151: Nvidia's Weight, Look-Through Cash, Frank Slootman on Snowflake, $10m Xbox Gift Card Heist, OnlyFans Biz Talk, TSMC 3nm + Apple & Intel, and The Night the Stars Fell

"between 50,000 and 150,000 meteors fell each hour"

The sure conviction that we could if we wanted to is the reason so many good minds are idle.

—Georg Christoph Lichtenberg

🥳 On Saturday, I spent 12 hours with 5 of my friends, in person, in a gazebo on a nice sunny day, chatting and laughing all day, for the first time in 1.5 years.

The next day my voice was hoarse from speaking so much (I guess I’m not used to long conversations anymore). It was great.

This is what my friend brought out when it came time to eat:

Wish you could’ve been there. Maybe someday our paths will cross, who knows? I’ve met 50+ people from Twitter and forums over the years…

🕸🐤 The desk from which I’m writing this is facing a window. A few days ago (well, for me it’s today, but for you it’s a few days ago), a bird landed on the windowsill.

It was a Spinus tristis (aka American Goldfinch):

It was bobbing its head for a while… I looked closer, and noticed it was picking up a spider web with its beak, just kind of collecting it all around its face… First time I ever saw this, so of course I looked it up:

it’s no surprise that many small birds make a point of collecting strands of spider silk to use in nest construction—birds like hummingbirds, kinglets, gnatcatchers, and some vireos. [...]

When a female Ruby-throated Hummingbird is building her nest, she collects the spider silk she needs by sticking it all over her beak and breast. When she reaches the nest site, she’ll press and stretch the silk onto the other materials, such as lichen and moss, creating a tough, tiny cup. Spider silk not only acts as a glue, holding the other bits together, but it’s flexible enough to accommodate the growing bodies of nestlings. And it’s resilient enough to withstand all the bustle of raising those hungry babies. 

Where we might reach for duct tape, these birds turn to spider silk

Evolution is clever!

And it’s even cleverer than it seems, because it had to find a way to *encode these instructions* to a bird using a bunch of atoms (nucleotides in a strand of DNA), and this encoding part is a lot more challenging than a sentient being telling another “hey, go pick up some spiderweb and then use it to build a nest”.

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Investing & Business

Nvidia: The Incredible Lightness of Being 🪶

When people think of Nvidia, they think of the hardware, A GPU card in a gaming PC, or the big server racks inside some gleaming data-center (with lots of blinking lights).

But in fact, when you look at what they really do, they’re basically a $500-billion market cap intellectual property company.

They don’t own the fabs where silicon is sliced and diced, they probably don’t own a lot of the other manufacturing that makes the stuff around their chips (they must have suppliers to make the casings, power supplies, circuit boards and such for their data-center products, for example).

So they basically just create big digital files that they send to other people so that they can build the physical products, and make other digital files so people can use their products (drivers, creation tools, AI models, etc).

All the way back in the Pleistocene era of edition #39, I highlighted this bit from an interview with Jensen Huang:

Jensen: Nvidia is an IP company because I'm pretty sure that TSMC makes the chips, and I'm pretty sure that what we delivered to them was effectively an e-mail after completion of a multibillion-dollar project.

An e-mail from a multibillion-dollar project. What a line.

Things are similar for other fabless companies that don’t make much, if any, of the physical products that are bought by the end users of their products (AMD, Qualcomm, ARM, etc), but Nvidia is definitely one of the bigger examples of this.

What’s Your Look-Through Cash Position

Buffett popularized “look-through earnings”, and it’s likely this idea that made me think about “look-through diversification”, which I wrote about all the way back in the Mesozoic era of edition #22:

A concept that I don’t see mentioned enough when it comes to portfolio construction and evaluating risk is the internal diversification of businesses. A lot of people will ask you “how diversified” you are, but they often stop at the level of “how many stocks do you own?”

One way I like to think of it is, if my portfolio was a conglomerate, how many businesses would I actually own?

Someone with a 5 stock portfolio may actually be more diversified than someone with a 20 stock portfolio because he may own 5 companies that each have lots of business units in various industries/niches, in various geographies, while the person with 20 stocks many own mostly single-product companies that cluster in just a couple industries and/or countries.

Think of it like the root systems of plants and trees. Some may have a single root that is fairly shallow, while others may sprawl in all directions and over great distances and be a lot harder to pull out, and may survive even if large sections are cut off.

One is not necessarily better than the other, and even with highly internally diversified companies you can have risks that aren’t diversified by all the sub-businesses (ie. if the CEO is bad or a crook). But I think it’s something you should still take into account to get a more accurate picture of what you actually own.

Friend-of-the-show and supporter (💚🥃) Adam Mead had a good riff on the similar concept of “look-through cash” and the implications:

Buffett’s look-through earnings approach to consider the look-through exposure of a hypothetical bank investor. How about cash? Should you consider the cash on the balance sheets of your investees as part of your portfolio? There are a few considerations.

  • First, are you okay letting that management team allocate the cash on the books for you? As a passive investor, you have no say in how that capital is allocated.

  • Second, what is the opportunity set of your investees compared to your own? I tend to fall in the middle on this. Berkshire Hathaway (BRK.B; disclosure: long) has about $135 billion in cash/equivalents on its books. If half is readily deployable, then about 10% of Berkshire’s market cap is cash, and therefore 10% times my allocation to Berkshire = my look-through cash position from Berkshire.

That second point about the opportunity set of management is a good one, and as usual, it goes back to good capital allocation.

While it may sound like you are less constrained on where to invest than most CEOs, because you have the entire stock universe laid in front of you on the buffet table (not to be confused with the Buffett table), good CEOs can do things that aren’t available to you directly, like hire good talent that is getting laid off by distressed competitors during hard time or acquire private companies or invest in high ROIC R&D, etc.

Adam also makes the point that whatever your cash position is when things are going well, all-else equal, it’ll be bigger when things go wrong (ie. cash stays the same but equities go down).

Frank Slootman Talking About What Snowflake ❄️ Does

Forward to 58:40 into it — I tried to embed it with a timestamp, but apparently that doesn’t work on Substack. But you can click here to go straight to the interview + Q&A part.

Note that Vimeo’s controls allow you to speed up to 1.5x. I don’t know why they don’t allow 2x like Youtube… ¯\_(ツ)_/¯

Frank’s points about governance/compliance for customers is a good one, and one that I keep seeing pop up with more and more companies.

He also highlights with emphasis the ways in which Snowflake is becoming more of a programmable platform (f.ex. Snowpark) with apps built on top of it. That both leads to more compute — which is how they get paid — *and* a more sticky flytrap for customers (ie. once you’ve built a complex application in there, you really don’t want to leave and have to replicate that elsewhere).

It does feel like at maturity, this business will be a real Hotel California.

And as they make clear during the Q&A, the 2029 projections (which are kinda ridiculous in the first place) they made were clearly a “worse case scenario” that “only assumes current functionality, no M&A, no entering adjacent markets”, so it would be very surprising if the real results weren’t significantly higher in both revenue and margins.

Oh, and the moment when Frank gets a spam phone call on his Apple Watch during the interview did make it feel very much like the lives of billionaires aren’t so different…

h/t Friend-of-the-show Muji

‘Junior Microsoft engineer exploited a bug to generate Xbox gift card codes worth $10.1M+’

Ok, this one is just kinda fun, and makes you wonder how many other similar situations have been going on undetected:

His team’s focus was to simulate purchases on Microsoft’s online store, looking for glitches in the payments system. This meant making lots of pretend purchases in the store. [...]

Kvashuk found a bug that would change his life, a flaw so stupidly obvious that he couldn’t bring himself to report it to his managers. He noticed that whenever he tested purchases of gift cards, the Microsoft Store dispensed real 5x5 codes. It dawned on him: He could generate virtually unlimited codes, all for free. [...]

By the time federal agents caught up with him almost two years later, he had stolen more than 152,000 Xbox gift cards, worth $10.1 million, and was living off the proceeds in a seven-figure lakefront home with plans to buy a ski chalet, yacht, and seaplane. (Source)

He was reselling the cards on the secondary market (for Bitcoin, of course).

Interview with an OnlyFans Creator ‘Earning $1.4 Million per Month’

Friend-of-the-show Conor at InvestmentTalk has a very interesting interview with someone really different from the usual interviewees in our financial circles, an anonymous OnlyFans creator who is apparently near the very top of the power law in popularity and earnings on that site (she has “several millions” followers across multiple platforms).

First, some context on the platform:

In 2019, it was reported that there were between 50,000 and 70,000 creators on [Onlyfans]. By the first third quarter of 2020, that number was closer to 700,000 and today it stands at well over 1 million.

Pre-pandemic, the site boasted ~20 million users, which now stands at closer to 130 million today.

Kinda amazing, especially when you consider, as I mentioned in edition #64, that they have around 75% EBITDA margins.

Back to the interview, here’s *one month* for her:

And that’s just on OF. She makes another $300k+/month from other platforms (Patreon and Twitch the biggest).

Some highlights from the interview:

I was actually so successful on Patreon that OnlyFans offered me a sweetheart deal (better % split than the standard 20/80, a HUGE profit share for referrals, etc) when they were trying to get traction (one that I declined at the time, a big mistake). 

Years later (in Jan of 2020, on the eve of the covid pandemic) I joined OnlyFans on my own without any additional incentives (and ran it in tandem with my Patreon). 

It only took a mere couple of months before OnlyFans eclipsed everything else I had going on (Patreon, Instagram, Youtube, etc). I had a fairly large online presence and OnlyFans was just the most efficient way to monetize across my audience. 

I am definitely in the vanilla content segment!  I started off doing pretty tame stuff as it was a real balancing act trying not to cannibalize existing sites I was using at the time (Patreon). 

I have been experimenting with more risqué and sexy stuff over time, I've gotten comfortable with being topless - I've made this transition extremely gradually -as I've grown on OnlyFans and to also help keep the novelty factor high. 

Patreon and OnlyFans are recurring revenue in a sense. 

I know the fintwit/business crowd is absolutely obsessed with companies like Adobe (which we use to edit our content!) and Microsoft getting that "recurring revenue" multiple, and I've found that Patreon (previously) and OnlyFans now is EXTREMELY powerful due to that passive auto-renew/revenue reoccurrence! 

Now, churn on any such personal content platform is much higher than in software, but there’s a pretty good chance that someone who joins once will join again, even if it's not consecutive. 

It's the social media version of  Buffett's "You only have to get rich once." 

You only have to go viral/build up a massive audience once.  Then all you have to do is regularly post and update them and try and keep them engaged. 

For me the funnel is something like, people follow you on TikTok, Instagram, Twitch, Youtube, and Twitter (I am a strong believer as a social media personality you should be on ALL the platforms -it diversifies some of the risks of one of the platforms banning you or losing relevancy and it's much easier to get you follower count up because you can cross-promote so easily).”

Read the whole thing here.

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Science & Technology

First Adopters of TSMC 3nm Process are Apple and… Intel

Here’s an headline you wouldn’t have guessed not so many years ago, when Intel was the leader in node size and didn’t outsource CPU fabbing on its big lines to third parties (and a little further back, Apple didn’t even make any CPUs, they bought them all from suppliers).

Apple and Intel are testing their chip designs with TSMC's 3-nanometer production technology, according to several sources briefed on the matter, with commercial output of such chips expected to start in the second half of next year. [...]

According to TSMC, 3-nm technology can increase computing performance by 10% to 15% compared with 5-nm, while reducing power consumption by 25% to 30%. [...]

Apple's iPad will likely be the first devices powered by processors made using 3-nm technology, sources said. The next generation of iPhones, which are to roll out next year, are expected to make use of the intermediate 4-nm tech for scheduling reasons.

Intel, America's biggest chipmaker, is working with TSMC on at least two 3-nm projects to design central processing units for notebooks and data center servers in an attempt to regain market share it has lost to Advanced Micro Devices and Nvidia over the past few years. Mass production of these chips is expected to begin by the end of 2022 at the earliest. (Source)

What the Normal Vaccine Reaction Tells You About Being Sick

I Recently had my second dose of the vaccine (🤘).

What's most interesting about the side effects that I felt for a period of about 24 hours a day after (tired, a bit achy, sensitive skin), is that it helped me disentangle clearly what causes what.

I know it was purely an immune reaction, so I know that none of the symptoms I felt came from a virus.

So the next time we have a cold, it'll be clearer in my memory what's immune, and what is caused by the virus itself. I mean, I’ll still feel like crap, but at least I’ll know.

Idea for a Documentary

Maybe it already exists?

I’m imagining a documentary that follows one or many recently released ex-prisoners who have spent a long time (decades?) in high-security prison and have never been exposed to most of the tech we now take for granted; never been on the internet, never used smartphones, never used social media.

It would be great to get their first reactions, ask them questions about what surprises them, and they like most and least about it, what they find confusing, etc.

Kind of a true "alien" perspective on it all, from someone who gets it all at once as an adult, is old enough to have grown up in a very different world, and didn't have time to get used to the changes as they came out.

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The Arts & History

‘The Night The Stars Fell’

The Leonid meteor storm was seen across the United States in the night and early morning of November 12th and 13th, 1833. Those who were awake to witness the storm were in awe as between 50,000 and 150,000 meteors fell each hour. (Source)

I don’t know how they were able to estimate the number at the time (especially without photos or video), but whatever the actual number was, it must’ve been insanely high for them to settle on these estimates!

h/t Massimo

‘Luca’ (Pixar, 2021)

I watched this with my two kids (3yo and 7yo) yesterday.

It’s not up there with Pixar’s golden-era masterpieces, but I thought it was pretty good.

From a technical point of view, the animation and visuals were really good. Very cool subtle light effects, very interesting world-building and architecture, lots of neat details everywhere, good use of color palettes.

I wish the writing had been a bit stronger, but it’s not bad per se. Just not as deep and layered as Pixar at its best.

And the ending was pretty unbelievable, but I get it — not every kids’ film can turn into Schindler’s List for sea monsters.

If you have young kids, I’d recommend it. The 3yo was a bit bored in the first act, but stayed with it after that.