By implementing this strategy, Amazon and Super Micro can move faster and stay ahead of the competition.
Two of the biggest long-term winners in the stock market, Amazon (AMZN -1.07%) and super microcomputer (SMCI -0.15%), at first glance they don't have much in common. The former is a leader in e-commerce and the inventor of cloud computing. The latter is a manufacturer of data center servers.
But they have more in common than meets the eye. First, both companies run retail and server hardware businesses, which are pretty cutthroat and low-margin businesses.
However, despite being in such a difficult business, each has managed more than just that. 9,000% Stock market returns over the past 20 years (i.e. 90x). This is more than 10 times the return of the Nasdaq 100 and more than 33 times the return of the S&P 500.
This unconventional success of both Amazon and Super Micro can be largely attributed to another similarity between the two companies. That said, both companies use an unconventional “building block” approach to product development.
building blocks for building an empire
“Building blocks? Like Legos?” you might ask. “How does that simple concept result in such incredible business performance?”
The concept of breaking down a product or service into the smallest possible components may not be surprising at first. But the results were certainly surprising.
In fact, this strategy is so important to Amazon that CEO Andy Jassy basically dedicated his entire 2023 letter to shareholders to the concept. And he said 2023 was a great year for his Amazon. Over the past 12 months, free cash flow has gone from his $3.3 billion to his $50 billion. spill For the 12 months ending March 2023.
Super Micro, on the other hand, has been touting its building block architecture for years. But as the computing world moves from traditional computing to the acceleration of artificial intelligence (AI), the benefits inherent in Super Micro's 30-year building block strategy have suddenly come to the forefront, with recent That led to his triple-digit growth.
How Amazon uses “primitives”
In his letter to shareholders, Jassy outlines Amazon's evolution toward a building block strategy, or what the company calls “primitives,” as the right approach to unlocking the creativity of customers and employees alike. .
It's important for builders to have the right tools to continue improving the customer experience quickly. The best way to do this is to build. primitive service. Think of these as separate basic building blocks that can be assembled in any combination the builder desires.
Jassy describes a eureka moment in the early 2000s when Amazon first opened up its high-traffic e-commerce pages to third-party sellers. One of the early customer trials was the goal (target -0.72%).
At the time, Amazon had a highly integrated e-commerce platform across aspects such as payments, search, and product management. But when Target wanted to use Amazon's backend platform to power its fledgling target.com, that solution didn't work. Amazon realized that each feature needed to be separated into separate application programming interfaces (APIs) so customers could optimize it in any combination they wanted.
The resulting system is much better and ultimately leads to the ultimate success of Amazon's third-party businesses, where brands use a combination of Amazon's fulfillment, shipping, inventory management, and advertising services. I did. Currently, Amazon's third-party seller services account for the majority of the company's paid units worldwide, 61%.
This revelation about primitive building blocks also led to Amazon Web Services (AWS), which began in 2006 with one simple, optimized primitive: Simple Storage Service (S3).
S3 was meant to do one thing very well: object storage. Currently, Amazon has over 240 optimized primitives that all work together seamlessly and can be combined as desired by the developer.
It's clear that developers love these flexible capabilities across storage, computing, data analysis, and many other features. Today, AWS is a $100 billion business and is still growing at 17%.
How Building Blocks Optimized Super Micro for the AI Era
Fortunately for Super Micro, founder and CEO Charles Liang envisioned the building block strategy nearly 30 years ago. While traditional server OEMs (Original Equipment Manufacturers) mass-produce standard models to simplify manufacturing, ODMs (Original Equipment Manufacturers) are companies or OEMs that have built their own servers. sell individual components or “white box” solutions. themselves.
However, Super Micro chose a middle path, building and optimizing each component of its servers, including microprocessors, graphics processing units (GPUs), memory, storage, power, networking, interconnect modules, and more, while maintaining all Contains components. Can be integrated into a complete system.
Developing building blocks from various semiconductor, networking, and storage companies and designing them to work seamlessly together in any combination is no small task. However, once completed, this model has many advantages.
First, Super Micro allows you to easily and quickly customize servers according to customer specifications. In the competitive era of AI, the ability to customize is a huge advantage as companies spend huge amounts of money building large, complex models and trying to optimize and differentiate them in every possible way.
And because each new chip only needs to be inserted into a new building block rather than the entire system, Super Micro can produce servers with new blocks faster than it takes to configure an entire new server design.
Also, in times of supply shortages, Super Micro can trade one block for another and ship it in a server without having to wait for sold-out parts to arrive. With major AI and cloud companies insisting on being the first to market with the latest AI capabilities, Super Micro's faster time to market is his second big advantage.
Finally, there is the issue of cost. AI systems are very expensive, as evidenced by the recent increases in capital spending that most of the Magnificent Seven companies have disclosed this fiscal year. However, Super Micro's building block architecture provides significant cost savings. Data center operators using servers can simply replace a new block or module in the server without having to purchase an entire new system, resulting in significant savings in update costs.
The cost, speed, and customization benefits of building block models are truly gaining traction in the age of AI, and Super Micro is reaping the benefits.
Slower at first, but faster in the long run
With these obvious benefits, some may ask, “Why don't all companies use building block strategies?”
The answer is probably that it requires foresight, long-term thinking, and a more deliberate pace of development, at least initially. But once the architecture is established, the pace of innovation accelerates. Jassy explained in his letter:
As a builder, it's hard not only to put together a bunch of components to solve a specific problem, but also to wait for those building blocks to be built. The latter may be faster, but will most likely be slower in the future… One of the many benefits of thinking in primitives is speed… Primitives, when done well, Rapidly accelerate builders’ ability to innovate.
In today's business world, innovation is happening faster than ever before. That's why these two forward-thinking companies, who have taken the time to develop building block models, are now outperforming their rivals.
Looking for your next multibagger investment? If you find a company that uses modular building blocks in an industry where its competitors don't, you may have just found one.