Last week, Intel executives took the stage in San Francisco to report to an audience of analysts, investors and media that Moore’s Law is alive and well. What does this have to do with our investment process and the Knowledge Effect? Everything.
Moore’s Law and the semiconductor era today fuel a knowledge economy that enables companies to innovate and therefore our Knowledge Effect to continue to persist as a market anomaly for investors. Click the link below for our analysis on what this means for investors.
Long-time readers will be familiar with the Knowledge Effect, which forms the basis for our investment strategy and is based on the work of Professor Baruch Lev of the NYU Stern School of Business. Lev first discovered a link between a firm’s knowledge capital and its subsequent stock performance, ultimately identifying a market inefficiency that leads highly innovative companies to tend to deliver excess returns in the stock market. We have named this market anomaly the Knowledge Effect (Read our white paper on the Knowledge Effect).
For companies that pursue innovation leadership, existing in an era of a general purpose technology can exponentially accelerate that innovation. Today we live in the semiconductor era.Entire generations of innovation originate from general purpose technologies. The early industrial revolution was driven by the steam engine, which provided constant rotary power. That rotary motion replaced human and animal energy, and as it diffused throughout the global economy, output, productivity and wealth creation soared for decades. Electricity catalyzed the second industrial revolution, allowing greater distribution of rotary power, again leading to huge increases in output, productivity and wealth.
The semiconductor provides continuous binary logic and is the basis of our modern knowledge economy. In 1971 Intel released the 4004, the first commercially available semiconductor. In 1965, Gordon Moore observed that the power of semiconductors doubled roughly every 24 months and predicted in “Moore’s Law,” that the trend would continue.
For years, investors have worried that Moore’s Law, which has always been interpreted as a physical law with finite boundaries, would reach its end. As the general-purpose technology of our times, it is critically important that innovation continues in semiconductors. The creation of new knowledge is a function of combining the existing stock of knowledge into new knowledge. The semiconductor provides the continuous binary logic that allows for the acceleration of new discoveries, and thus the testing of new combinations that lead to innovation.
Years ago, Stanford economist Paul Romer offered an estimate on the scope for further possible innovations. ”To get some sense of how much scope there is for more such discoveries, we can calculate as follows. The periodic table contains about a hundred different types of atoms, which means that the number of combinations made up of four different elements is about 100 × 99 × 98 × 97 = 94,000,000. A list of numbers like 6, 2, 1, 7 can represent the proportions for using the four elements in a recipe. To keep things simple, assume that the numbers in the list must lie between 1 and 10, that no fractions are allowed, and that the smallest number must always be 1. Then there are about 3,500 different sets of proportions for each choice of four elements, and 3,500 × 94,000,000 (or 330 billion) different recipes in total. If laboratories around the world evaluated 1,000 recipes each day, it would take nearly a million years to go through them all.”
Semiconductors are the backbone of the knowledge economy and have been experiencing a nearly 36% compound annual growth in the number of transistors for the last 52 years. To gain some perspective on this, starting with $1, a 36% CAGR for fifty-two years yields $8,790,695.47.
The continued rapid compound growth in semiconductors is central to the continued rapid growth in the creation of knowledge and hence central to our Knowledge Leaders Strategy. Our confidence in the ability of firms who choose to be Knowledge Leaders by deliberately pursuing an innovation strategy is strengthened when we hear that Moore’s Law is still firmly on track and will be at least into the next decade.
Last week Intel Corp, the largest semiconductor manufacturer in the world —the most advanced manufacturing company in the world —held a Technology and Manufacturing Day conference at which executives discussed Moore’s Law extensively, offering insights on how it is fundamentally misunderstood and marching boldly ahead anyway. In this report we curate the most impactful observations from these presentations as they relate to our work investing in the world’s most innovative companies. We hope the reader finds this curation from the conference enlightening and encouraging: enlightening for the techniques Intel is employing to stay firmly on the innovation curve described by Moore’s Law, and encouraging, that an American company — a manufacturing company —is far and away the worldwide leader in the production of semiconductors, which is a key comparative advantage for the US in a world seeming to get more chaotic by the day.
Stacy Smith, EVP-Manufacturing, Operations & Sales: Our ability to advance Moore’s Law to make products less expensive and more capable year in and year out is really our core competitive advantage. It’s a huge driver of our business and truth that’s a huge driver of the worldwide economy. It enables people to connect, it enables people to entertain themselves, to play and to learn. Moore’s Law helps us solve some of the biggest problems on the planet and it improves people’s lives. So I’m going to kick off today by answering just a few of the questions that we get, things like whether or not Moore’s Law is dead, do we still have technology leadership, spoiler alert on those, it isn’t and we do. I’m going to take a second and define Moore’s Law for you, just starting at the highest level here. Gordon’s observation back in 1965, was that the number of transistors, per square millimeter was doubling approximately every two years. That simple observation has become the heartbeat of technology, it means that the capability of devices that use semiconductors doubles every two years. It’s what brings us technology from supercomputers to virtual reality to wearables, it’s really the driver of the industry.
But at its core, Moore’s Law is really an economic law. It says that by advancing semiconductor manufacturing capability at a regular cadence, we can bring down the cost of making semiconductors over time. And since it’s a doubling every two years, the cumulative effect of Moore’s Law has been enormous, it has literally changed the way we live our lives.
To illustrate this in a fun way, we like to look at what would happen if other industries saw innovation at the rate of Moore’s Law, a doubling of capabilities every two years, starting at the same timeframe that Gordon Moore penned his law.
If you apply the same metric to car mileage, it would be so efficient that you can travel the distance between the U.S. and the sun on a single gallon of gas, you can feed the entire planet on a