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Building Moats, One Chip at a Time

Chipmakers today are carving out competitive advantages through their proprietary chip designs, high customer switching costs, and exposure to the burgeoning market for electronic systems in vehicles.

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Brian Colello: Often in technology, investors are skeptical of economic moats because of the constant fear of disruption. But for a variety of reasons, we don't see this in analog semiconductors. Our review of the industry looks at several firms with wide and narrow economic moats, such as Analog Devices (ADI), Linear Technology (LLTC), Microchip (MCHP), Maxim Integrated (MXIM), and Texas Instruments (TXN).

Looking at the industry, we think these firms have built economic moats based upon intangible assets around proprietary chip designs. This expertise is based off of decades of work from talented engineers. We view analog-chip design as more of an art than a science. We think it takes years of trial and error for these chipmakers rather than simply shrinking transistor sizes or learning designs from a textbook.

Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.