In the movie the Graduate staring Dustin Hoffman, Mr. Robinson tells the Dustin Hoffman character the future is plastics. It could be, but the real future was the transistor or what we call computer chips.

Recently read an excellent book on the subject called Chip War by Chris Miller published by Scribner, NY, 2022. The book highlights the history of the computer chip as well as adds geopolitical themes which the State Department worries about.

If you ever seen or used a radio from the 1930’s – it was the size of many bedroom dressers but the insides were vacuum tubes. In the 1950’s the insides of a radio was transistors. Then William Shockley working for Bell Labs owned by AT&T was trying to make the transistor more efficient came up with the by assembling multiple components on the same piece of semiconductor material. The material used was silicon thus the silicon chip was invented.

William Shockley was a genius in the labs and not a great businessman and 8 people left the company to form Fairchild Semiconductor in 1964. The start of Silicon Valley had begun. The 8 included Eugene Kleiner, who founded Kleiner, Perkins venture capital fund; Gordon Moore who gave Moore’s Law to describe the exponential growth of computing and Bob Noyce who could bring both inexpensive and quality to computer chips as well as profitability.

When Charlie Sporck joined Farichild, the company it was mostly men who designed the semiconductors and women who assemble them. Charlie was all about the greatest efficiency and keeping costs down. He went through multiple states and eventually was asked to check out Hong Kong. Fairchild was the first company to locate operations offshore but soon Texas Instruments, Motorola and all US chipmakers had operations in Hong Kong. After a decade, Charlie went to Singapore and China. Mr. Sporck said he never had union problems in the Orient as millions of peasant farmers moved into the cities to find work.

In 1968, Noyce and Moore who were unhappy with their lack of stock options and tired of dealing with head office in New York left Fairchild to form Intel. The company’s first product was a chip called a DRAM or dynamic random access memory. The advantage of DRAM is they could be used for many functions or to produce them in mass would be less. At the time, most chips were specialized or could only be used for one function such as a calculator or missile guidance computer.

Intel invented the general logic chip. The chip eventually became the x86 and came popular just as Microsoft was the software for personal computers, the computer chip was the x86. Both might not be the best, but they were picked and became the standard. Being the standard led to high margins and profitability for both companies. Each company essential had a moat around it.

The x86 also dominated the server business, which companies such as Amazon and Google run the cloud from. Today nearly every major data center uses chips x86 chips from Intel or AMD.

This does not mean there is no competition. ARM uses a simple chip architecture called RISC.

Then becomes the opportunity or blunder looking back or the innovator’s dilemma

Intel has a license to print money in the 1990’s and 2000s, then a new emerging technology comes along. At the time, mobile phones were big and clunky and did not have the infrastructure to run very well. Apple decides to reinvent the phone to be a computerized phone. Apple went to Intel and asked for chips at a low price. There was not profit for Intel and the cellphone industry was in its infancy, Intel turned down Apple. Steve Jobs at Apple went to ARM and the iPhone was launched.

In just a few years, Apple was making more money in smartphones than Intel was selling in PC processors. Today, cell phone chips consume a third of chips sold and Intel is not in the game.

Linking to dividend paying stocks, we all see the world as it is and rarely what it could be or will be because investing in high margin stocks is a good way to make money. The company is profitable, it stock is stable and rising, dividends are paid, and all is good till it is not. Looking back, there are plenty of companies you could have invested in but did not for some very good reasons. All investors do the same thing, because the only perfect information is looking backwards.

There are more questions than answers, till the next time – to raising questions.