Science Fiction Investing
Throughout the course of this article, we will discuss how technology companies are creating products that were once thought of as science fiction and show that a familiarity with the work of Philip K Dick can help investors spot trends relating to the future of technology. Dick (1928-82) is the greatest science fiction writer that you have never heard of. He wrote the short story ("We Can Remember it for You Wholesale") that the recent rerelease, "Total Recall," is based on. He also wrote the novel that was turned into "Blade Runner" ("Do Androids Dream of Electric Sheep?"), and the short stories that were turned into "Minority Report" (same title), and one of my all-time favorite short stories, "Second Variety," which was turned into "Screamers."
Dick's writing often deals with the nature of reality and his characters struggle to determine what is actually real. A subset of this appears in a few of his works and involves robots/androids that are so life-like, they are almost indistinguishable from humans. This struggle to determine what is real often gives his work a mind-bending, harried feel and in fact, some experts believe that Dick suffered from paranoid-schizophrenia.
Often the highest praise that a new phone, for example, can receive is to be called "intuitive." This word is used so often now that it has become cliché. So, what does intuitive mean? In this case, the phone is so easy to use, that it is almost as if the phone knows what you want. This is what we desire of our technology: It is supposed to make our lives easier; you don't want to have to be a computer programmer to use your phone. These days, the way technology is becoming easier to use is that it is growing into something more human.
Although Dick wrote about ultra-human androids, they are not yet advanced enough in their movement and facial expressions to be easily confused with humans. However, artificial intelligence is getting close. It can be hard to have a discussion that separates artificial intelligence from robotics, but since the topics are so vast, I decided to split them into two articles. We will talk about A.I. first because it can stand alone in digital realms and does not rely on robotics to function. Robotics is therefore secondary because it is has little value without A.I. to control it; I hope to write about it for my next article in the series.
Mimicry is the Sincerest Form of Being Human
The quest to make computers/technology like humans is nothing new. In 1950, Alan Turing, the father of computer science and artificial intelligence, devised the Turing Test, a way to assess a computer's intelligence and ability to mimic human behavior. Whether a computer has passed the test yet is rather controversial, but if not yet, soon. A deeper discussion of the test and the nature of intelligence is beyond the scope of this article, but here are two interesting links for further reading.
The Prevalence of Artificial Intelligence
Over the past few years, we have seen forms of artificial intelligence begin to quietly creep into our everyday lives and become something on which we depend. A very simple form would be something like Microsoft Corporation's (MSFT) spelling and grammar check in its Word software or the method that Facebook, Inc. (FB) uses to suggest people that you might know.
Google, Inc.'s (GOOG) search engine is a form of artificial intelligence that most of us could not live without. We tend to think that Google is really smart, but until a short time ago, it mainly ran keyword searches and put you in touch with the information that was on the Internet. Recently the company's engineers have begun teaching it to think like a human, that is, by association (Just a side note: In the article, Google's Senior Vice President, Amit Singhal, uses science fiction, more specifically, Star Trek to talk about their goals for the future of the search engine).
One form of artificial intelligence that you may have forgotten about is International Business Machines Corporation's (IBM) Watson. During three episodes of Jeopardy! in 2011, Watson defeated two of the show's most famous champions. While Watson was not perfect, it was truly amazing to watch. Watson is currently being trained to assist medical personnel in diagnosing ailments through examining up-to-date medical data, family history, and doctor's notes/patient symptoms.
Crypton Future Media Inc. (a private company), in partnership with Yamaha Corp. (GM:YAMCF) created Hatsune Miku, a fully digital pop star; she is not just any pop star, though. She is the most popular one in Asia. While she has a cartoon/anime body, her voice is created by an A.I. program called Vocaloid. For further information about this phenomenon, check out this recent article in Wired and this video biography (Side note: I must pay homage to the science fiction author from my first article, William Gibson, who published Idoru in 1996, a book about a Japanese virtual pop star).
The most personally chilling example of how artificial intelligence is becoming more human is Chicago-based Narrative Science. (Narrative Science is a private company; no investment information was given on their website, but they recently completed a round of funding lead by Battery Ventures). Narrative Science have created an artificial intelligence/program that is writing news stories for such prestigious news organizations as Forbes (Here is an example of an earnings preview for Cisco Systems (CSCO) that Narrative Science wrote for Forbes). Narrative Science's Chief Technology Officer, Kristian Hammond, predicts that over the next couple of years, 90% of news will be written by computers and that artificial intelligence will be awarded a Pulitzer Prize in 5 years.
Nuance Communications' (NUAN) is probably most well-known for licensing the technology behind Siri to Apple Inc. (AAPL). With each new question or command, Siri is learning how to serve us better/become more human. Peter Mahoney, Nuance's chief marketing officer, has said that soon these types of personal assistants will become more intuitive, able to answer questions like, "Is my favorite movie on tonight?"
Nuance is also well-known for its "Dragon" series of "apps" for translation, etc. However, even with some of the recent, high-profile breakthroughs in translation, it will be a while before we will see this technology used to create a type of universal translator that has been part of science fiction lore for quite a while now.
Additionally, Nuance has been partnering with major automakers like Audi, BMW, Mercedes, and Volkswagen; their software is being used to allow the vehicle to accept voice commands. Not only does this help improve the safety of the drivers, but speaking is just a more natural way to interact with technology.
Revenues have grown by over 150% of the past 5 years and 25% for the past fiscal year. Part of the growth is due to their many acquisitions and, unfortunately, this is one of the reasons they have 2.12 billion in debt. Nuance has also had trouble managing expectation and this past quarter was no different. They beat on EPS but missed by 6 million on revenues. As far as guidance for the first quarter of 2013: They estimate EPS of $0.33-$0.37 vs. an expected $0.41, but revenue of $484M-$500M as compared to consensus of $472M. For fiscal year 2013, they guided EPS of $1.84-$1.94 and revenue of $2.17B-$2.22B, vs. the expected EPS of $1.84 and revenue of $2.04B. Whether they can achieve their stated estimates with consistency remains to be seen.
The P/E stands at 33.7 with a low forward P/E of 13 and a PEG Ratio of 0.9. The current Price/Book is 2.5, Price/Sales 4.3, and Price/FCF is 14.9 (Data taken from Morningstar).
So, why is the stock price down roughly 33% from its all-time high in February? There are any combination of the following issues that may have come together to drive down the price.
- Initially early in 2012, the price spike was due to inflated expectations and buy-out rumors. Since then, the company has not done a great job of meeting their targets and, as previously mentioned, the last quarter was no different.
- Fellow Seeking Alpha author, Modernist, has made an argument that is worth consideration. Will Google Inc. devote its considerable resources and new technology to competing with Nuance? If you read the comments below the article, there are a number of people who disagree with the article's premise; however, even a slight rumor of a juggernaut like Google entering the market could be enough to affect the stock.
- General market weakness/Fiscal Cliff worries.
After considering all of the positives and negatives, I recently took a small, speculative position.
Often investing involves seeing the future before everyone else. Knowledge of science fiction can help investors take advantage of emerging trends; in this case, the trend of making computers more human has only just begun.
Ironically, in this new, increasingly digital world, we are faced with age-old, philosophical problems: What is real? What is true? And it seems that each day we are inching closer to the world of Philip K. Dick. After all, how do you know that I am not the latest version of Narrative Science's software, these articles, the newest type of Turing Test?