The inequality among virtues

There are two kinds of virtues. There are those that you should imbibe irrespective of the society, for your own good, like gratitude or discipline. The other kind includes those that are useful only if a large part of society adapts them.

For instance, honesty, often quoted as the best policy, carries values when everyone around you is generally honest. Otherwise, the wealth transfer is likely to be one way, from the honest to the dishonest. Tourist guides and street vendors learn this early at places that people are likely to frequent once in a lifetime and there is little risk of losing one's reputation (hotel owners cannot afford to be as devious because people can easily identify and badmouth them). 

However, a dishonest world would be extremely distressing to live in- where no man's word can be trusted and one lives in constant suspicion. In the few months after Lehman's collapse in 2008, global trade collapsed because no one, including banks, was willing to trust another. Therefore, society as a whole tries to place a great penalty on the dishonest to ensure compliance. 

Tolerance is another virtue of the second kind. Taleb articulates it very well when he says that 'the most intolerant wins'. The tolerant ones would always end up compromising. A tolerant culture will allow others to prosper, an intolerant one, when it gets the opportunity, will wipe others out. It is easy to guess who will survive in the long run.

Honour is a particularly strange one. Highly valued among feudal societies, especially among the Japanese, it can be puzzling to a bystander. As an individual, there is no upside in committing hara-kiri. You can hope to gain nothing after you are dead. As Tyrion Lannister says in the Game of Thrones, “Death is so final. Whereas life, ah, life is full of possibilities.” 

A man who lays down his life for society either does it for the welfare of his family, that they are looked after well, or to prevent his name from being sullied. The implicit assurance is that the society will honour its share of the agreement. However, in a war with the unprincipled and for the greater good, honour can be overlooked.

For one, history is written by the victors. A belligerent might have fought an honourable battle, but if he is on the losing side, history can still be unkind to him. Churchill or Stalin are rarely considered monsters despite their war crimes because the Allied Powers were victorious. Two, there is the wisdom of Krishna behind it. If honour harms Dharma in the long run by giving the opponent an unfair advantage, it is no longer a virtue.

Forgiveness is an interesting one. It provides a sense of comfort that the offences of the one who forgives would also be looked upon kindly when the chance comes. Perhaps that is what the Lord's prayer also talks about - 'and forgive us our trespasses as we forgive those who trespass against us'. Forgiveness (or mercy) is another interesting virtue. It provides a sense of comfort that the offences of the one who forgives would also be looked upon kindly when the chance comes. That is what the Lord's prayer also talks about - 'and forgive us our trespasses as we forgive those who trespass against us'. That said, neither was the Church forgiving during the Crusades or the Inquisition, nor were the Conquistadores when they expanded into the Americas under the banner of the Church. On the other hand, Prithivraj Chauhan suffered for his folly of being soft on Ghouri.

Charity is a similar one, albeit with a difference. One can argue that it does provide value to the giver by instilling a sense of pride ('I am among the few who can afford to give'), or promises a divine reward. The wealthy also get a sense of comfort that they would be looked after when they fall upon hard times. Sometimes, charity is just the price one pays for peace. To avoid a civil war or an uprising of the extremely poor.

A lot of other virtues can be discussed on these lines, but I stop here. Perhaps what we can take away from the discussion is to choose which of the buckets a specific virtue falls in before extolling it. The first kind of virtue should be stuck to even if one is marooned on an island with no one around. Such as hard work, hope, or patience. The second kind is contingent upon the kind of society and times you live in. Just as Krishna was ready to bend the rules of the battle in a war where the opponent played unfairly. Or forgiving an enemy who you know would seethe with vengeance. Most importantly, the framework is important simply because it would prevent you being manipulated by those foes who rarely play fair.

 

Tip for young credit analysts

As young analysts learning the ropes, a piece of useful advice that we received from senior DB credit analysts like Juergen Fiedler was to resist the temptation of investigating and explaining 10-12 credit risks. Most companies have just 3-4 credit drivers that make or break them. The extensive list of business risks mentioned in the 10K is not worth a deep dive, as they are largely mitigated (the worthwhile ones are usually brushed under the carpet).

It reminds me of a tale that Osho used to narrate.

In a district, it was customary to welcome the archbishop by a tolling of the bells. One day, when the archbishop visits a church, the bells stay silent. Puzzled, he decides to quiz the priest. Now it so happened that the priest was particularly fond of the phrase 'There are 50 reasons for this'. When asked about the uncanny silence of the bells, the priest, as usual, explains - 'There are 50 reasons for this.' He then adds, 'the first one being that we do not have any bells. They have gone for repair.' The archbishop interrupts, 'You need not tell me the rest. That is enough.'

Man vs. Machine

Decades ago, in the 1960s, the Oregon Research Institute decided to create a simple algorithm – one that judges the likelihood of an ulcer being malignant by considering just seven equally weighted factors. To build it, the researchers consulted doctors and asked them to judge the probability of cancer in 96 different cases of stomach ulcers, mixing up X-ray slides and sometimes showing them the same ulcer twice. This was the input on which the algorithm was to be based on - expert judgement using a fairly small data set (by today's standards), and then cleaning it for human errors. The model was supposed to be a starting point. Nothing groundbreaking. The results, however, shocked everyone.

The doctors, whose inputs were used to build the algorithm, had often contradicted themselves when looking at the same X-ray. Even though this sounds absurd, human biases and memory shortcomings works in strange ways. The model, on the other hand, beat even the single best doctor. Do remember that the model had just incorporated seven equally weighted factors. A real-life doctor might consider many more, and assign unequal weights depending on the circumstance. Despite such constraints, a back of the envelope algorithm was good enough to outdo expert judgment.

Like us, machines also use historical data, or inductive reasoning, to arrive at a judgement in such cases. However, unlike us, they do not suffer from lapses of memory, or psychological biases. Also, in some cases, they have access to much more data. Even the celebrated Nobel Prize winning chemist, Linus Pauling, committed a basic blunder when he tried to arrive at the structure of a DNA. If he had access to a computer, with the data and constraints known to Pauling being plugged in, the computer would have raised a red flag on what he proposed - a triple helix in which the phosphates were held together by a hydrogen bond. Ironically, Watson and Crick confirmed the error by referring to Pauling's classic "College Chemistry" textbook. Importantly, it is not that a computer with sufficient AI would have helped Pauling solve the DNA problem, because he did not have access to X-ray crystallography that Watson, Crick, Wilkins, and Franklin knew about, which was so crucial to solve the puzzle. However, a computer would have prevented him to make a blunder, and sometimes, we are as good as our biggest blunders.

With the kind of computing power and big data we have now, the algorithms will only keep getting better. The more data points computers observe, the smarter they become. Not surprisingly, in 2017, Stanford researchers developed an algorithm that can diagnose pneumonia better than expert radiologists. Notably, AI has made these impressive strides in the field of medical research, where doctors spend years to build expertise. How will it impact other not so complex domains is a fairly simple conclusion.

Science fiction authors need to rethink their plots

The period in the 1940s and 1950s is widely considered the golden age of science fiction. Some extend it to the 1960s as well, when man's landing on the moon further fueled popular imagination. The belief that space travel to the depths of the Universe was within reach led to more space stories, with people toying with the possibility of inhabiting other worlds and crowded space stations. When Arthur Clarke penned 2001: A Space Odyssey in 1968, he foresaw man travelling to Jupiter by the beginning of the next millennium. 

The authors of that age also talked about flying cars, transportation belts, and affordable video communication. While the latter did become a reality, the other two will perhaps never see the light of day. The way science fiction has changed over the years led one writer to comment that while science fiction of the golden era had a firm faith in scientific progress for the betterment of humankind, contemporary literature is largely pessimistic and talks about a dystopian future. The themes now are of worlds submerged in rising water levels, humans taking refuge from climate change in subterranean caverns, or artificial intelligence gone rogue. Even when the books are about alien life, it is mostly hostile and destructive. The COVID-19 outbreak will perhaps revive the genre of lab designed viruses as well. A valid argument put forward by authors is that the purpose of science fiction is to imagine possible scenarios far away in the future, and prevent the nightmarish ones from playing out. However, just as hope is a dangerous thing, so is despair.

Some ideas of science fiction, like flying cars and power beams, were preposterous from the very start, and abandoning them is no great setback. The kind of energy needed to sustain a car in the air, managing the traffic, and the associated cost-benefit made it far fetched to start with. Perhaps the same could be said of moving transportation belts that Asimov was so fond of. We needed too much cheap and sustainable energy that we could throw at these ideas. We are moving in that direction, but even technology like hydrogen fuel cells is not going to make those ideas a reality.

Perhaps somewhere down the line we abandoned hope of space travel as well. As space programs started going slow after the Cold War came to an end, enthusiasm about space travel receded. Now even movies are rarely based on intergalactic travel using spaceships like the Enterprise, despite the special effects being available. The new buzzword is Artificial Intelligence, but it brings up images of rogue robots, an evil Skynet, and mass unemployment. Asimov, who came up with the three laws of Robotics, had a kinder view of things to come. While even he talked about the hostility that humans are likely to have towards robots, no matter how benign they are, the overall impact was favourable. He envisaged a world where humans and robots will co-exist and work as a team, even solving crimes together as detectives.

All said and done, science fiction authors need to take a more cheerful outlook. I find the space travel novels charming, and if you ignore the low production value, Star Trek, made in 1966, is quite creative. One of my favourite authors, Jules Verne, almost always considers science as an ally, not as a force that will lead to destruction unless we are extremely cautious. His books talk about curious scientists who want to harness the power of science for the greater good. HG Wells is an exception, who despite being on the other end of the spectrum, is still a joy to read. But I digress.

While authors might have a small role to play, they can help in shaping science for the future. Dystopian novels spark fear in the populace, making it difficult to secure political funding for projects. People do not want to invite hostile aliens, or encourage the development of autocratic robots, or tools that can lead to surveillance. Genetic alterations are almost always associated with the creation of monsters or deadly pathogens. Even particle accelerators are supposed to open up dimensions from which hideous beings will enter our world. To put it crudely, this is plain fear mongering. Scientists can spend their time developing the next version of smartphones or quantum computing, but pardon the word usage, this will not lead to quantum leaps in progress. We need to encourage them to take braver bets. Most science fiction literature, in its current form, is being a roadblock to that. 

AMD has risen from the ashes to win Round one, but Intel has not been knocked out yet

I have not covered the semiconductor industry for a long time, but analysts’ reactions to Intel’s recent earnings call are too loud to ignore. The stir has been caused by the delayed rollout of Intel’s 7nm chips by six months, which are now planned to be launched by late 2022. AMD is now expected to gain substantial lead time over Intel, as its latest chips are already built on a 7nm process and will gain further lead by moving to the 5nm process by late 2021.

A Bernstein analyst went on to say that the earnings call was the ‘worst we have seen’ in the company’s history. Indeed, Intel’s share price tanked by 20% after the call, and has been languishing there for more than a month now.

That said, despite the pessimism exuding from analysts, revised price targets are not that bleak, down mostly in the 6%-14% range. The analyst reaction prompted Bill Maurer to comment in Seeking Alpha that ‘it seems everyone thinks Intel is dead’. He goes on to say that while the bleak commentary would have you believe that projections moving forward would be quite bearish, it is not really the case, and Maurer therefore recommends to ‘skip the funeral’. Of course, this is partly because Intel is no longer just a chip company – about half of its operating profit is now contributed by the data center group.

This is not the first time when AMD has left Intel behind on the development front. In the past twenty years or so, AMD’s share price has done significantly better than Intel in two instances. One is now, and the other one was when AMD held sway with its Athlon processor.

A brief history of AMD will reveal that fortunes in the processor market can be fleeting, and tables can turn overnight. Perhaps this prompted Andy Grove to say “only the paranoid survive”. The point that I wish to put across is that AMD has been here before, but it needs tremendous effort to stay at the top when you have a rival like Intel. While AMD’s recent feats are by no means trivial, Intel has the capability to bounce back if it gets really serious about the CPU market.

The beginnings of AMD as an underdog

Let us start from the start then. Both companies trace their roots back to Fairchild Semiconductor. Intel was formed when two employees of Fairchild, Robert Noyce and Gordon Moore, left the company in 1968 to form N M Electronics. Less than a year later, eight people left Fairchild and set up AMD. Historically, AMD was considered the cheap, copycat option. Before 1999, what Intel designed, AMD simply tried to make better. But even though AMD used to ‘reverse engineer’ Intel’s processors, they trumped Intel on performance – for instance, the Am486 processor launched in 1993 offered roughly 20% more performance than Intel’s i486. AMD’s success with the 386 and 486 helped double its revenue to USD 2bn during the 1990-94 period.

Days of Glory

In 1996, AMD acquired NexGen, a chip design company whose Nx686 processor demonstrated a 180 MHz core speed when AMD’s K5 and K6 (under development) were facing scaling issues. After the buyout, the Nx686 became AMD’s K6 and thus began an era of AMD’s dominance over Intel. Interestingly, Vinod Dham, who is called the Father of Pentium, had left Intel in 1995 to join NextGen. A classic case study that underlines the importance of keeping track of key management movement. The K6 processors, launched in 1997, gave stiff competition to Intel’s Pentium series and costed half as much as equivalent Pentium chips.

 

AMD retained its research edge, for instance, the K6-2 was known for offering an easier route to accessing the CPU’s floating-point capabilities. Finally, in 1999, AMD launched Athlon, which truly rocked the boat. It stood apart on several counts, from overclockability, to DDR RAM support and full speed L2 cache. In 2003, Athlon was upgraded to Athlon 64, because it added a 64-bit extension to the x86 instruction set. Till early 2006, AMD had the upper hand in the server market as well with its Opteron chips. This was the period when AMD’s share price did far better than Intel, whose Netburst architecture was looking like a failure. The company’s rating was upgraded from B2 to Ba3 in January 2006 by Moody’s. And then, AMD’s juggernaut hit an iceberg.

The ATI acquisition blunder

AMD decided to acquire ATI Technologies, the graphics card manufacturer, in July 2006. The deal size was USD 5.4bn, comprising USD 4.3bn in cash and loan, and the rest raised through equity. This was about half the market capitalisation of AMD at that time. ATI had no manufacturing sites and negligible revenue, and the value could almost entirely be attributed to its intellectual property. Over the next few years, AMD had to write off USD 3.2bn related to ATI's acquisition, revealing the extent to which the company had overpaid for ATI. In what could be termed as an embarrassing blunder, AMD also sold off the handheld graphics division of ATI for just USD 65mn. That division is now known as Adreno.

On the development front, AMD’s planned to challenge Intel in the server market through its quad core K10 Barcelona processor (Intel’s Xeon chips were just dual core). However, a bug was discovered in the K10, and by the time a BIOS patch was rolled out, AMD’s reputation had been damaged.

Intel makes a comeback

Meanwhile, Intel dumped Netburst and switched to their older Pentium M architecture. The Pentium name, now much maligned, was relegated to low-end budget models and was replaced with “Core”. In end-July 2006, the Core 2 Duo was launched and by the end of the year, Intel had reconquered the summit. AMD tried to retaliate by pushing the quad-core K10 design to the desktop market in late 2007. While the K10 was superior in some aspects, it was slightly slower and more expensive. It seemed that AMD’s research pipeline had run dry.

AMD perhaps then thought that the Athlon brand had suffered some damage, and launched Phenom to challenge Intel’s popular Core 2 Quad Q6600. But by this time Intel was well-entrenched on the software side of business, and unlike AMD, advertised more. Intel had its own foundries tailored to its own products and a large marketing budget. Intel did not stop here however. They used their large cash reserves to keep AMD CPUs out of new computers. Intel paid Dell a whopping USD 723m to remain the sole provider of its processors. AMD stood little chance to compete. The company was downgraded back to B2 by 2008.

AMD rises from the ashes

In 2010, AMD pulled up its socks by cutting down costs, disposing assets (chipmaking foundries) and focusing solely on processor design. The initial products were disappointing – the FX series could not effectively compete with Intel’s Core i7 for instance on power consumption and size. Support came from unexpected quarters though. The purchase of ATI helped AMD to come up with a combined CPU and GPU package, which was later used in the Jaguar architecture and selected for the Xbox One and PlayStation 4 in 2013. However, this helped to build reputation instead of profitability, as margins tend to be weak in the console business. AMD generated operating losses in each year from 2012 to 2016 (except 2013), and revenue was on a downtrend. But then in 2012, AMD hired former lead architect Jim Keller, who returned after a 13 year absence, and Lisa Su from Freescale Semiconductors.

Meanwhile, cracks were starting to appear in Intel’s citadel. In 2012, Intel expected to release CPUs on the 10nm node within 3 years. The company however released the first 14nm CPU in 2015. Yield issues kept cropping with 10nm.

The Ryzen effect

In March 2017, AMD launched Ryzen on its entirely new architecture (Zen). Ryzen was remarkably different from the processors that had come before it, and as Ryzen 3 and 5 models were released, they gave stiff competition to Intel on price. The developments kept on coming – in April 2018, AMD came up with Zen+ and in mid-2019, Zen 2 was launched. Helped by the success of Ryzen, AMD’s cash flows and profits witnessed a welcome turnaround. The CFO/Debt improved from just 6% in FY16 to 96% in LTM June 2020.

 

How closely Ryzen’s launch and success coincides with a turnaround in AMD’s fortunes can be seen from its rating history. The company witnessed a string of upgrades since 2017, at very short intervals. From being at a precarious Caa1 in September 2016, AMD was upgraded to B3 in February 2017, and is now rated Ba2, almost close to investment grade.

At the same time, Radeon (AMD’s graphics division), which had its roots in ATI, started to do well when given full independence. The new architecture is being deployed by Microsoft and Sony for their new consoles (Xbox and PlayStation 5). That said, Radeon is still far behind Nvidia and is seen as a budget option.

AMD has won the battle but not the war

As of now, with USD 7.6bn of revenue in LTM June 2020, AMD is even smaller than Nvidia (USD 13.1bn in LTM Jul 2020), forget Intel. In fact, Nvidia is so strong that its market capitalisation has doubled YTD at roughly USD 340bn, and is worth more than Intel and AMD combined. New titles like the Flight Simulator 2020 that need tremendous graphics power will keep the growth going for Nvidia. While one can argue that Nvidia is focused only on graphics cards and lacks diversification, AMD too is heavily dependent on the Ryzen series. AMD also has limited presence in the Enterprise segment, where Intel rules the roost (Intel derived USD 27.7bn from its data center group alone). AMD will also face problems because of its weak marketing. The ‘Intel inside’ campaign is still yielding dividends for its rival.

This time AMD is not competing with Intel alone. With Amazon’s Graviton2 and Ampere (that has a whopping 128 CPU cores) also in the race, the competition is heating up. Also, Radeon is still not out of the woods. Only recently gamers faced serious driver related issues. In a poll of 49,000 AMD GPU users, about half stated that they experienced driver problems.

AMD however has a few aces up its sleeve. Nvidia chose AMD over Intel for their new AI compute clusters, because AMD offers more cores and faster PCI Express lanes. AMD’s share for laptop processors reached a new all-time high of 19.9%, and new Ryzen 4000 mobile processors are expected to go into more than 100 laptop designs this year. Moreover, AMD’s latest chips are already built on a 7nm process and the 5nm process is expected by late 2021, whereas Intel’s 7nm chips will arrive by late 2022.

The real risk to Intel might be on the server (data-center) front

The bigger threat to Intel is from future in-house processors by cloud players (like Graviton2 from Amazon). These can hurt Intel where it now rules supreme – the server market. Intel holds a ~90% market share in the lucrative data-center/server market (operating margins of ~44%), although AMD is gradually gaining share just by offering lower prices. Competition can also come from Ampere, and from unexpected fronts like SiPearl, a Parisian company which is being backed by the European Commission as a part of European Processor Initiative Project. If price-led competition gets tough, Intel might be forced to sell Xeon chips at less than USD 1,000. The question to ask would be “Can Intel sustain if Xeon margins collapse?”.

Intel has historically shied away from low-margin businesses. It ignored Steve Jobs’ suggestion that they fabricate an ARM chip for the iPhone because of the thin margins in phone CPUs. Intel’s strategy has been that of a high-volume, high-margin company, which cannot afford to offer low-margin versions of its products for fear of cannibalisation. If the server market mirrors that of mobile processors, Intel’s days of glory might be well behind it. But that story is yet to play out.

The Empire strikes back

It appears that AMD has the upper hand as of now, but Intel has been quick to make changes. The Chief Engineering Officer Murthy Renduchintala left the company in August and Intel is considering to hire a third-party foundry to build its processors. A few days ago, Intel launched its new 11th Gen Tiger Lake laptop chips. When put to test against an AMD Ryzen 7 4800U device and a machine running an Nvidia MX350, the an 11th Gen Iris Xe-powered laptop (Tiger Lake machine) clearly comes out top, with significantly better frame rates.

Intel has previously tackled the AMD challenge either by its sheer balance sheet and marketing power, or on the development front (Core 2 Duo against the Athlon). The company is not going to go down easily and I am tempted to use one of my favourite witticisms from Mark Twain “The reports of my death have been greatly exaggerated”.

 

Sources:

1.      Google Finance

2.      Yahoo Finance

3.      CapitalIQ

4.      AMD

5.      Techspot

6.      AnandTech (https://www.anandtech.com/show/161/4)

7.      Techcrunch

8.      PC Gamer (https://www.pcgamer.com/intel-tiger-lake-11th-gen-launch/)

9.      All About Circuits (https://www.allaboutcircuits.com/news/ampere-altra-max-128-core-processor-challenges-intel-and-amd-in-a-cloud-based-processor-showdown/)

10.   Gizbot (https://www.gizbot.com/computer/news/intel-and-amd-might-face-tough-competition-with-arrival-of-new-players-067321.html)

11.   Standard and Poor’s

12.   Moody’s Investor Services