Dan Chung: Semiconductor Renaissance
March 5, ​2018
Many investors are just beginning to see the positive implications of significant transformation around a piece of technology—semiconductors—​that plays a vast role in today’s world. As the brains and networks behind all modern technology, semiconductors are responsible for all computing. The concept of Moore’s Law, a 1965 prediction by American engineer Gordon Moore that the number of transistors per silicon chip doubles every year, has allowed for higher density computing over many decades. We can most clearly see this in the fact that we now carry the power of a 1980 mainframe around in our pockets every day.

​Today semiconductor manufacturers strain the laws of physics by squeezing just a few atoms together to create a circuit. The number of semiconductor manufacturers with the know-how and financial resources to stay ahead of the game is decreasing, leading to industry consolidation. Consolidators benefit from increasing technological moats, scale, and pricing power. Due to these changes the semiconductor industry can potentially enjoy structurally higher operating margins.

Additionally, current improvements in chip performance will allow for increased adoption of transformative technologies that should spur semiconductor unit sales growth. We currently see the Internet of Things driving significant growth, and by 2020 we expect to see autonomous driving and artificial intelligence playing a meaningful role as well.

With considerable unit growth throughout the last several decades, semiconductor companies are an exciting example of the Positive Dynamic Change we seek at Alger. We believe companies in the semiconductor industry present examples of this type of milestone. The transition in the space began five years ago and we predict it will continue for several years.

Fred Alger & Company, Incorporated is the parent company of Fred Alger Management, Inc. The views expressed are the views of Fred Alger Management, Inc. as of March 2018. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any strategies managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities.  Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities.

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