Each year, Ensemble Capital hosts client day events in San Diego, LA, Seattle, and the San Francisco Bay Area. At these events, we share a presentation that explores some interesting facet of investing, financial markets, or the economy. In late September, we hosted these events for 2023.

While these are private events for our clients, we are happy to share the core presentation with the wider readership of our Intrinsic Investing blog. This year’s presentation focused on the emergence of “filter bubbles” that pollute investors’ ability to make accurate judgements, explored the surprising ways that the human mind processes information, and described our approach to overcoming these challenges.

This presentation was designed for a broad audience and so while it addresses complex economic and financial market concepts, it does so without jargon and uses a common sense framework that does not rely on the viewer having any prior detailed understanding of the topic.


During our third quarter portfolio update, we profiled portfolio holding, Analog Devices, Inc. (ADI). Below is a replay of our live commentary on the company from our quarterly portfolio update WEBINAR and an excerpt from our QUARTERLY LETTER.

Analog Devices: Analog Devices, known in the industry as ADI, makes semiconductor chips that predominantly operate at the boundary of the physical world and the digital world, more commonly referred to as analog and mixed signal chips. These chips usually play a supporting role to the sexier “digital brain” that is the latest and greatest processor from Nvidia, Intel, AMD, Apple, or Qualcomm. While the digital brains get a lot more media attention, the supporting analog chips are as vital as those big expensive digital processors in driving value in electronic devices, which are becoming ubiquitous and intelligent throughout our lives.

Anything with an on-off switch requires lots of these analog chips if it is going to relay input and output information with the physical world as well as manage the electrical power supply feeding the device. While these analog chips are relatively inexpensive to manufacture and distribute, it takes a long time to design and build a catalog of literally thousands of specific products to create the scale that makes them economically attractive businesses with a reputation of dependability and quality.

What’s unique about this class of chips is that companies making them do not need to make the huge investment bets that digital chips require in both R&D and manufacturing to stay ahead on the Moore’s Law performance treadmill. Analog chips usually use manufacturing equipment that’s several years or even decades old, which are much cheaper to buy than the latest and greatest that digital chips require.


In addition, consolidation has reduced the number of players in the semiconductor industry to a few big players globally and just a handful in the US, with analog chipmakers demonstrating a focus on strong returns on invested capital, high levels of free cashflow, and good competitive advantages built on scale, reputation, and a cornered talent resource of specialized analog engineers that we’ll explore further.

To understand why we believe ADI is both different and valuable, we have to delve a little bit into the technicalities of semiconductors. While we think of chips as “thinking” in ones and zeros, the real world does not operate on ones and zeros. The forces in the physical world have more of a continuous analog waveform that is not binary – examples of these are light color and brightness, sound frequency and volume, pressure, temperature, etc.

Mixed-signal chips will take those continuous signals and transform them into digital data that digital processors and memory chips can understand. Then the digital chips can operate on that data to compute new information or activate an output signal, which are translated back for consumption in the physical world by a mixed signal chip. Analog chips perform a similar role, but usually in the realm of power regulation and communication. Analog and mixed signal chips are often made by the same companies and sometimes referred to interchangeably.

As technology has broadly penetrated our world and everyday lives, semiconductors have also done the same as the underlying hardware substrate. Moore’s Law has allowed their capabilities to grow, and their cost and energy consumption to fall at an exponential rate, which has driven their adoption and use in a broad range of applications in all industries, bringing us to where we stand today, on the verge of ubiquitous connected intelligence.

As devices are able to do more and become more intelligent, their semiconductor content has increased, relying on more sensors, power management, and communications capabilities. These devices and systems are dispersed throughout our lives… from smartphones to computers, cars, planes, microwaves, ultrasound machines, HVAC systems, cellular radio towers, data centers, factories, etc. Given their role, it’s important to recognize that the more powerful and capable the main digital processor is, the more data it needs to bring new applications and value to market.

A lot of these applications also leverage connected devices – think your smart bulbs or fridge or cars – and all of these applications that can do more, generally require more analog chips to do the “sensing” that creates the data that feeds the application or main processor. In the case of the latest cars, those with adaptive cruise control, fancy smart LED lights, and electric vehicles – which are basically getting close to becoming computers on wheels – the number of chips required is multiples that of vehicles just a few years ago and is 10-100x as many as traditional products we think of as technology products like iPhones, PCs, and game consoles.

Therefore, we believe that the analog segment of the semiconductor market can see faster growth ahead, but without the risk and high levels of ongoing cash reinvestment necessary for the sexy digital brain part of the industry. In analog, the pace of technological change is slower and product cycles are much longer, spanning decades in many cases. This results in sustainably higher returns on R&D and manufacturing investments, along with more consistent secular forecastability. In addition, the markets they sell into are global and across all industries making them relatively less dependent on one or two end markets, like smartphones or the data center.

Companies like ADI and Texas Instruments (which the industry refers to as TI), two of the largest analog companies, have built broad portfolios of tens of thousands of products, each with over a hundred thousand customers who make millions of products that sell billions of units. The product needs and lifecycles across all industries can vary from a year to decades, which is why ADI derives half of its revenue from products that are over ten years old! Historically, the prices of these chips have ranged from less than a dollar to a few dollars while volumes in the billions of chips result in $10-20 billion dollars of revenue for each of these companies at operating profit margins of 30-50%.

Once these chips are designed into customer products, it is generally uneconomical to switch them out for a competing chip because the average selling price is so low relative to reengineering costs, especially when you consider software that is built on top of the designed in hardware. This makes ADI’s products sticky once they are designed in, resulting in a competitive moat that spans across the scale of products and distribution, switching costs, and service capability.

Another source of competitive advantage and value to customers is that unlike digital chip design, there is a lot of “art” or experience-based know-how that goes into analog and mixed signal chip engineering that deals with its own unique set of design challenges. This results in an engineering talent pool that is hard to replicate at new companies or even at customers’ product design teams. Consolidation in the industry has meant that these resources are even more concentrated at the largest companies, which enable them to drive further efficiencies in product development.

Taken together, in most end markets[…]

During our third quarter portfolio update, we profiled portfolio holding, Mastercard, Inc. (MA). Below is a replay of our live commentary on the company from our quarterly portfolio update WEBINAR and an excerpt from our QUARTERLY LETTER.

Mastercard: Mastercard is a company that pretty much everyone has heard of. In fact, when we meet with Ensemble’s clients, we occasionally tell them that we’re nearly certain that they are carrying a Mastercard in their wallet or purse as we speak, and if not, they are carrying a Visa. Most people carry both.

People carry Mastercard and Visa because they are accepted nearly everywhere in developed markets. And they are accepted in most emerging economies, at least at locations where higher income people spend money. As a shopper you can show up at a bodega in Peru, a high end hotel in Tokyo, a truck stop in Alabama, or an ice cream cart in Milan, show them a piece of plastic and they’ll let you walk away with goods and services without any worry that they aren’t going to get paid.

Importantly, these companies do not lend any money. If you look at your credit or debit card, you’ll find that it is issued by a bank. If it has the name of a non-bank company on it, such as American Airlines or Apple, these companies have just partnered with a bank to issue the card. In American Airlines case, its Barclays and the Apple credit card is issued by Goldman Sachs. The issuing bank is the one whose checking account a debit card is tied to, and they are the ones lending the money to fund credit card payments.


On the other side of the transaction is the merchant and its bank. No matter whether you swipe your card, or wave your smartphone, or use an online digital wallet to make a payment via your credit or debit card, in each case your bank and the merchant’s bank need to exchange information across a communication network. And that network is almost always provided by Mastercard or Visa. While you might hear about how merchants pay 2% or more in credit card fees, Mastercard or Visa are only collecting between 1/10th and 1/20th of that fee, with the banks, the ones taking the credit risk and covering the risk of fraud, earning the bulk of the fee.

Americans are so used to using debit and credit cards that it is easy to lose sight of how amazing the Mastercard and Visa networks are. The fact is that when you walk into a store anywhere in the United States, you take it for granted that the merchant will allow you to swipe a little piece of plastic with either the Mastercard or Visa logo on it and they will then let you walk out with your purchase. The reason you carry a Mastercard or Visa is because you know they are accepted everywhere. And the reason they are accepted everywhere is because everyone carries one. This is a classic example of a “chicken and egg problem”. Before everyone accepted these cards, it was difficult to convince consumers to carry one. And before everyone carried one, it was difficult to get merchants to accept them.

Having solved this problem, Mastercard and Visa now have a competitive moat around their businesses, which makes it very difficult for any new company to compete with them. Let’s say that some new payment network was launched that offered superior benefits to merchants and customers. To be successful, a new payment network must offer superior benefits to both sides of the transaction because driving a change in the long ingrained behavior of using credit and debit cards demands a change by both sides.

Even if a new network offers superior value to both sides of the transaction, adoption is still difficult. While early adopters might be attracted to the new payment option, they will find it difficult to actually use until there is widespread adoption such that a customer can expect most merchants to accept it, which will only occur once merchants can expect most customers to have adopted the new offering.

Building a globally accepted payment network was hard in the past. But today it is even harder because not only must a new company in the payment industry solve the chicken and egg problem themselves, but now that it has already been solved, a new competitor must solve the problem in a way that is much better than the existing solution. Credit and debit payments were a significant improvement compared to paying in cash and checks for both customers and merchants. But even with so many technological advancements in the payment industry over the last decade, there has been little in the way of significant improvements versus the existing debit and credit card payment networks. The one major improvement has been the increasing ease of use of credit and debit cards for both merchants and customers, such as the ability to carry a card within your phone, or a merchant’s ability to easily set up and accept card payments via tools like Square or online services like Stripe.

While some companies are subject to highly unpredictable changes in macro factors, such as an oil company being dependent on the price of oil, Mastercard’s business is driven by far more stable trends. The key metric for them is global consumer spending trends, which even during recessions does not decline by more than a couple percentage points and which we are confident will grow at a modest, but steady rate over the very long term. On top of that growth driver, the company benefits from the relentless shift of consumer spending from cash and checks to credit and debit. While it might seem that this shift has already played out in developed markets, we can look to near cashless countries like Sweden to see that even US consumers are likely see continued declines in their use of cash and checks.

Despite their incredible ease of use, and the broad based benefits that card-based payments have brought to consumers, merchants, and the global economy as a whole, it is not uncommon to hear complaints from merchants about what they view as the high cost of accepting credit cards. But it is important for observers to understand that these complaints are primarily an argument between merchants and banks about the share of economic value they each capture from the existence of card networks. One way to illustrate this reality is by noting that if accepting credit cards was inferior to getting paid with cash, merchants would simply refuse to accept credit cards. But instead, we see the opposite trend. More and more merchants are no longer accepting cash. Why are they refusing cash and requiring customers to use credit or debit cards?

Cash is expensive to accept.

At first glance it appears that cash has no transaction costs. A customer simply gives cash to a merchant and there are no fees involved for either party. But it turns out there are actually a lot[…]

During our third quarter 2023 investment update, Ensemble Capital Management’s Chief Investment Officer Sean Stannard-Stockton and Senior Investment Analyst Arif Karim  discussed the current market and economic conditions, as well as two of our holdings; Analog Devices, Inc. (ADI) and Mastercard, Inc. (MA). The webinar concluded with a live Q&A session with the team.

Below is a replay of the full webinar as well as a link to Ensemble Capital’s QUARTERLY LETTER.


Each quarter, Ensemble Capital hosts a webinar to discuss the current market, economic conditions, and a few of our portfolio holdings. This quarter, we’ll discuss these items as usual, as well as share our thoughts on Analog Devices (ADI), and Mastercard (MA).

The event will use a webinar format. Participants will have a chance to ask live questions of the research team during the Q&A portion of the event.

This quarter’s webinar will be held on Tuesday, October 17 at 1:30 pm (PST)

We’d love for you to join us, which you can do by REGISTERING HERE.

If you’d like to listen to our previously-held quarterly updates, an archive can be FOUND HERE.

We hope to see you there!