• Microsoft’s secret project is underway…
  • Quantum will solve our most complex problems
  • Walmart’s last-ditch effort to compete with Amazon

Dear Reader,

The last three trading days on the Nasdaq have definitely worried some investors. We’ve witnessed a 10% pullback in the Nasdaq Composite Index… Is there more to come?

For perspective, we’re 55 days to a presidential election, amid a global pandemic that is being used for political purposes, and cities around the U.S. have been suffering mass riots and lawlessness on a daily basis. I’m actually surprised we haven’t seen more volatility.

The Nasdaq has been on a near straight run-up since its March lows. It’s up 75%. It was long overdue for a breather.

The index is now sitting on its 50-day moving average. We’ll keep a close eye on that over the next few days. If the index breaks through that average, we will see a lot more forced selling in the market.

That said, the last three days are the market taking a healthy breather. After a 75% run-up since March, it is overdue for some profit taking. And the dynamics of this market are certainly unique. Facebook, Apple, Amazon, Netflix, Google, and Microsoft make up about 25% of the S&P 500.

Amazon raced up 78% this year, Apple up 65%, and Netflix up 59%. When these companies drop, which they did, it has an outsized effect on the market.

The technology market has so much promise right now that even Warren Buffett is buying into an upcoming high-tech IPO at a valuation that likely exceeds 40 times annual sales. As we know well, Buffett is known for being a value investor, and he’s also well known for missing just about every major technological trend of the last three decades.

Perhaps it’s not too late for Buffett to catch on after all.

This tech market still has plenty of room to run, but the gains will not be evenly distributed. Sloth-like incumbents and tech companies that are way overvalued are in for some more pain.

And companies well positioned for the new economy that is unfolding post-pandemic are in for an incredible few years as the world continues its transition to a digitally driven economy. If you’d like to find out more about this trend, you can go right here to see a presentation I recently put together.

Now let’s turn to today’s topics…

The race for a quantum computing operating system…

It was bound to happen…

A U.K.-based company called Riverlane just announced that it is developing an operating system for quantum computers. Riverlane, which spun out of Cambridge University, is calling it a “universal operating system.”

This is the logical next step for quantum computing.

Up to this point, companies have been writing their own software for the quantum computers they are developing. Very little has been standardized in the industry.

For quantum to scale, it would benefit from a standardized operating system on which third parties can develop software. This would greatly simplify and accelerate the development of applications capable of running on top of a well-defined operating system.

If we think about it, this is why most of the world’s classical computers run on Microsoft Windows. Microsoft created an operating system that made it simple for other companies to develop compatible applications. The same is true for Linux and the world’s server infrastructure.

We also have Apple and its well-designed operating systems. But only a small percent of the world’s computers run on Apple.

A move to develop an operating system for the next generation of computing systems was inevitable. We’ll see a wave of companies rushing to develop operating systems for quantum computers. They’ll be looking to replicate the success that Microsoft had with Intel-based CPUs.

Riverlane received a £7.6 million grant from the U.K. government to help jumpstart its work. Given that the leading developments in quantum computing have been in the U.S. to date, it’s smart for the U.K. government to provide some incentives to catch up with these developments.

The industry will be rooting for small upstarts like Riverlane. But it will be an uphill battle.

I haven’t seen this talked about anywhere else, but it is logical to me that Microsoft’s underlying interest in developing its own quantum computer has nothing to do with the computer itself.

Its real strategy is to build an operating system for a quantum computer that it can then license out to other hardware manufacturers to establish yet another de facto standard in the industry.

Microsoft has been engaged in a lot of fluffy marketing. It’s communicated ambitious targets for its own quantum computing goals, but the company hasn’t had much to show for it at all. The rest of the industry is moving ahead boldly, and Microsoft is still at the drawing board.

But it doesn’t matter that Microsoft is behind in developing an actual quantum computer if its real goal is to develop a quantum operating system.

I’m expecting that Microsoft will announce some partnerships with hardware companies. The result will be a quantum computing system built around Microsoft-led software.

I doubt it will be successful, though. The last thing the industry wants is for quantum software to be dominated by a massive, slow-to-innovate incumbent like Microsoft.

My bet would be on a private, nimble, and innovative upstart with strong ties to the quantum computing industry and academia… and/or an open-source initiative that also comes from industry.

The first commercial quantum computer is in the works…

One of my favorite early stage quantum-computing companies is Rigetti Computing. Rigetti is working on a universal quantum computer. We talked about the company’s progress last month.

And Rigetti is now leading a £10 million consortium to develop the U.K.’s first commercial quantum computer.

The consortium includes U.K.-based tech giant Oxford Instruments, startup Phasecraft, bank Standard Chartered, and Edinburgh University. The consortium is partially backed by grants from the U.K. government. Its goal is to open new economic and academic possibilities in the country.

So here we have another instance of the U.K. government encouraging development in the quantum computing space. This is a smart move.

If the U.K. can establish itself as a leading quantum hub, it will attract some of the world’s top talent and top companies. The U.K., rightfully so, is anxious to further diversify its economy away from the services sector – particularly financial services – which makes up about 80% of its GDP. More high tech would be a great thing for the U.K.

I like the fact that the group includes Phasecraft, which is focused on material design, energy technology, and pharmaceutical development. This brings the practical element of how quantum computers can be used to solve complex problems.

Whether it is controlling a plasma reaction in a nuclear fusion reactor, mastering the mystery of protein folding for next-generation pharmaceutical development, or developing the materials and energy technology we need to explore deep space – these are all things that are very difficult, expensive, and time consuming to solve with classical computers. In fact, in some cases, they’re impossible to solve even with a supercomputer.

The developments in the last 12 months have been incredible in quantum computing. The focus has primarily been on the hardware.

I’m excited about 2021 because we’re going to see major developments with regard to software and applications in quantum computing.

And that’s when things will start to get really exciting…

Walmart’s desperate attempt to keep up with Amazon…

We’ll wrap up today with Walmart’s big push to break into e-commerce…

The retailer just announced that it is ready to launch Walmart+. This is Walmart’s subscription service that will offer free delivery for online orders greater than $35. It will also offer same-day delivery in certain markets as well as fuel discounts at Walmart gas stations and early access to product deals.

CEO Janey Whiteside said that Walmart+ was designed to improve customer loyalty, not compete with Amazon. But I don’t buy that for a second.

For one, it is pricing the service at $12.95 per month. That’s four cents below Amazon Prime’s $12.99 monthly fee. Looks like an obvious and very intentional marketing move to me.

And if we look at the numbers, Walmart saw its online sales jump from 3.9% to 6% of all sales last quarter thanks to the COVID-19 pandemic. That means its e-commerce revenues almost doubled. That’s encouraging. Walmart wants much more.

But if we look at the national marketplace – Amazon does 39% of all online sales in the United States. By comparison, Walmart comes in at just over 5%. It’s a massive gap.

Making matters more dire, half of all Walmart customers have an Amazon Prime membership. I’m sure Walmart concluded that its only chance to catch up on e-commerce was to launch a competing membership service.

So this is Walmart’s last-ditch effort to close the gap with Amazon. It’s amazing that it took Walmart this long to offer an annual subscription for free shipping.

The problem, however, is that Walmart doesn’t have a high-margin business like Amazon Web Services (AWS) to power its e-commerce initiatives.

Amazon generated $31.9 billion in free cash flow last quarter, with the bulk of that coming from AWS. This free cash flow enables Amazon to build out its world-class logistics network and run its e-commerce business at thin margins.

That’s how Amazon can guarantee Prime members two-day delivery and, in some markets, same-day delivery for less than $13 a month. It’s a great deal.

Plus, Walmart knows that older consumers have already adopted Amazon Prime and won’t be warm to buying another service. There’s nothing Walmart can offer that Amazon doesn’t already have. I believe this is why it teamed up with Microsoft to go after TikTok’s U.S. operations.

TikTok’s main users are teenagers and young adults – consumers who may not have subscribed to Amazon Prime yet. Walmart’s plan is to target those consumers with ads for Walmart+, hoping to capture the younger demographic.

But as we discussed yesterday, China just threw a wrench in the TikTok deal. We’ll see if that throws a wrench into Walmart’s expectations for Walmart+ memberships as well…


Jeff Brown
Editor, The Bleeding Edge

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