Three High Potential Companies in the Semiconductor Industry

The semiconductor industry has seen exponential growth over the last few years, driven in large part by investor excitement surrounding generative AI (Gen AI) technology. While this excitement has caused a few select stocks to soar into nosebleed valuations, many semiconductor stocks are still reasonably priced given their growth potential. Moreover, the industry overall is projected to continue to expand at a rapid pace. In 2013, chip revenue worldwide stood at $315 billion. Ten years later, global chip revenue had reached $545 billion. By 2033, this figure is expected to more than double to $1,138 billion.

The semiconductor industry is also technically complex, extremely competitive, and always evolving. For successful investing, it is important to do the rigorous research needed to understand industry dynamics and monitor developments closely. Keep in mind as well that the semiconductor industry historically is highly cyclical, requiring patience and the conviction to stick with names through the downcycles. As bottom up, long-term investors with dedicated research analysts who possess deep industry expertise, we have been following semiconductors closely for many years and hold stocks across multiple themes within this space.

Three names we think have exceptional long-term potential in the semiconductor industry

Broadcom is a global technology leader that designs, develops, and supplies a broad range of semiconductor and infrastructure software solutions with a more than 50-year history of innovation. We believe Broadcom’s semiconductor portfolio is reaching an inflection point, driven by its AI solutions in networking and custom compute.

A combination of a strong competitive positioning, AI-related growth, accretion from the VMWare acquisition, and reasonable valuation sets up a favorable outlook for Broadcom.

Competitive Advantages

• In networking, Broadcom is the market leader, and it expects virtually all hyperscale customers will use its Ethernet solutions over time as it grows AI training clusters from 100,000 accelerators today to over one million in the future.
• With three key consumer internet hyperscale customers, Broadcom has a multi-billion-dollar opportunity in custom compute.

• We expect the 2023 acquisition of cloud computing company VMWare to result in rapid sequential growth as Broadcom simplifies product offerings and converts customers from a perpetual license/maintenance model to a true SaaS model.

   

Taiwan-based TSMC is the world’s leading semiconductor foundry. While the broader semiconductor foundry market remains sluggish, there is robust AI-driven demand for the most advanced chips.

TSMC’s undisputed market dominance and stellar reputation, combined with rapidly growing global demand for advanced chips, position the company for years of continued growth.

Competitive Advantages

• TSMC has a near monopoly in manufacturing the world’s most advanced chips.
• According to CEO C.C. Wei, “almost all the AI innovators are working with TSMC to address the insatiable AI-related demand for energy-efficient computing.” This strong AI demand, coupled with TSMC’s unrivaled competitive position, is driving “a high level of customer interest and engagement at N2” (TSMC new process node scheduled to start production next year), with N2 revenue expected to “certainly be larger” and with a “better margin profile” than N3 (TSMC’s most advanced node today).

• TSMC is known for its superior technology, reliability, and customer service.

   

Many of us remember TI as the maker of our trusty TI-81 high school calculator. In fact, the hand-held calculator was invented at TI (in 1967) along with the transistor radio (in 1954), and, most notably, the semiconductor chip (in 1958). Today, Texas based TI remains the leading analog and embedded semiconductor company.

While currently in a cyclical downturn, TI is seeing early signs of improvement, especially in markets where inventory corrections started earlier such as personal electronics and some pockets of industrial. Longer term, key industrial and automotive end markets should continue to expand.

Competitive Advantages

• With more than 80,000 products, TI’s diverse and long-lived product lineup positions it well to capture market share across a wide range of end markets.
• The company is currently building four new fabrication plants that will eventually produce more than 100 million chips a day. We believe this investment will prove valuable when the industry recovers from its cyclical downturn, enabling TI to gain market share with high returns on its investment thanks to its participation in the CHIPS Act1 and its extensive category of products. In August, TI won $1.6 billion in grants and $3 billion in loans under the Act to go toward the factory build.

• TI’s U.S.-based capacity has increasing strategic importance given U.S.-China and other geopolitical tensions.

   

Baron Capital can provide exposure to the stocks featured in this piece through an investment in our Funds as follows: Broadcom Inc. - Baron Durable Advantage Fund (4.1%), Baron Opportunity Fund (3.2%), Baron Technology Fund (5.2%); Taiwan Semiconductor Manufacturing Company - Baron Emerging Markets Fund (9.7%), Baron International Growth Fund (3.2%), Baron New Asia Fund (7.3%), Baron Technology Fund (4.6%), Baron Durable Advantage Fund (4.4%), Baron Opportunity Fund (1.5%); Texas Instruments Incorporated - Baron Durable Advantage Fund (1.5%) (all percentages as of June 30, 2024).

Baron Capital is a premier asset management firm focused exclusively on delivering growth equity investment solutions to institutions, financial advisors, and individual investors. Since its founding in 1982, Baron Capital has employed the same approach across all strategies: investing for the long term in secular growth businesses with durable competitive advantages, run by great management teams. With $41 billion in assets under management across 19 strategies, Baron Capital prides itself on delivering the best solutions and outcomes for clients globally.