Week 44: Market Caps, Interoperability, Semiconductors & Squid Games

Briefing:

• The market capitalization of an investment is dependent on the distribution of ownership and liquidity. Squid Game’s popularity is so powerful it spawned a new currency… that promptly went to zero.
• Interoperability refers to compatibility between software systems and data sets. It’s an essential component of the future of our interconnected digital world.
• ASML semiconductor manufacturer is likely the most important company globally and perhaps one of the most impressive as well.

Market Caps, Distribution of Ownership and Liquidity

What makes a market cap? Tesla’s current market cap (market capitalization) is among the largest globally, at $1.2T, with a share price around $1200/share. Elon Musk owns around 17% of the company, worth nearly $200B at today’s prices.

Nassim Taleb wrote in Dynamic Hedging, “the market is a large movie theater with a small door.” Too much buying or selling causes markets to soar or crash. In Tesla’s case, the average daily trading volume is equivalent to about 3-4% of the company’s value. If Elon were to liquidate all of his shares in one day, there would not be enough liquidity available and Tesla’s stock price would crash in dramatic fashion. In this case, large holders like Bezos, Musk, Gates, etc., cannot liquidate their shares without causing significant economic challenges for all other shareholders, including employees.

You may have heard by now about SquidGame coin, which experienced an epic -100% crash over the weekend. Squid Game coin is a cryptocurrency named after the popular Netflix TV show. SquidGame coin prices skyrocketed from $.01 to just north of $2800/coin, with a total supply of 800,000,000 coins indicating a market cap of $2.2 trillion – nearly double Tesla’s market cap. Within 5 minutes, that price dropped from $2800 to $0.01. We call this a rug-pull, when the founders crash their market and run away with the proceeds. If we look at the holders of DOGE coin, 45% of the supply is held by just 14 people. If those DOGE whales sold all of their holdings, they would also instantly send the price of DOGE to $0. Since DOGE trades at a market cap of $50B, with low distribution of ownership, how reliable is the $50B market cap? Not very reliable at all.

In short, a market cap is only as good as the distribution of ownership and the market’s liquidity.

Interoperability

When Mark Zuckerberg recently laid out his thesis for the future of the metaverse, he said, “In order to unlock the full potential of the metaverse, there needs to be interoperability.” This was an interesting statement because Facebook is not known for its leadership in open data sharing.

Interoperability refers to compatibility between software systems. Interoperability refers to data shared between programs and users that exist on different platforms. In the video game world, this would be the same as moving your car, spaceship, outfit or in-game currency into another game. As we start to build a metaverse, the virtual recreation of our physical world, you can imagine that you would want to bring your virtual “stuff” between the different platforms.

It’s easy to see how restricting interoperability can create a monopoly. In the current Web2.0 world, where almost every application is free (Google, Facebook, LinkedIn, etc.), interoperability is not currently an obvious pain point for consumers. However, in the Web3.0 world, people spend real money buying virtual Bored Ape NFTs for $250,000+. You can see how users will become increasingly frustrated in the near future if they aren’t able to carry their $250k purchases from one system to another. Interoperability makes the internet a more diverse and user-friendly place. Preserving interoperability standards should help spur innovation and competition. If you’re really curious about this topic, you can read the Interoperability whitepaper published this year by EFF.

ASML – Quite Possibly The Most Important Company In The World

MIT Technology Review published another great deep dive last week, this time on one of our favorite semiconductor leaders: ASML. ASML manufactures the machines that semiconductor fabrication plants (fabs) use to build the chips that go into every one of the top of the line computer products for Apple, Google, NVidia and many others. ASML is the only company in the world capable of producing the level of precision required to make the special chips that power the latest version of your iPhone – the M1 chip, for example.

The level of precision within ASML’s machine is truly unbelievable, and it’s earned them a monopoly position within the semiconductor equipment business.

ASML machines use EUV – Extreme Ultraviolet Light with a wavelength of 13.5 nanometers, just above an x-ray. It took ASML 17 years and $9 billion in R&D to build a working EUV machine. The machines must operate in a complete vacuum as even air particles will absorb the EUV light waves. Their machines hold 11 magnifying lenses polished for months via an ion beam that knocks individual molecules off to create the most precise surface in the world.

The EUV light that powers the machine is produced by firing tin droplets just 1/3rd the diameter of a human hair into a chamber. Each droplet is tracked via a camera and hit with a laser beam at the perfect moment to turn the tin into plasma heated to 500,000 Kelvin. This process repeats 50,000 per second (not a typo). The tin plasma droplets emit the EUV light used to burn patterns into the surface of the silicon wafers to create logic gates used in your phone. Even if you want to replicate this process, you can’t do it without extensive in-field experience and critical global partnerships with other elite manufacturers. ASML shipped its first EUV machine in 2017 after first embarking on this EUV project in 2000. 

The world’s three leading chipmakers: Intel, Samsung and TSMC have become as reliant on ASML as the rest of the technology industry is on their chips. Canon and Nikon, the only other two competitors in the space, are no longer pursuing EUV technology. ASML’s commitment to R&D puts them ahead of everyone in the industry.

Trump and Biden have successfully prevented ASML from selling their machines to China, creating a severe disadvantage for the Chinese technology industry. Apple and NVidia would not be able to ship their latest products, and Google would not be able to continue to refine its AI models without the capabilities invented and implemented by ASML. One could argue that our global reliance on ASML’s innovative products makes it one of the most important companies of the modern world.