Invest Like the Best with Patrick O'Shaughnessy
· Gavin Baker
And this is so crazy to me because one, we have an existence proof for software investors being willing to tolerate gross margin pressure as long as gross profit dollars are okay. And it's called the cloud. People don't remember. But when Adobe converted from on-premise to a SaaS model, not only did their margins implode, their actual revenues imploded too, because you went from charging upfront to charging over a period of years. Microsoft, it was less dramatic, but Microsoft was a tough stock in the early days of the cloud transition because investors were like, "Oh, my God, you're an 80% gross margin business." And the cloud is the 50s and they're like, "Well, it's going to be gross profit dollar accretive and probably will improve those margins over time." Microsoft, they bought GitHub and they use GitHub as a distribution channel for Copilot for coding. And that's become a giant business, a giant business. Now for sure, it runs at much lower gross margins, but there are so many SaaS companies. I can't think of a single application SaaS company that could not be running a successful agent strategy. And they have a giant advantage over these AI natives in that they have a cash-generative business. And I think there is room for someone to be a new kind of activist or constructivist and just go to SaaS companies and say, "Stop being so dumb." All you have to do is say, "Here are my AI revenues and here are my AI gross margins, and you know it's real AI because it's low gross margins. I'm going to show you that. And here's a venture competitor over here that's losing a lot of money. So maybe I'll actually take my gross margins to zero for a while, but I have this business that the venture funded company doesn't have." And this is just such a obvious playbook that you can run Salesforce, ServiceNow, HubSpot, GitLab, Atlassian, all of them could run this.
· Patrick O'Shaughnessy, Gavin Baker
[00:00:00] S0: And the way that those companies could or should think about the way to use agents is just to ask the question, "Okay, what are the core functions we do for the customer now? How can we further automate that with agents effectively?" [00:00:00] S1: If you're in CRM, well, what do our customers do? They talk to their customers. We're customer relationship management software and we do some customer support too. So make an agent that can do that and sell that at 10 to 20% and let that agent access all the data you have. Because what's happening right now, another agent made by someone else is accessing your systems- [00:00:00] S0: To do this job. [00:00:00] S1: ... pulling the data into their system, and then you'll eventually be turned off. And it's just crazy and it's just because, "Oh, wow, but we want to preserve our 80% gross margins." This is a life or death decision, and essentially, everyone except Microsoft is failing it. To quote that memo from that Nokia guy long ago, "Their platforms are burning." [00:00:00] S0: Burning platform. Yeah. [00:00:00] S1: Yeah. There's a really nice platform right over there and you can just hop to it and then you can put out the fire in your platform that's on fire, and now you got two platforms and it's great. [00:00:00] S0: Your data centers in space thing makes me wonder if there are other kind of less discussed, off-the-wall things that you're thinking about in the markets in general that we haven't talked about.
· Patrick O'Shaughnessy, Gavin Baker
[00:00:00] S0: Your data centers in space thing makes me wonder if there are other kind of less discussed, off-the-wall things that you're thinking about in the markets in general that we haven't talked about. [00:00:00] S1: It does feel like since 2020 kicked off and 2022 punctured this, a series of rolling bubbles. So in 2020, there was a bubble in startup EVs that were not Tesla. And that's for sure a bubble, and they all went down 99%, and there was a bubble in more speculative stocks. Then we had the meme stocks, GameStop. And now it feels like the rolling bubble is in nuclear and quantum. And these are fusion and SMR. It would be a transformative technology. It's amazing. But sadly, from my perspective, none of the public ways you can invest in this, or really good expressions of this theme are likely to succeed or have any real fundamental support. And same thing with quantum. I've been looking at quantum for 10 years. We have a really good understanding of quantum, and the public quantum companies, again, are not the leaders. From my perspective, the leaders in quantum would be Google, IBM, and then the Honeywell Quantinuum. So the public ways you can invest in this theme, which probably is exciting, are not the best. So you have two really clear bubbles. I also think quantum supremacy is very misunderstood. People hear it, and they think that it means that quantum computers are going to be better than classical computers at everything. With quantum, you can do some calculations that classical computers cannot do. That's it. That's going to be really useful-
· Gavin Baker, Patrick O'Shaughnessy
[00:00:00] S1: It does feel like since 2020 kicked off and 2022 punctured this, a series of rolling bubbles. So in 2020, there was a bubble in startup EVs that were not Tesla. And that's for sure a bubble, and they all went down 99%, and there was a bubble in more speculative stocks. Then we had the meme stocks, GameStop. And now it feels like the rolling bubble is in nuclear and quantum. And these are fusion and SMR. It would be a transformative technology. It's amazing. But sadly, from my perspective, none of the public ways you can invest in this, or really good expressions of this theme are likely to succeed or have any real fundamental support. And same thing with quantum. I've been looking at quantum for 10 years. We have a really good understanding of quantum, and the public quantum companies, again, are not the leaders. From my perspective, the leaders in quantum would be Google, IBM, and then the Honeywell Quantinuum. So the public ways you can invest in this theme, which probably is exciting, are not the best. So you have two really clear bubbles. I also think quantum supremacy is very misunderstood. People hear it, and they think that it means that quantum computers are going to be better than classical computers at everything. With quantum, you can do some calculations that classical computers cannot do. That's it. That's going to be really useful- [00:00:00] S0: That's exciting. Yeah.
· Patrick O'Shaughnessy, Gavin Baker
[00:00:00] S0: That's exciting. Yeah. [00:00:00] S1: ... and exciting and awesome, but it doesn't mean that quantum takes over the world. I think the thought that I have had, and this is maybe less related to markets than just AI. I have just been fascinated that for the last two years, whatever AI needs to keep growing and advancing, it gets. Have you ever seen public opinion change so fast in the United States on any issue, as nuclear power? Just happened like that. Like that. And why did that happen right when AI needed it to happen? Now we're running up on the boundaries of power on earth. All of a sudden, data centers in space. It's just a little strange to me that whenever there is something, a bottleneck that might slow it down, everything accelerates. Rubin is going to be such an easy, seamless transition relative to Blackwell, and Rubin's a great chip. And then AMD getting into the game with the MI450. Whatever AI needs, it gets. [00:00:00] S0: You're a deep reader of sci-fi. [00:00:00] S1: Yeah, exactly. [00:00:00] S0: You're making me think of Kevin Kelly's great book, What Technology Wants. He calls it the Technium, the overall mass of technology that just is supplied by humans- [00:00:00] S1: Absolutely. [00:00:00] S0: ... to grow more powerful. [00:00:00] S1: Yes. It just wants to grow more and more powerful. [00:00:00] S0: It sounds like the name of a movie. [00:00:00] S1: And now we're going into an end state.
· Gavin Baker, Patrick O'Shaughnessy
[00:00:00] S1: And now we're going into an end state. [00:00:00] S0: I have a selfish closing question, speaking of young people. So my kids, who are 12 and 10, but especially my son who's older, is developing an interest in what I do, which I think is quite natural. And I'm going to try to start asking my friends who are the most passionate about entrepreneurship and investing why they are so passionate about it and what about it is so interesting and life-giving to them. How would you pitch what you've done, the career you built this part of the world to a young person that's interested in this?