Randy’s (CMF_BigECat) question about whether the macro business environment has fundamentally changed interests me. The thread got long and ended, even though the essence of his question wasn’t really addressed. Thinking about it tied into a post I had wanted to make about Nvidia (NVDA) and our companies, so I’m going to try to tie a lot of threads together.
Business Macro
While companies of all kinds have long had branches and connections of various kinds in other countries, the degree to which the business environment is now global is many orders of magnitude greater than it was 20 years ago. The “World Wide Web” used to mean the internet. It can now safely be used to refer to business. Even just a small business out of someone’s home in one location can sell globally, or wreak havoc globally, without ever leaving the house.
The speed at which this has happened was ramped up by our companies, as software pushed compute beyond the server in your closet and into the cloud. And that rolling snowball (made of Snowflakes?) was given a huge push by a global pandemic–a blizzard of fresh powder through which it could run (indeed must run) unimpeded as we locked down in our cities and homes.
To understand the impact, I want to use an example from Nvidia.
The Nvidia Canary in our Coal Mine
As I posted awhile back, I got into NVDA. I think it’s an amazing company destined for great things. Right after I posted “The Case for Nvidia,” their pre-earnings warning announcement came out. Ugh. It was clear from that announcement and from the call that the issues with supply were not going to be resolved until early 2023. But I was in at a pretty good price and so I held.
On the earnings call, one line in particular caught my ear, especially since some had smugly posted about how vastly superior were the companies that didn’t rely on hardware. Here is the line. They were talking about their data center revenue expectations:
“Demand for GPU rentals far exceeds current supply.” They talked at length about how much hardware it takes to set up data centers and how even when they had provided the coveted GPUs, companies also looked to them to supply kits with cables, switches, and other hardware to connect it all. And they were having trouble getting those additional things.
Gee, do any of our companies rely on data centers? Maybe all of them? How is their growth impacted if they are backlogged waiting on the hardware to expand those data centers or create new ones for their shiny new outreach in a new region of the world?
Before we crow about how our companies are all software and don’t need physical inventory, we might want to pay attention to the warnings from the company whose hardware runs so many of them. It’s not just the chip shortages.
But, like I said, I held through all that.
And THEN, this last week, out came another announcement that the US government was now requiring specific licenses for NVDA and AMD to sell certain technology to China out of fear that it could be put to military use. Shares plummeted and I got out. Considering another ship had just gotten stuck in the Suez canal, it began to look like the wait time for Nvidia to get back on track might be longer than they indicated on the call.
But beyond the impact on the share price, in the space of about a week there were three announcements of macro concerns outside the company’s control that would not only affect Nvidia, but could potentially ripple out to all of tech.
Want another one? Those of you on Twitter may have noticed Cloudflare (NET–I’m long) as a trending topic this past week. They had been in the crosshairs early in the year because they remained in Russia after they invaded Ukraine. That settled down when the US government confirmed that they supported NET being there, so that opposition sites could remain online.
But this past week wasn’t about that. It was about this: https://www.nbcnews.com/tech/internet/cloudflare-kiwi-farms-…. Whether they should continue to platform a notorious hate group or not is not my point. It’s not even the obvious branding problem for the people whose vision is to create a better internet to facilitate a site that uses the internet to encourage people to commit suicide. My point is that tech companies today are facing issues that did not exist even 20 years ago, and the ability for those issues to scale globally and instantly is unprecedented.
My Takeaway
The volatility is not just in the stock market and our hypergrowth companies. The volatility is in the world. Some of that is the generational shift in how we communicate and conduct business; a paradigm shift in global culture that I believe is a greater disruptor than the industrial revolution of the 20th century.
But that kind of has a trajectory. There is much we can’t see, but we’re far enough in that we can begin to spot trends and make at least semi-educated guesses about what comes next. That’s the value of this board when it comes to spotting companies that are on the cutting edge and starting to make their mark.
There are other things, however, that are much more opaque. Given the past couple of years, talking about “a black-swan event” seems quaint. We are witnessing a bevy of black swans, mating and breeding to make more; and then a wedge of black swans flying off to every part of the globe.
Covid, with more variants to come. “Where are all the workers?” Well, there are over a million dead Americans for one. Climate disasters of all kinds in every part of the world.
Both of those things are severely affecting China. The worst heat wave on record lasted over 70 days and forced large swaths of the country to close factories to preserve power just to keep people alive. Hydropower doesn’t work without the hydro part. Chengdu just locked down 21 million people for Covid. Apart from the horrific toll on all living things in the region, is that going to get the data centers for MDB, DDOG, SNOW, NET or anyone else their cables and switches more quickly? Good thing data centers like the heat. Oh, wait…
And did I mention war? And shelling at a nuclear site that could send a cloud across Europe? And disinformation about what is happening and how to appropriately address any of it? Good thing the political scene is stable. Oh, wait…
There’s a lot more than the Fed that can roil the markets. Randy asked if we might be asking a bit much of our companies in this environment. I tend to think we are.
So what do we do?
How do we proceed in such times? We each have to find the thing that helps us sleep at night. For some that means keeping a large cash position. For some it means watching the numbers with eagle eyes and jumping in and out when a key metric begins to wobble. For me it has meant concentrating into companies that are stable growers, whether or not they are hypergrowth at the moment. (Although my bet with Nvidia didn’t turn out so well.) I’m long CRWD, DDOG, NET, and TTD for that reason. CRWD is my largest position (at current value) by a good bit.
I also have positions in companies that I believe are key to helping some of the most dire threats we face and that I think have great potential, whether that is evident on their current balance sheet or not. I am still in UPST for that reason. The bias in the FICO score system that limits access to credit for those who are actually credit worthy is, I believe, at the root of more social ills than I can count. And I can count a lot. My thesis for them would be another whole post, and I don’t think this board has the stomach for that at the moment. But, for those who write me about it off-board, yes. I haven’t sold any shares since the end of last year, when I sold my highest-cost shares for tax loss harvesting. (My losses for this year will last me until I die.)
Another company that I have bought recently in the “solving big world problems” category is outside the scope of this board in just about every way. PureCycle Technologies (PCT) is a newly public plastics recycling company, spun off from the R&D department at Proctor and Gamble. Although they’re listed on the NASDAQ as “Clean Tech,” I see them more as a Materials company. But I wanted at least one company that goes up when all my others go down. It has served that function so far and allows me to support an issue I care very much about. Their first plant in Ironton, OH is on track to open at the end of this year.
Rounding out my portfolio is a mid-size position in Global-e (GLBE). I was in it last year, got out when SNAP crashed mid-2021, and got back in after a great earnings report for Q2. As an Israeli company there is less visibility into management than I would like, but they sure have been executing. And the share price is back close to their IPO. I wanted some exposure to e-commerce without committing to a single geography, so the company that enables cross-border commerce seemed like the way to go.
That combination is what helps me sleep in extremely troubled times: Throw down some anchors, support some good in the world, and take a chance here and there. You will need to find your own way; but I’m grateful to Saul for providing a place for us to learn from each other as we do so.
JabbokRiver