The Future of Encryption, Improved Chip Performance, and the Winds of Change

ToP Investor's Letter: Volume CI, Issue #10

EMERGING TECHNOLOGY

Quantum Encryption Technology

Public key infrastructure, or PKI, is used to encrypt most communications today. Experts believe PKI, developed in the 1980’s, is like to break within this decade by quantum computer algorithms.

Symmetric encryption is replacing PKI. It is a technology known to be more secure than PKI, and able to withstand quantum attach. There hasn’t been a secure way to distribute symmetric encryption keys at scale, until now. A company called Arqit, has developed a way with their QuantumCloud product. Their technology secures the communications links of any networked device against current and future forms of hacking.

Their software creates a simple and fast way to distribute unlimited numbers of symmetric keys. Currently, their source keys originate in data centers. However, the company plans to launch two quantum satellites in 2023 to assume the symmetric key distribution role. The satellites will use Arqit’s quantum protocol, solving all the known problems associated with satellite quantum key distribution.

The company believes their solution will transform cybersecurity via an elegant migration from existing encryption technology, while also protecting against quantum attack.

Arqit recently announced they’ve entered a definitive agreement to go public through Centricus Acquisition Corp. (Nasdaq: CENH), a special purpose acquisition company (SPAC). After closing, the newly formed Cayman holding company, Arquit Quantum, Inc., will merge with Centricus, acquire Arquit, and register it’s shares for listing on the Nasdaq Stock Market.

The estimated addressable market for information security and risk management is expected to be about $194 billion by the end of 2024.


STOCKS TO WATCH

Applied Materials (AMAT)

Boosting improvements in chip power, performance, area, and cost/time to market

The company recently unveiled plans to grow revenue, earnings, and free cash flow by allowing customers to boost improvements in chip power, performance, area, and cost/time to market (PPACt). Plans include generating 70 percent of future services and parts revenue through subscription-like long term agreements.

"The core strategy is to be the PPACt enablement company.” says President and CEO Gary Dickerson

The new strategy is aligned to meet the complex needs of customers. Applied is committed to sustainable growth of the semiconductor industry, Its ESG initiative is driven in collaboration with suppliers, customers, and the computing industry.

The digital transformation of the global economy and new Al workloads require new architectures based on new types of silicon. Moore's Law 2D scaling is slowing, PPACt is required for chip and system level improvements. As a result, the business model has shifted to solutions delivered via subscription models.

The Applied Al(X) (Actionable Insight Accelerator) allows semiconductor engineers to harness the power of big data and AI to accelerate the development of new chip technologies.

As the silicon content per device is increasing. Applied is addressing growing demand through their CAPS group (loT, Communications, Automotive, Power and Sensors). This segment is now generating over $3 billion per year.

Conclusion

With adoption of Al, a revolution in chip making is underway. According to client Dr. Mark Liu, chairman of TSMC, “...We need to innovate in new transistor structures, in new materials, in new system architecture, and in new 3D integration. It is an exciting time. We look forward to working with Applied Materials to discover the future semiconductor innovations."

The stability of a subscription like revenue stream should sit well with more value-oriented investors Applied is also committed to returning between 80 and 100 percent of free cash flows to shareholders.


REFLECTION

The American Revolution

With permission from Morgan Housel, author of The Psychology of Money, I’m relaying a story he posted recently. Fitting for the 4th of July, The Battle of Long Island illustrates how seemingly small things can have massive impact, including that you or I are here now reading this story

The Battle of Long Island was a disaster for George Washington’s army. His 10,000 troops were crushed by the British and its 400-ship fleet.

But it could have been so much worse. It could have been the end of the Revolutionary War.

All the British had to do was sail up the East River and Washington’s cornered troops would have been wiped out, with Washington captured and executed for treason. That was their plan.

But it never happened, because the wind wasn’t blowing in the right direction.

Historian David McCullough once explained to Charlie Rose:

McCullough: If the wind had been in the other direction on the night of August 28th, I think it would have all been over.

Rose: No United States of America if that had happened.

McCullough: I don’t think so.

Rose: Just because of the wind, history was changed.

McCullough: Absolutely.

We know one version of history – the version that actually happened – but there are infinite alternative versions that were just as likely to come true.

Read enough of these freak events that changed everything and you become less willing to make big predictions.


Pete Weishaupt does not own shares of Arqit, Centricus, or Applied Materials. Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Tao of Pete has a disclosure policy.

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