January 2023 Last Half

"Your expectation as a first-year was to “BE USEFUL!” Isn’t that respectable and even beautiful?!"

Jan 31, 2023

Welcome back. In a busy world we can be distracted with the trivial many things or we can focus on The Vital Few.

Something that I am thinking about

SNOW 0.00%↑ NET 0.00%↑ CRWD 0.00%↑ DDOG 0.00%↑ are some of the largest high growth leaders in the cloud space. They don’t compete directly with one another although there is some TAM overlap. To be sure, there are other companies that I did not select, and there are other great metrics that I did not present.

I was reviewing metrics for them, and these columns that I graphed were the 3 metrics that I liked the best and wanted to share visually with you.

If the winner takes all or the winner takes most market outcome happens then these 4 firms are elbowing into leadership positions in their respective areas. And, if we are in the early days of cloud computing (I think we are in very early days) then the growth runways ahead of them is enormous.

Their growth will be organic, they will invent and innovate, they will copy from competitors, and they will acquire other firms along their journey. But, I think AWS, MSFT and GOOG are still growing and exerting control at the top of the food chain. AMZN 0.00%↑ MSFT 0.00%↑ GOOG 0.00%↑

The gross margins of these 4 high growth cloud leaders are significant (purple above), ranging from 72 to 79%. The high GM might be viewed as attractive for a potential acquirer to capture and eliminate the sales and G&A function of the target. More naturally, the high GM of these 4 is a healthy indicator of what is available to the existing shareholder base when the growth market matures and the excess margin can be redirected away from growth and toward capital returns to shareholders.

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Investing, Companies, Market Past/Future

(I invest in Companies, not in stocks.)

Interesting companies that hosted earnings results or information session since my last edition that I reviewed-

Technology- These management teams and earnings calls are outstanding. TXN 0.00%↑ ASML 0.00%↑ LRCX 0.00%↑
- MSFT 0.00%↑ Azure cloud☁️⛅ is still growing in the mid 30% rate. Amy Hood, CFO is one of my top 10 favorite CFOs. Listen to her to understand why.
- INTC 0.00%↑ is attempting a corporate turnaround and presently it looks like a dumpster fire 👎🏽🔥😡. I am a fan of Intel's founders and its history.
Housing & Banking - DHI 0.00%↑ Bring your second order thinking to bear on the home builders. This economic downturn is not their first rodeo 🐎🤠.
Others- TSLA 0.00%↑ When an industry or a business stands in opposition to Tesla prepare for an unpredictable fight.👊🏾 The auto insurance industry was making it difficult and costly for Tesla owners... so Tesla started their own insurance company. From the Q4 earnings call-
- Elon said- “ ..just by Tesla operating insurance for our cars at a competitive rate, that makes the other car insurance companies (GEICO) offer better rates for Teslas. …Then it is also giving us a good feedback loop into minimizing the cost of repair of Teslas… we've actually adjusted the design of the car and made changes in the software of the car to minimize the cost of repair.”
- Elon has deployed this tactic of calling the bluff of an opponent that stands in the way of his progress many times- National charging network, Selling Direct to consumers and not through dealerships, self manufacturing batteries for the Tesla, Insurance, etc.
- Elon’s handling of opponents reminds me of Jigoro Kano, the legendary five-foot-tall founder of judo.🥋 “Trying to fight with Kano was like trying to fight with an empty jacket!😵‍💫” A fight with Elon is a foolish exercise.

The visual of banking consolidation below is fascinating. After 20 years of combat, 4 emerge. C 0.00%↑ JPM 0.00%↑ BAC 0.00%↑ 🚨👮🏼 WFC 0.00%↑ 👮🏾‍♀️🚨. I bet you will recognize some of the names from the past. (Chart h/t Patrick McKenzie )

Podcasts

Tobi Lütke: CEO and Founder, Shopify

Tobi Lutkie is the founder and CEO of Shopify SHOP 0.00%↑ , an e-commerce company based in Ottawa, Ontario, Canada. But when Tobi was 16 years old in high school in his native Germany, he could not stand higher education. So, Tobi took an option to leave school in the 10th grade and start as an apprentice. No more boring teachers, gym class or cafeteria lunches.

Tobi told his story to Kevin Scott, CTO of Microsoft MSFT 0.00%↑ in the podcast episode above. Tobi was gifted in math and was a hobby programmer. Tobi felt that much of what the school system was teaching him could be made obsolete with the use of computers.

Tobi talks about how Europe and Germany specifically have this “Heritage of a Craft” built into their culture. High school age children choose between 1 of 2 routes. Either Vocational or Higher Education. Tobi emphasizes that this “Heritage of a Craft” does not exist in the same way in North America. He is not being critical, but he is drawing a sharp distinction. A vocation route is respected in Germany, it is not viewed as “less than” higher education and parents support it. Tobi was not motivated to continue on a school path that he thought was a waste of time. In the 10th grade, Tobi left high school.

This was the first year computer programming was taught as a craft in Germany. Practical, hands on, building software solutions. Tobi was an apprentice, but at that time they didn't even call you an apprentice the first year, they called you a “Pencil ✏️(Bleistift)”. Pencil, a metaphor for UTILITY or USEFUL. Your expectation as a first-year was to “be useful!” Isn’t that respectable and even beautiful?! Tobi describes how he could be responsible for coffee, photocopying, accounting, even inventory sorting. Tobi says with excitement “IT WAS VERY GOOD!!” Now Tobi’s company Shopify, founded in 2006, is building e-commerce warehouses and is counter positioned as a competitor to Amazon AMZN 0.00%↑ . Tobi’s net worth is ~$3.8 billion. Look for the Shopify label on some of the packages showing up at your house.

Tobi and Kevin talk about a craftsman as a problem solver. A craftsman/problem solver is willing to make the thing that they really want, with what they have. They caution a little about being defined by your tool or your raw material- I am a carpenter, blacksmith, web developer, database engineer, business analyst. No. Be willing to adapt to new tools to solve the problem. Your identity should not be the tool, it should be your ability to problem solve.

Kevin Scott, CTO of Microsoft MSFT 0.00%↑ is not as well known outside of the technology world. Kevin is brilliant and a cross between your favorite mild mannered uncle or sibling. In addition, he grew up in my home state of Virginia and attended UVA. Kevin’s podcasts are excellent.

Tobi and Kevin also discussed incremental hiring.

When a manager is planning to add an additional person to a team have they asked themselves really why? Bigger is always worse, so you don’t want to get bigger unless it is absolutely necessary.
Have you exploited every other possible way to get the work done that you think this new person is necessary for.
Have you built the tools to make yourself more efficient,
Can you clean up a bunch of friction that you have in the system,
Don’t just add more people to cover up for the inefficiency that you have let creep into the system.
It is not engineering if you have unlimited resources (time or people). That is called daydreaming! Limited resources are good. Engineering is getting the thing that you want with what you have.

Videos

Madoff: The Monster of Wall Street, Netflix, 4 Episode Mini Series

Watching the Madoff documentary was something that I had to force myself to do. ¯\_(ツ)_/¯ It is very similar to a dental cleaning to scrape the tartar off my teeth and gums.🦷⛏️ I don’t want to go, but I know I need to go. Because of my activity in financial markets I need to see the bacteria below the gumline.

The documentary is very well done, and I want to recommend it to you like a visit to your dentist.

“The only people who can deceive you completely are the people you trust completely.”

Books and Articles since my last edition

(I am usually reading 2 at a time, and if I get bored of a book I quit and move on.)

Finite and Infinite Games: A Vision of Life as Play and Possibility by James P. Carse, Good philosophical framing of life and situations.

Educated by Tara Westover, Everyone has a story.
Altered Carbon by Richard K. Morgan Science fiction, Cyberpunk.

Here is a link to many of the books I have read and my 1-5 star rating- Goodreads Books Read

Wild Card🃏

(Leave a comment if you can identify Paul’s young companion in this picture above.🤔)

Paul Erdős, born in Hungry, and arguably one of the top 50 mathematicians of All Time has something uniquely in common with the concept of Six Degrees of Kevin Bacon. Erdős wrote papers with a total of 509 coauthors.🤯

Imagine you work in an interesting field in the mathematics/science community and you get a phone call one day from a math superhero🦸. ☎️📞📞 “Hello this is Paul Erdős. I heard about what you are working on. I am coming tomorrow and I would like to work with you on your problem for a couple of days. I will give you my brain. I am going to live with you during my stay and you are going to feed me, and we are going to work nonstop on your problem. Can you pick me up at 9am at the train station?”

Erdős did mathematics with a missionary zeal, often 20 hours a day, turning out some 1,500 papers, an order of magnitude higher than his most prolific colleagues produced. His enthusiasm was infectious. He turned mathematics into a social activity, encouraging his most introverted colleagues to work together.1 Erdős was known for traveling the world and collaborating with mathematicians on problems and proofs he found interesting. When he felt a visit was complete, he would call the next potential collaborator and move on. Many scientific papers resulted from these intense face-to-face events.

Above is the social graph of Paul Erdõs.2 He was an expert in the mathematics of networks. Erdős practiced what he preached -- he was a weaver of social networks and thus a builder of social capital. Erdős was 83 when he died in 1996.

The Erdős number is the number of "hops" needed to connect the author of a paper with the prolific late mathematician. An author's Erdős number is 1 if he has co-authored a paper with Erdős, 2 if he has co-authored a paper with someone who has co-authored a paper with Erdős, etc. Albert Einstein’s Erdős number, for instance, is 2. G. H. Hardy is 2. Richard Feynman, John von Neumann, and S. Ramanujan’s Erdős number are all 3.

Erdős wrote papers with a total of 509 coauthors, meaning 509 people have Erdős number 1. (If you are curious, here is a list of people by Erdős number.)

At the risk of meddling, are you collaborating enough?

None of us working alone is as smart as all of us collaborating.

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Disclaimer: All of my posts are for informational purposes only. I might own some of the companies discussed in these posts. This is NOT a recommendation to buy or sell securities discussed. Please do your own work before investing your money.

Nick’s Vital Few