The Exchanges

Q What do you think makes for a more resilient company? Being, uh, playing at multiple spots in the value chain such that you compete with your customers and have optionality, or being super pure play so that you have no strategy conflicts?

A I mean, I think it depends. I mean, if you're talking about something in, in semiconductors, and I mean, like, Intel's the classic example of this where they're more vertically integrated. I mean, the hard thing about doing that is you have to fight multiple fronts, um, or battles on multiple fronts, right? Like, Intel has to fight TSMC on process technology, which, like, in itself is one of the hardest things, you know, any technology companies had to do over the last 20 years, and that's why Intel has been surpassed by TSMC, right? But they also have to fight AMD, um, in their core, kind of, like, chip design market, where AMD, enabled by TSMC, is, um, innovating, you know, faster than they have in the last 20 years, and, and, like, really delighting customers and, and, um, you know, taking share from, from Intel. Kind of real time or, you know, Nvidia where they were trying to just basically marginalize the CPU and make the CPU less relevant. So Intel is less relevant. So I think that's the hard thing about being vertically integrated in semis versus being more of just like a horizontal pure play is the, the needs of Moore's law are just so difficult that like, it's hard enough to just do one of these things well and doing multiple of them well, um, makes it, um, makes it harder. So I, I generally, I think Britain's point on, on just like the business model difference betwee…

AI assessment note: “hard thing about being vertically integrated in semis versus being more of just like a horizontal pure play”

Q Is that the idea that if there's consumer surplus, you know, if there's money left on the table for, for consumers where they're not getting every dollar extracted that they could by the company, that that company is more resilient over time, even if they're not making every profit dollar and growing as quickly as they could today?

A I agree with that, especially if you're, I mean, if you really have a management team that's thinking really long-term, I don't know why you wouldn't give up a little bit of extra economics for your key partners, whether that's suppliers or developers on your platform or your customers, um, to really solidify your trajectory over the next, you know, 10 to 20 years versus, I don't want to pick on Apple too much, but like, what's the gross profit impact if they cut their app store, um, you know, take rate from 30% to 15%, you know, across The board. What is that like? Five percent of gross profits. It's like meaningless to them and it would create so much value for, um, all the, and there's, there's obviously knock on effects of that. But, um, anyway, I think that's what we're, we're looking for as companies that are paying it forward. Like again, back to the TSMC example, cause you guys covered it so well, like TSMC has lower margins than most of their gross margins than most of their customers. And so at any point they could, they could probably take the margins from 50% to 60% and say, Hey, I'm obviously have a monopoly in this market, but the way, you know, Morris Chang architected the culture there. Um, is, is on, you know, long-term value creation and really creating a platform for, for their customers to, you know, create massive, you know, amazing businesses. And so I thi…

AI assessment note: “I agree with that, especially if you're... thinking really long-term”

Q think we kind of glazed over in our TSMC episode is the current state of Moore's law from a, from a, like, literal perspective, but then probably more interesting, the current state of the spirit of Moore's law. And I was wondering, maybe John, let's, uh, let's go to you. Could you give us a little bit of a download on, like, does Moore's law still work, at least spiritually?

A Yeah. I'm, I'm glad the way you, you framed it that way. Cause it is kind of like a religious debate and people much smarter than me in the semi-industry are on like both sides of like, is like the true Gordon Moore, um, Moore's law still, um, holding up. I think, I think just like for the spirit of Moore's law, we still have, we have visibility probably for the next. 10 to 15 years. And to be honest, that's like the industry never has more than 10 to 15 years of visibility. I think obviously the death of Moore's law has been pronounced for a very long time, but I think that's one thing to keep in mind is like There, there are a lot of things out there that's going to keep us driving down Moore's law. And so, I mean, one, one thing that you guys covered well, um, in the TSMC episode is, is the, um, implementation of EUV systems, um, from, from ASML. And they actually are allowing us to shrink the transistor, um, kind of the fundamental building block, um, you know, two dimensionally. So it actually put more, you know, transistors into a chip. And so ASML is kind of on record saying they think that, That EUV will last about 15 years.

AI assessment note: “for the spirit of Moore's law, we still have, we have visibility probably for the next. 10 to 15 years.”

Q have these, um, two concepts and then one kind of super concept that combines both of them of, uh, resilience and optionality that you look for, uh, in investing. And, um, you know, neither of those are terms that, uh, uh, most investors are, are familiar with. Um, can you, uh, can you define what you mean by both of them and maybe, maybe give a few examples of companies?

A Sure. Yeah. On, on the resilient half of the portfolio. Um, I mean, we, we kind of say, you know, when you see it, which I think is kind of an unsatisfying answer, but generally what we're looking for are companies that are further along kind of in their S curve and their growth trajectory. Um, and so this would be a company like companies we own in the head of the portfolio, be someone like a Microsoft or a TSMC where we're not, we're not looking for like value stocks or kind of like cheap companies. We're looking for companies that are healthy growers that we think can durably grow for the next, you know, 30 years and our, our turnover in this half of our portfolio is around 10%. So this is, um, really kind of like the hopefully set it and forget it part of the portfolio. And so, um, they know a few characteristics we tend to see in that part of the portfolio are, are kind of like mission criticality and switching costs, which I know you guys cover well, um, and, and some of the, the deep dives you've done. Um, I mean, just scale like TSMC, which we can talk about in more details, just like a classic scale company where, um, you know, we, we talk about power laws in our, our investing framework and kind of like, You know, pockets of industries where one company can take 90 to 95% of the profits in a given industry, and TSMC is a great example of that. And then you, exactly th…

AI assessment note: “On, on the resilient half of the portfolio... be someone like a Microsoft or a TSMC”

Q you know, you, you start an optionality position. There are two copies of the multiverse where this works, and then X amount of time passes, and you start to Have more of a view of which copies, you know, two out of 10, and now, you know, maybe it's like two out of five, or two out of three, or like, you know, as it evolves, what do you do?

A There's like kind of two scenarios that you can really see this happening. Like a good example is beyond Peloton before the pandemic, you know, and the stock obviously went parable, like they were huge beneficiary of work from home, but it's also still just a really dynamic company, you know, that's early in its life cycle, building a brand and a platform. And so with a company like that, you know, I think it's still early days to call that business resilient for, for many reasons, both just like the, the context of the company of we're going through a digestion after, you know, the, the, the, kind of a, a record year for, for them and off the charts here, I should say. So for a position like that, we'll actually, we'll just trim it. And, you know, we have this cap of how big in the portfolio we allow optionality positions to get. And so I think that it's generally pretty clear, like how much of this is something that's a really durable inflection in the business. And sometimes, like I said, it's both like, I think Peloton is definitely a different company in this version of the universe versus the non COVID version of the, of the, of the metaverse. Right. But, um, I think we, we can't cross it over.

AI assessment note: “So for a position like that, we'll actually, we'll just trim it.”

Q resilient position in the portfolio, having just done our TSMC episode and got a deep dive on the whole semi, you know, industry infrastructure. You know, you mentioned they also have A competitor, Synopsys. Uh, and the two of them, it's like a duopoly in the EDA, uh, space. How did you decide, how did you decide to own Cadence, and I'm assuming not Synopsys, or do you hold both?

A Yeah, that's, I mean, it's a really good question. We've talked a lot about both of them over the years. We've owned Cadence for nine or 10 years back to our, our days at our, our previous, um, portfolio, um, or our previous, um, you know, employer. Um, I think on, on Cadence, it's, it's a few things. I mean, it's actually kind of a cool story of just kind of like how we even kind of got into the idea of investing in, in EDA as part of our kind of process for finding new ideas and, and just kind of being up to Speed on what's going on in the industry as we follow is going to like industry trade shows instead of investor conferences. Like we don't generally go to a lot of like big investor conferences. And so in like early last decade, I used to go to all these, um, chip conferences and like every presentation, it was like, Someone from TSMC, and someone from Arm, and then someone from either Cadence or Synopsys. And at the time, Cadence and Synopsys were viewed as these, like, sleepy, crappy companies. And, um, it was just kind of like this, like, well, we, we love TSMC, and we love Arm, so it's like, let's do some work on Cadence, you know. And then we, the more work we did, I mean, both, both companies are amazing. Like, they deserve a lot of credit. I think what, what steered us towards Cadence, um, one is the management team. So, Lib Boutin at the time was the CEO. He's act…

AI assessment note: “I think what, what steered us towards Cadence, um, one is the management team.”