Sunday Finds + 3 Thoughts From Last Week

Snowflake, dLocal, Quarterly Roundtable

Apr 17, 2022

Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.

1. AWS’s Widening Moat

New Amazon CEO Andy Jassy released his first letter to shareholders this week. There were a lot of good nuggets in the write-up, but this section stood out to me the most:

But, it wasn’t until 2020, after taking the learnings from Graviton and innovating on a new chip, that we had something remarkable with our Graviton2 chip, which provides up to 40% better price-performance than the comparable latest generation x86 processors. Think about how much of an impact 40% improvement on compute is. Compute is used for every bit of technology. That’s a huge deal for customers. And, while Graviton2 has been a significant success thus far (48 of the top 50 AWS EC2 customers have already adopted it), the AWS Chips team was already learning from what customers said could be better, and announced Graviton3 this past December (offering a 25% improvement on top of Graviton2’s relative gains).

What he is referring to is AWS’s own chip line it built called the Graviton. The x86 chips are from AMD if you’re wondering.

I’m sure this was known among industry investors already, but these efficiency gains seem like stunning improvements if they could be applied to AWS’s entire infrastructure. The competitive advantage is mind-boggling, to say the least. Not only does AWS have economies of scale, brand power, and high switching costs, it now has added intellectual property to separate itself from the competition. Before the Graviton’s, it would be tough to rationalize choosing someone like IBM for your cloud computing needs. But now, with these price-performance improvements, you could argue it’s a breach of your fiduciary duty if you’re a CFO/CTO and you choose a 3rd-rate cloud company over AWS.

If AWS comes out with new Graviton’s every few years that keep offering these efficiency gains, I don’t know how anyone can compete with them outside of Microsoft and Google. And those two giants may still find it difficult.

(caveat: I am far from an expert in the IT field)

2. Please go public Chick-fil-a

There are a few private companies I wish were public more than Chick-fil-a:

Those lines of cars you saw curving around Chick-fil-A drive-thrus throughout the pandemic? Turns out they were far more than social media fodder. According to the company’s annual FDD, of Chick-fil-A’s 1,836 U.S. freestanding restaurants outside of malls (those open and operated for at least a full calendar year, from a total of 2,023), average annual sales volumes clocked in at $8.142 million last year, with 849 of those, or 46 percent, producing figures at or above. One operator pushed $17.16 million.

These are some astounding numbers. For reference, the average McDonald’s and In-N-Out do $2.9 million in AUV, meaning that the average Chick-fil-a does almost 3x as much revenue. This likely makes Chick-fil-a the most efficient and well-run chain restaurant in the world, and they are only open six days a week!

But what makes Chick-fil-a special? Like all good restaurant brands, I don’t think it is complicated. Chick-fil-a serves a consistently decent meal, has great customer service, and has a super-efficient ordering system. There’s also consistency across the majority of locations. All of these things please customers and convince them to come back again and again. There’s not much more to it than that.

By the way, two other companies I’d love to see go public but likely never will are REI and Trader Joe’s. Why do all the high-quality retailers stay private? It’s not fair to us lowly investors limited to the public markets.

3. Why Does No One Talk About Hershey’s?

We had a fun discussion (linked below) in our quarterly roundtable ranking what we think are the best businesses ever. I came in with a bit of a wildcard for one of my picks: Hershey.

Hershey is rarely if ever talked about among public market investors, and I can’t quite grasp why something like Coca-Cola gets 100x the coverage from the media (maybe that is just the Buffett influence). Anyway, it is an amazing business, with free cash flow per share up 8,000% over the past few decades. To me, it feels almost undisruptable, given how it is a core part of American culture and that the chocolate has a distinct taste that nobody can replicate.

According to Koyfin, the stock is up over 100,000% since 1968, and that is before reinvesting dividends. Talk about one of those businesses you can buy and just never sell.

See you next week,

Brett

***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***

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Catch up on Our Shows From Last Week

3 Good Reads

Chick-fil-a’s Packed Drive-Thrus Were Not a Mirage - QSR Magazine

As a company, soaring AUVs led to record performance. Chick-fil-A’s revenue climbed to $5.8 billion last year, well ahead of the $4.3 billion it appreciated in 2020 and $3.8 billion the year prior. Comprehensive earnings of $1.198 billion sailed $715.9 million ($647 million in 2019).

Idea Brunch With Josh Young of Bison Interests - Idea Brunch

They say that building a model lets you be “precisely wrong” about valuation. I’ve found that the model building exercise, particularly in oil and gas public equities, focuses investors and analysts on factors that are hard to predict and in many cases are not the actual drivers of the investment outcome.
Instead, I try to focus on what the market is expecting, why the stock looks cheap, and how that might change. After checking valuation, capital structure, and asset quality and composition, I look to see if I can validate whatever has caught my attention through mutual connections or third-party information. Local realized pricing, services costs and availability, and other specific factors that I stay up to date on play a major role in company economics and the outcomes of companies in the space.

Mark Zuckerberg’s Augmented Reality - The Verge

Still, Zuckerberg has ambitious goals for when his high-tech glasses will be a reality. Employees are racing to deliver the first generation by 2024 and are already working on a lighter, more advanced design for 2026, followed by a third version in 2028.

1 Good Listen

Professor Donald Hoffman — The Case Against Reality, Beyond Spacetime, Rethinking Death, Panpsychism, QBism, and More - The Time Ferriss Show

Donald Hoffman ( @donalddhoffman) received a PhD in computational psychology from MIT and is a Professor Emeritus of Cognitive Sciences at the University of California, Irvine. He is an author of over 120 scientific papers and three books

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