Investing in Computing Companies and Stocks
Ever since Intel introduced the 8086 processor in 1978, mankind has been using the power of computing to do everything from putting man on the moon to letting everyone know what the useless Kardashians have been up to. When we talk about computing as an investment thesis, we need to think well beyond buying the picks and shovels.
Computing has matured to a certain extent. Moore’s Law no longer applies. Ecommerce is largely mainstream. Selling software-as-a-service is the norm. The sharing economy has largely been exhausted with Uber lookalikes – an Uber for motorcycles, an Uber for moving furniture – it’s the same idea spun differently. In emerging markets like Indonesia, there may be opportunities in old-school technologies that are just now coming of age. But what we’re interested in are computing-related investment themes that promise to be as disruptive as computing was when it first debuted in 1978.
Now that everyone carries around a supercomputer in their pockets that contains all of the world’s knowledge, you may be hard-pressed to think of what else there is we can accomplish (aside from making sure said supercomputer can always connect to the Internet anywhere in the world.) Sure, we can improve the supercomputers by giving them tactile keyboards, and sapphire screens, but there has to be more than just incessant device upgrades. There is still software to be built to help solve age-old problems like excessive business expenses or inefficient freight forwarding, but isn’t there something much bigger than that?
Turns out, there’s some really cool stuff being developed. Remember on Star Trek where they used to pull out that handheld device and point it at things and then the device would tell them cool things? That’s what spectrometry is all about, and it’s just one of many cool things being funded in the world of high-tech startups. Here are a few examples of startups that are doing some very innovative things in the world of computing:
- A startup called What3Words has assigned a three-word address to every location on earth. Everywhere you go, there’s an address for your location.
- A handful of startups like CTRL-labs are working on building brain-computer interfaces.
- ClimaCell uses cellular networks to learn about what’s happening with the weather to improve weather forecasts.
- Startups like Notion are now using WiFi signals as indoor motion sensors.
- Amazon’s Mechanical Turk now uses humans around the globe to train computer algorithms to do things better.
- DNA Data storage is now a thing.
- Playing computer games for a living – what they’re calling eSports – is now a thing.
- Miniaturization means we’re now able to embed very small hardware products into electronic systems, something they’re calling “Micro Electro Mechanical Systems” or MEMS.
In other words, there are lots of disruptive applications for computing that are left to be realized by ambitious entrepreneurs who are backed by visionary investors.
There’s also an obvious overlap with artificial intelligence as machine learning algorithms become pervasive. Companies like Schrodinger are now using computational chemistry to optimize molecules for drug discovery. Thoughtspot is now using machine learning to transform the traditional notion of business intelligence.
While there’s lots of true innovation happening, there are also plenty of management consultants regurgitating old concepts with new nomenclature and using them to sell solutions to CTOs. Process mining? That’s pretty much just good old business process analysis. Edge computing? That’s just moving things from out of the cloud and putting them back where they were before the cloud. (It’s also called fog computing.) Microservices architecture? That’s about having all your software components decoupled so you don’t have a single point of failure that can take your whole application down.
Instead of trying to make things sound more complex, we like to distill technology topics down to the simplest of terms so dumb people like us can understand them. If you can’t explain what Docker is to a 9-year-old during the time it takes to ride the elevator, you don’t truly understand what Docker does. You don’t need to hire a cartoonist to explain what federated learning is, just use plain English. Some industries are still catching up, so you might need to explain the difference between big data and data warehouses.
Some of the themes investors may want to keep an eye out in the area of computing are high-growth sectors like cybersecurity and 5G, or moonshots like quantum computing.
Investing in Quantum Computing
Quantum computing is perhaps the strangest “technology” humans are trying to master. We say strange because even the experts don’t understand how it works. To make matters worse, some of the theories behind quantum computing sound otherworldly. Look no further than a talk given by the head of quantum computing startup D-wave who talks about harvesting computing power from other dimensions. The audience of professionals listening to the talk nod thoughtfully. It gives us a hint that trying to understand quantum computing may be a bit difficult. That’s why we headed up to Vancouver Canada to meet with quantum computing software startup 1Qbit.
What is Quantum Computing?
Without getting all technical here, traditional computing uses electrons to perform computations. Optical computing proposes to use photons to perform computations instead of electrons. Then there is quantum computing, along with its many uses of the word quantum, that departs from the binary system entirely.
Quantum computing refers to a completely new type of computer that uses quantum mechanics to perform at levels that are millions of times faster than the computers we use today. You will often hear the word qubit used in reference to quantum computers. Qubits or quantum bits represent the basic unit of quantum information that is used in the same way traditional computers use ones and zeros. Except with qubits, it’s neither a one nor a zero. You’ll never know what it is because when you observe it, the value changes to something else.
What Can We do With Quantum Computing?
It’s all too mysterious, and nobody really understand how it works, yet investors are throwing millions at it hoping that we can reach quantum supremacy and solve the world’s most difficult problems. You’ll hear examples being thrown around about how quantum computing will take 25 seconds to solve a problem it would take a classical computer 25,000 years to solve. Those sorts of things are why people from all industries get so excited about quantum computing.
In speaking with 1Qbit, we learned that trying to compare quantum computing firms with each other is like comparing apples to oranges, even when looking at the few simple metrics used by us commoners to gauge progress. The first is the “number of qubits” where a bigger number is better. The second is “error rates” where a lower number is better. “Error rate” is one of the biggest impediments to achieving quantum supremacy. We need tons of qubits to do useful things, but whenever we increase the number of qubits, the error rate increases. Roughly speaking, that’s the problem we’re trying to solve here. Let’s look at some of the quantum computing companies up for the challenge.
Quantum Computing Companies
Unfortunately for retail investors, largely all of the investing activities taking place for quantum computing are in privately held companies. When we first took a look at the quantum computing space in 2016, we could only find a handful of quantum computing startups. Since then, the number has ballooned to more than twenty quantum computing startups. Some are getting more attention from investors than others. In 2018, we wrote about a number of quantum companies to watch which are receiving lots of attention and lots of capital.
- Rigetti Computing ($190.5 million) – Full-stack quantum computing company in that they develop everything from the quantum chips to the software that interacts with them. They’re offering a $1 million prize for the first person who can solve a real problem on their platform that’s beyond the reach of classical computers.
- QuintessenceLabs ($21.1 million) – Claims to be the global leader in quantum security developing hardware devices like quantum random number generators.
- Cambridge Quantum Computing ($22.4 million) – Developing a proprietary operating system for quantum computers that manages quantum computer software and hardware resources.
- QxBranch ($8.5 million) – Builds applications and developer platforms for classical and quantum computers with a focus on predictive analytics, forecasting, and optimization. (Acquired by Rigetti.)
- 1QBit ($32.7 million) – The world’s first quantum computing software company. We met with 1QBit’s Co-founder and President, Landon Downs, and coined an entire article on quantum computing software.
- D-Wave Systems ($204.7 million) – Perhaps the most well-known quantum computing company which is surrounded by plenty of controversies.
The big question surrounds which company will be the first to achieve “quantum supremacy,” an event where a quantum computer does something a classical computer cannot do. In 2019, Google claimed to have a breakthrough which led to everyone asking, Has Google Finally Achieved Quantum Supremacy?
If we put our cybersecurity hat on for a moment, what’s perhaps most concerning about quantum supremacy is that once that’s achieved, our current methods of encryption can be hacked. That’s why many companies like Isara Corporation are developing quantum-safe cryptographic solutions for integration into commercial products to protect against quantum attack.
Investing in 5G
What is 5G and Why is it Such a Big Deal?
You probably know that 4G is the fourth generation of wireless technology. It follows that 5G is the fifth generation of wireless technology that will enable autonomous cars to operate, connect trillions of devices and eventually turn your own handheld computer into a supercomputer, because all of the heavy processing can be done remotely. That’s because 5G promises higher speeds, higher capacity, and far lower latency than 4G. How fast? Experts expect internet speeds to be as much as 20 times as fast as 4G (you’ll even hear some say that it’s 1,000X faster). The latency – the time between you hit “enter” and the data starts to stream in – should be nearly zero. In short, everything on the planet will soon be connected to the cloud and the applications are limitless. It only makes sense that we would want to invest in some picks and shovels.
For retail investors, you need to be very wary about some of the “5G stocks” being peddled by digital nomads who know little about the topic and don’t have your best interests in mind. Even the so-called experts are getting it wrong, reverting to the old “just invest in Amazon” advice that’s all but useless. It’s much more complicated than that. It’s something we detailed in our Guide to Investing in 5G Stocks. Some of the bigger opportunities lie around infrastructure – the chipmakers, the companies that build fiber optics which are used to build a bigger backbone, the companies that build cellular towers, and the companies that build 5G devices. Whatever you do, just stay the hell away from penny stocks (what we call OTC stocks). Never, ever invest in that garbage.
Investing in Cybersecurity
Hacking used to be a much more romantic trade prior to everything being about money. Back in the day, hackers hacked for bragging rights. Today, 90% of all cybercrime involves money. An entire industry has formed around those who want to do malicious things to earn a living, and in some countries, live like a king. We’re talking about students who graduated from some of their country’s top universities who can’t find a legitimate job because the market sucks so bad.
Maybe one of the most interesting companies we ever had the pleasure of meeting was an elite cybercrime fighting unit in Moscow that excelled in tracking down the world’s most dangerous hackers. We sat in their war room and watched in real-time as hacking groups like Silence and Cobalt tried to attack their corporate clients. They regaled us with incredible tales, like when North Korean hackers stole $81 million from the Central bank of Bangladesh.
It was an eye-opening experience that showed us the world of cybersecurity goes way beyond just keeping your antivirus software updated. Nowadays, niche applications for cybersecurity are morphing into groups of startups trying to solve similar problems. For example, cybersecurity for medical devices is now a thing because of the government’s increased focus on medical privacy. The supercomputers we carry in our pockets need to be protected from more than just a fall, so mobile cybersecurity is now a niche along with app testing. Hackers can also listen in on what’s being said, so building more secure ways to communicate is now a niche. If hackers don’t like what you’re saying, they’ll launch a DDoS attack on your servers, so now we have a whole slew of startups working on ways to thwart DDoS attacks.
While there are dozens of hot cybersecurity startups being funded by institutional investors, there are also many cybersecurity stocks for retail investors. For example, there are at least two cybersecurity stocks – Fortinet and Palo Alto Networks – that are using machine learning to offer better protection. As criminals begin to use advanced technologies like machine learning for attacks, it only makes sense to use the same technologies for defense.
There are also new jobs being created by the growth of cybersecurity. Top computer engineering graduates may find jobs as ethical hackers, people who get hired to expose vulnerabilities in enterprise networks. Some will work for firms like Group IB that go undercover to find “threat intelligence,” the whispers from the underground world of criminal hackers. Others will find jobs with companies trying to fix one of the most archaic niches in cybersecurity – authentication.
Authentication and Biometrics
Coming up with a password these days is a nightmare. You all know the drill. All the passwords you’re supposed to memorize have to:
- Have more than 8 characters
- Use upper and lower case letters
- Use numbers and special characters
- Be reset every 90 days and be used no more than once
- Blah, blah, blah
No matter how good you make your password, you can still be tricked into giving it to someone else. You may think that will never happen, but criminal groups like the Sakawa Boys in Ghana employ exceptionally sophisticated methods, like voice actors who use what they already know about you to extract even more information. When it comes to authentication, there are many different methods that are appropriate for a variety of use cases. Some methods fall under biometrics – behavioral and physiological.
For example, your voice could be used to identify you when you call your bank so that your record gets automatically pulled up. As you engage with the live human agent, the AI-powered voice recognition algorithm is listening to your voice until it recognizes you with a 99% probability. Then, you’re authenticated without even having to answer any questions. Imagine how secure that would be.
Then there is online authentication. Did you know that your average corporate slave manages 191 passwords at their job? Then we are told not to write them down or use the same password everywhere. Who the hell can remember 191 unique passwords? Single-sign-on works a whole lot better than having to memorize 191 different passwords, but the truth is, we’re all vulnerable right now because we’re still using alphanumeric combinations we memorize to access our most valuable possessions. That’s why many companies are working on replacing traditional passwords. A company called MobileIron thinks the way forward is Zero Sign-On (ZSO). You simply enter your credentials once and that’s it. Your phone will then continue automatically authenticating you as you go about doing what you do. After all, nobody will be able to type your name the way you do.
That’s why startups like Callsign are using machine learning to monitor what happens when the cursor disappears. It may intentionally make the cursor disappear to monitor that little wrist wiggle we all do which makes the cursor appear again. That wiggle is unique to you, and just another creative way to perform authentication using more sophisticated methods than just word memorization, a domain that we now refer to as “behavioral biometrics.”
Then there are actual biometrics. For example, you’re the only one with your face, which is why facial recognition for authentication is becoming a thing now, especially in China. A whole slew of startups are working on various ways your body parts can be used for authentication. Another emerging technology that enables lots of use cases that relate to authentication is blockchain technology.
Investing in Blockchain Technology
What is The Blockchain?
What is the blockchain? Simply put, the blockchain is a ledger that records ownership and changes over time. Software developers might refer to this as “change management.” When a piece of code changes, you need to know who changes it and when. If you want to change a piece of code, you need to know if anyone is already working on it. Blockchain lets you track things using a ledger that’s infallible because it gets replicated on many different servers. It’s impossible to change something if you need to hack into 1,200 servers to do it. Now you can see how blockchain technology can be used to create currencies. We call these “cryptocurrencies” or “utility tokens” and they should largely be avoided because most cryptocurrencies have nothing of value attached to them. Tokens that do have something of value attached to them are called “security tokens.” In order to understand all the hype around blockchain, let’s take a look at some use cases.
Examples of Blockchain Use Cases
The blockchain world is long on ideas and short on traction. Early on, it was difficult to tell which startup were ICO scams and which startups were legitimately trying to solve problems using blockchain technology. For example, the Deloitte Center for Financial Services wrote a piece on how blockchain may be transforming commercial real estate. They listed five blockchain startups to watch, and looking back at those names today, we don’t see much has happened with half of them. Contrast this to what’s going on in residential real estate where startups like Othera are already gaining traction on a business model that rids the mortgage industry of its many inefficiencies.
Speaking of inefficiencies, is anyone else sick of paying exorbitant Western Union fees every time you send money to your Thai mistress? Turns out blockchain is the perfect solution for cross-border payments, and financial services applications in general. There are also more obscure but interesting use cases, like voting on the blockchain, or putting your will and testament on the blockchain along with a dead man’s switch that you can use to tell people things when you’re dead that you never had the balls to say when you were alive.
For investors, we’re in the trough of disillusionment where the real success stories are just starting to emerge. Blockchain started out as a solution looking for a problem, and many companies felt like they needed “some blockchain” to remain relevant.
The blockchain opportunity isn’t about mining bitcoins in emerging markets where electricity is cheapest, it’s about enabling the world’s supply chains with blockchain to rid them of inefficiencies. Like software development, blockchain solutions are only as good as the people who are implementing them.
Some Blockchain ETFs
There are some ETFs that claim to offer exposure to blockchain technology – four of them to be exact. The problem is, none of these four blockchain ETFs can agree on which stocks offer exposure.
That’s because blockchain is far too new a technology for there to be many pure-play stocks for retail investors. It’s just another technology tool that’s only as good as the people implementing it.
Advances in Software Development
It’s all about software and data. The companies that build the best software and wield the best datasets will have a sustainable competitive advantage which adds value over time. Many of the advancements being made today in software development are about making software easier to develop, or taking an old way of doing something and adding value to it – like enterprise backups.
Eventually, the machines will program themselves. Until then, you’ll need highly-intelligent people to do more than just code to a set of requirements. The best programmers will understand the business side as well as the tech side while being able to navigate the politics and not piss anyone off or complain too much. Problem is, these people are exceptionally rare. When you do find them, you don’t worry about maximizing their productivity, you worry about them leaving your firm.
That’s why when you develop a solution for the programming community, it better work exceptionally well. Furthermore, you need to understand the nuances of the communities you’re selling to. A startup called Kite autocompletes lines of code in Python, and they adhere to the values of that community – keep it simple. Great programmers don’t tolerate incompetence.
Great programmers also know their worth. Since most companies don’t like being dependent on a resource that’s both hard to find and expensive, some are turning to low-code or no-code technologies. Why reinvent the wheel when startups like Algorithmia provide a database of algorithms already being used by thousands of other developers around the globe. Eventually, we’ll build software so well that we won’t need customer support.
Investing in Disruptive Computing Stocks
The most exciting computing themes like quantum computing aren’t really investable yet for retail investors. Sure, Google says they’ve reached quantum supremacy, but that’s debatable. Plus, an investment in Google is largely an investment in online ads, at least that’s the case today. Nonetheless, plenty of pundits will say you can invest in everything with Google. Sounds a whole lot like IBM.
We’ve been longtime shareholders of IBM because they’re a dividend champion with a decent yield and a 25-year track record of increasing their dividend. Their archaic mainframes are a staple in many organizations, and these cash cows fund the many other areas of their business that can never seem to get off the ground – the “strategic imperatives” that we’re all sick and tired of hearing about. IBM, like its previous leader Ginni Rometty, is old, tired, and in need of some serious refurbishing. Sure, they talk about their hybrid cloud, or all the work they’re doing in blockchain, but none of that seems to move the needle. Neither does their “cognitive computing” platform which was supposed to transform healthcare and never quite got there. Now, IBM’s new leader believes that artificial intelligence is the way forward for IBM. While it may not be the best performing tech stock ever, we continue to hold shares of IBM as long as that dividend keeps increasing.
Retail investors seem most interested in quantum computing as an investment theme. We’ve discussed before how you might invest in D-Wave, but it isn’t that clear cut. There are four companies that claim to be ahead in quantum computing – Google, Intel, Microsoft, and IBM – but again, these are multi-billion dollar technology companies that are focused on a whole lot more than just quantum computing. There is no pure-play element. Also remember that quantum computers are not supercomputers in the same way supercomputers are not mainframes. (If you want to invest in supercomputers, check out Cray.) Various computing platforms will continue to service various use cases.
Over our years of research, we have come across some interesting investment opportunities. Some stocks like Altair Engineering (ALTR) blur the lines between what industry they should be classified in, dabbling across many different disruptive themes.
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