stumble highlights the value of the legacy Hollywood studios, which already have robust advertising businesses. The more interesting lesson concerning Netflix is how to approach stocks that plummet and experience a change in thesis, which I address in the final section of today’s SITALWeek.

Entertainment Spreads Out
Another hot topic of late has been the shifts in targeted advertising as a result of Apple’s changes to user privacy. Facebook’s subsequent slowdown in ad revenue growth from prior years is well known. Last week, YouTube also reported weaker than expected revenues, while its parent company, Google, continued to post results that benefitted from advertisers shifting money to search. But, there’s something else going on that makes the situation more complex: the ongoing explosive growth in alternative content (detailed in Spiraling Content Meets Maxed-Out Attention). As TikTok continues its meteoric rise and video consumption wavers (down 8 minutes/day overall in the US in 2021) it’s hard to parse the impacts of privacy rules vs. habitual changes on shifting usage and ad revenues. Indeed, the unlimited growth of content options might be driving Netflix’s customer attrition as well. At the heart of the argument is whether storytelling is still important to human culture. Are we still interested in detailed arcs of triumph, redemption, and love that stick with us for decades, or do we want 10 seconds at a time of instant hits that are instantly forgettable? As is often the case with complex systems, there are many factors interacting with each other, and it’s only with the passage of time that we can look back and know what might have been going on. This is one of the reasons we try to focus on companies whose future success hinges upon relatively few predictions. Forecasting consumer behavior regarding entertainment consumption is particularly tricky because we humans tend to be fickle. That said, I think it’s a fairly safe prediction that humans will maintain some interest in stories; after all, we’ve been telling them for hundreds of thousands of years.

Being Real
A new social app called BeReal is growing rapidly, in part because it’s the antithesis of many current social networks. The app asks everyone once a day (at a different time each day) to post two pictures, one of yourself, and the other of what you’re looking at around you. It has no filters, no edit buttons, and you have only two minutes to make your post for the day. CNN explains: “The result is a social feed filled with unedited photos of people doing mostly everyday, unglamorous things -- lounging in pajamas, doing homework, riding the bus, microwaving their dinner. With only one post a day, there's no clutter of friends' pictures to mindlessly scroll through. You can only see friends' posts if you share a photo, which eliminates lurkers.” This constant rise in new forms of content underlies my view that, unlike many other industries, there are No Power Laws in Art.

Miscellaneous Stuff

103 More Bits of Advice
Always a popular link with my readers, Kevin Kelly is out with another list of life lessons on the occasion of his 70th birthday. Practical gems include:
• “You can’t reason someone out of a notion that they didn't reason themselves into.”
• “When you open paint, even a tiny bit, it will always find its way to your clothes no matter how careful you are. Dress accordingly.”
• “The biggest lie we tell ourselves is ‘I don’t need to write this down because I will remember it.’”

Fantasy CGI vs. Fluid Dynamics
After decades of computer animation evolving to appear more lifelike, recent animated movies have shifted to the creation of stranger, more imaginary places. Polygon reports animators are working against algorithms, which have been tuned for realism, in order to create the weird-worlds impact they are looking for. Does this trend reflect ennui toward our own world, or does it indicate optimism for our ability to reimagine and reshape our future reality? Real and unreal are becoming increasingly fungible as augmented reality technology continues to progress. A couple of months ago, I was certain the new promo for Amazon’s LotR series was faked with overly stylized CGI, but it turns out it was completely real-world footage.

Escaping Fear
My favorite living lyricist and novelist, John Darnielle, was interviewed in The New Yorker. Here’s one quote that stood out to me: “I think young people do practically everything out of fear, whether it’s fear of missing out, or fear of not becoming what you want to become, or fear of not getting away from what you want to get away from. If you keep working spiritually, you think, 'Oh, wait, if I work and I’m able to provide for myself, what do I truly have to be afraid of?' Not so much. And, well, then you can approach something like freedom, I guess.”

Stuff about Geopolitics, Economics, and the Finance Industry
Population Ebb Graphic
Toward the end of this FT article on birth rates rebounding to (but not exceeding) pre-pandemic levels, there is a useful interactive chart for demographic junkies that shows birth rates over time amongst developed and emerging countries as we move towards global population decline in the next couple of decades.

Rising Rates Jeopardize Debt Pyramid
The WSJ reports on the potential for rising rates to cause a liquidity crisis for the wave of debt-fueled private equity deals over the last few years. One of the best arguments for rates staying lower over the long term is simply the existential debt burden around the globe for companies, consumers, and governments, the cost of which would be perilously high with structurally higher rates. It suggests that inflation should instead be tackled with more targeted policies such as incentivizing production and technology investments to clear bottlenecks. However, that’s not the path central banks and governments are currently following. Rate hikes are likely to cause significant structural damage that could be avoided with a different approach.

Overcoming Tribalism
In SITALWeek #342, I talked about Jonathan Haidt’s essay Why the Past 10 Years of American Life Have Been Uniquely Stupid. In the essay, Haidt references the excellent book Nonzero by Robert Wright, and, last week, Wright posted his response to the essay. Wright makes the point that fragmegration, the concept that new technologies tend to both fragment and integrate people, being both unifying and divisive, is the key concept to understand for new technologies and how they impact tribal instincts. This has been the case throughout history, with the printing press being a prime example. Wright also notes that the Internet has created unifying groups across borders while dividing groups inside of borders: “the formation of international tribes whose cohesion sometimes comes at the expense of national cohesion—was bound to happen, given the direction of technological evolution; and it was bound to be turbulent.” Wright strikes a much more optimistic note than Haidt: “The psychology of tribalism is an extremely hard thing to grapple with. But at least grappling with it is a single, identifiable challenge...The inexorable march of information technology, combined with the psychology of tribalism, has heightened turbulence, loathing, and delusion before, and it’s doing that now. And it’s doing a lot of that now—in part because of how rapidly the information technology is evolving, in part because of the forms it’s assuming (most notably social media), but also, I think, because of the magnitude of the attendant change in social structure: a movement from national toward international social organization.” Wright’s focus is on identifying and breaking down the psychology of tribalism, an increasingly difficult task; but, as he optimistically points out, it's one humans have overcome multiple times in the past.

Zen and the Art of Stock Analysis
As I mentioned above, the more interesting thing to discuss on a stock like Netflix is: what do you do when you own a stock that goes down materially and has a major change in thesis? The hard part is trying to gain some objective perspective because your brain will either: 1) Go into overdrive trying to justify why you are right and/or the rest of the world is wrong, or 2) Evoke such an emotional response that you will irrationally sell the position before you get the necessary perspective. Here is an exercise I like to do: 1) Assume that you didn’t own the stock. Imagine the world where you are an omniscient genius, avoided taking the hit, and are now analyzing the stock with an open, unencumbered mind (this is the hardest step as it requires a lot of practice to dissociate). 2) Ask yourself: what is the thesis today, without any consideration for what it might have been in the past. 3) Identify the broad and relatively safe predictions that underlie the thesis (e.g., around two-thirds of viewing is still shifting from linear to streaming). 4) Identify the more narrow and specific predictions that underlie the thesis (e.g., Netflix can successfully build an ad platform, continue to improve content quality, crackdown on piracy, etc.). 5) Assess the degree to which the valuation requires you to be correct about your predictions (i.e., can you be wrong on some assumptions, or are you making a parlay bet and need to be correct on all counts?). 6) Work through the pre-mortem scenarios: a) You buy the stock and it’s been a great performer, what led to that happening? b) You sell the stock at a loss, what caused that to happen? Now, after all that analysis, would you buy the stock today? And, what position size would appropriately match the risk defined by the range of outcomes you’ve identified?

There are many methods for evaluating stocks, but creating emotional space is probably the most important part of any strategy you might have. I’ll make one last comment as it relates to Netflix, emotions, and predictions. Bill Ackman put out a release that his firm, Pershing Square, was selling Netflix the day after the company reported earnings two weeks ago. In it he said: “We require a high degree of predictability in the businesses in which we invest due to the highly concentrated nature of our portfolio. While Netflix’s business is fundamentally simple to understand, in light of recent events, we have lost confidence in our ability to predict the company’s future prospects with a sufficient degree of certainty.” It was the line “We require a high degree of predictability” that caught my eye. There are a lot of ways to make money in the market, so this is not a criticism of any one style of investing, but we’ve found more success not relying on predictability. The fewer predictions we need to make on an investment, the more likely we are to own more of it. If the valuation is implying we have to be correct about very few assumptions for growth to drive performance over time, that is a larger Resilient position for us; and, inversely, if valuation is forcing us into winning a parlay bet, then the stock is either a smaller Optionality position (if the asymmetry is high enough) or what we would call a gamble, which we would pass on. We discussed this philosophy in more detail in our paper Redefining Margin of Safety.

✌️-Brad

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 an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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