Think big and invest small.
It’s a motto I’ve adopted over the years, but it might not mean exactly what you think.
This isn’t a mantra about market cap size or limited holdings — it’s a reference to the physical size of technological devices on the market.
We all know smaller devices pack more of a punch today than they did a decade ago, but many are unaware that there is a governing law that accurately predicts this trend. Specifically, this law lays out a mathematical formula that can foresee just how quickly computer circuits will decrease in size.
As investors, we can actually use this formula to assume a variety of market outcomes and conditions. While I’ll leave out the specifics for now, the general idea is to invest in both the technologies that enable and the markets that benefit from shrinking semiconductor size.
Below, we’ll review a few specific beneficiaries of this trend, including one biotechnology company with a pivotal FDA approval on its side. First, though, I’d like to share some history behind the law described above with an interesting story about a group known as the “traitorous eight.”
Silicon Ego
The story starts with a man named William Shockley. He was a brilliant academic from equally brilliant roots. His father was a mining engineer fluent in eight languages, and his mother was a highly successful Stanford graduate.
In the 1940s, Shockley was involved in various war-related research efforts surrounding radar and anti-submarine warfare. In 1945, the U.S. War Department had Shockley prepare a report on possible casualties resulting from what would have been an invasion of the Japanese mainland.
Using historical data, Shockley predicted between 5 and 10 million Japanese casualties and up to 4 million U.S. casualties. Shockley was so highly respected as an academic during the time that this report was used as a primary influence behind the decision to bomb Hiroshima and Nagasaki.
Shortly after the war, Shockley worked alongside several other great minds to create the world’s first transistor in 1947. The transistor soon became one of the single most important inventions of the 20th century and is now a key component in just about every modern electronic device on the market.
Shockley was also responsible for the push towards the material silicon over germanium in transistor production. He began developing silicon-based semiconductors through the Shockley Semiconductor Laboratory in 1956, the same year he received a Nobel Prize in Physics.
The Laboratory was funded by umbrella company Beckman Instruments and ultimately became the foundation for Silicon Valley as we know it today.
Not long after these accomplishments, Shockley would self-destruct — an outcome by and large a product of his ego.
Despite his apparent genius, Shockley lacked the ability to manage his colleagues. He was abrasive, domineering, and, most of all, paranoid.
Out of fear his ideas would be stolen, Shockley kept entire projects secret from the remainder of his staff. He tapped phone lines, limited communication between staff, and even once sent out a company-wide lie detector test.
In response to Shockley’s distressing management style, a group of eight employees led by a young Gordon Moore approached company owner Arnold Beckman in 1957. Moore and company provided Beckman with an ultimatum: Get rid of Shockley or lose eight of its greatest scientists.
Backing Shockley, Beckman refused, and the group was soon branded the “traitorous eight.” Shockley openly declared that each of these traitors would never be successful without him.
He was dead wrong.
Members of the traitorous eight went on to found dozens of pioneering companies including Fairchild Semiconductor (NASDAQ: FCS), National Semiconductor, Intel (NASDAQ: INTC), and Applied Micro Devices (NYSE: AMD).
All the while, Shockley Semiconductor Laboratory faded into non-existence.
Moore’s Law
Possibly the greatest slap in the face to Shockley was an observation made by traitorous eight front man and Intel co-founder Gordon Moore.
In a 1965 paper, Moore noted that the number of transistors on integrated circuits would double approximately every 18-24 months. In simple terms, this meant that every two years, computer chips would become 50% smaller.
Though technically not a law as defined by physics, Moore’s observation proved incredibly accurate for the next half century.
Below, we see hard drive capacities over time and their conformity to the blue line predicted by Moore:
After it was shown to be so remarkably predictive, Moore’s observation was soon coined “Moore’s Law” and has since been adopted by the entire semiconductor industry.
Much to the dismay of Shockley, Moore had become the most widely recognized name in computer science, while his own contributions would be completely forgotten by the general public.
The Fantastic Voyage
Today, many view Moore’s Law as a self-fulfilling prophecy. The idea is that it only works because semiconductor manufacturers use it as a target for engineering purposes. Others would argue that the biennial doubling rate is driven more so by natural laws.
In truth, it’s likely a combination of the two theories — but that ultimately doesn’t make much of a difference. In either case, we can expect companies to follow Moore’s Law as closely as possible. In turn, we will continue to see devices shrink at a predictable rate.
As for overall markets, we can look for players in wearable computing and biotechnology to benefit from this trend.
Himax Technologies (NASDAQ: HIMX) is one example in wearables. After the company was found to be providing the miniature display for Google Glass, shares skyrocketed: 700% in the last 12 months and 200% from when we first recommended the stock in July.
A more recent example of the benefits of decreased size comes from Israeli biotechnology company Given Imaging (NASDAQ: GIVN). Last week, Given received FDA approval for its PillCam, a bite-sized camera to be used for patients unable to receive a complete colonoscopy.
Previously, cams by GIVN have been limited to small bowel imaging, but this approval grants the company access to a much wider market.
The market size for incomplete colonoscopies in the U.S. is approximately 750,000 procedures a year — a $375 million opportunity for GIVN assuming the current $500 price tag per pill.
Considering the company’s healthy financial position and just how unnoticed this approval went by the market (shares were curiously flat following FDA approval), Given Imaging is certainly worth investor consideration right now.
The company boasts little debt, healthy cash flow, strong revenue growth, and consistently positive margins. GIVN’s bottom line has moved further into the green for three consecutive years — a trend we can expect to continue with access to a market double its current annual revenue.
Turning progress to profits,
Jason Stutman
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