Billionaire portfolio manager Philippe Laffont of Coatue Management had a busy first quarter. The tech investor significantly reduced his fund’s holdings in the big three cloud providers Amazon, Alphabetand microsoftwhile completely abandoning his position in Oracle.
Meanwhile, it was buying a couple of semiconductor infrastructure enablers. Increased participation in Taiwan Semiconductor Manufacturing Co.(NYSE: TSM)which is its main holding, while adding a new position in ASML Holding(NASDAQ: ASML). The moves are interesting, as Laffont is shifting focus from companies that buy and use the technology to companies that facilitate it.
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I’m still a big fan of big cloud providers, with Amazon and Alphabet being two of my favorite stocks. Both have good cost advantages due to their chip businesses, while they also have strong and growing businesses outside their cloud divisions. Meanwhile, Microsoft’s software and cloud units are doing well and the stock appears undervalued for the opportunity ahead. As such, I certainly wouldn’t get rid of these stocks.
However, let’s focus on what may have attracted Laffont to TSMC and ASML.
Taiwan Semiconductor Manufacturing: The Foundry Leader
Making logic chips is not easy, which is why most semiconductor companies leave manufacturing to third-party foundries. That’s where Taiwan Semiconductor Manufacturing comes in. It is the largest foundry in the world and, thanks to its experience and scale, has a near monopoly on manufacturing advanced logic chips such as graphics processing units (GPUs).
While it has competitors in the space, what sets TSMC apart is its ability to produce advanced chips with high yields, meaning they have few defects. As nodes (chip density) have reduced, other foundries have generally had problems in this area. At the same time, the company is also a leader in advanced packaging, where it can place GPUs next to high-bandwidth memory (HBM) through its CoWos (Chip-on-Wafer-on-Substrate) technology.
With its ability to do all of this at scale, TSMC has become an invaluable part of the semiconductor value chain. This has also given the company strong pricing power, with reports that it has already informed customers of planned price increases for several years. It also helped generate strong margins for the company.
One of the best things about an investment in TSMC is that the company wins no matter which chip technology grows the fastest or gains share, since it is the one that makes all of these chips, whether they are GPUs NVIDIA and amdor artificial intelligence (AI) application-specific integrated circuits (ASICs). The company should also see a new growth driver in its high-performance central processing units (CPUs), demand for which is increasing with the rise of agent AI. Overall, the venture is one of the best ways to take advantage of the rise of AI infrastructure without having to pick a winning technology.
Image source: Getty Images.
ASML Holding: the company behind AI chips
While TSMC manufactures the logic chips used in building the AI ​​infrastructure, ASML manufactures the machines that TSMC and other foundries use to create these chips. The company has a monopoly on extreme ultraviolet (EUV) lithography, which is the technology that makes advanced chip manufacturing possible.
As demand for advanced logic chips continues to grow and TSMC and other foundries expand their capacity, they will need to purchase more machines from ASML. At the same time, memory manufacturers also rely on ASML to help them increase their capacity. DRAM (dynamic random access memory), including high-bandwidth memory (HBM), typically requires a combination of ASML’s older DUV (deep ultraviolet) technology and EUV (extreme ultraviolet) machines for the most critical layers, while NAND typically only uses DUV machines.
As demand for advanced chips and memory continues to grow, ASML is well positioned to benefit from this dynamic. Meanwhile, it has already developed a new technology called high-NA EUV, which should eventually be a growth driver. While TSMC has objected to the pricing of the new machines, others are starting to adopt the technology and eventually the technology will be needed to shrink nodes further, preparing ASML for future growth.
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Geoffrey Seiler has positions in Advanced Micro Devices, Alphabet and Amazon. The Motley Fool positions and recommends ASML, Advanced Micro Devices, Alphabet, Amazon, Microsoft, Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
This billionaire dumped cloud stocks for these new AI stocks. Should investors do the same? was originally published by The Motley Fool
