Microsoft - Lunar Capital

Web of Silicon

The semiconductor industry is composed of several key players, each playing a distinct role in the supply chain. Among the most important are the designers, manufacturers, and equipment suppliers.

Designers such as Nvidia are responsible for creating the architecture of various semiconductor chips. These chips are then sold directly to clients like Amazon, Microsoft, and Alphabet, where they serve as the backbone of cloud computing infrastructure and AI workloads.

Once designed, the chips are sent to manufacturers like Taiwan Semiconductor Manufacturing Company (TSMC), which operates advanced fabrication plants to produce the chips at scale. These foundries rely heavily on equipment suppliers such as ASML, which provides the highly specialized lithography machines essential for chip production. Lithography equipment represents a significant portion of a foundry’s capital expenditure.

Last week, ASML and TSMC released their Q2 2025 earnings, offering insight into the current state of the industry.

ASML reported quarterly revenue of €7.7 billion, a 23% increase year-over-year. Its gross margin rose to 53.7%, up from 51.5% in the same period last year, while operating income surged 45% to €2.7 billion.

TSMC posted net revenue of NTD 933.8 billion (approximately USD 30.1 billion at a weighted average exchange rate of NTD 31.054 per USD), marking a 38.6% year-over-year increase. The company’s gross margin climbed to 58.6%, up from 53.2%, and operating income rose 61.7% to NTD 463 billion.

Despite their strong financial performance and interconnected business models, the market reacted differently to each company. ASML’s share price fell 8.4% over the week, while TSMC’s rose 4.3%.

ASML’s decline was largely attributed to its inability to provide guidance on whether 2026 will be a growth year, citing uncertainty around trade policies and tariffs being set by the Trump administration. This is despite TSMC’s planned $100 billion investment in the US over the next four years and the increasing demand for graphics processing units (GPUs) used in AI computers.

TSMC’s investment aims to reduce reliance on Taiwan, which faces ongoing geopolitical pressure from China, and to align more closely with U.S. policy incentives for domestic semiconductor production.

The semiconductor industry remains a critical driver of technological progress, but its future is increasingly shaped by political dynamics and global supply chain realignments.

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Disclosures
Lunar Capital (Pty) Ltd is a registered Financial Services Provider. FSP (46567)
Read our full Disclosure statement: https://lunarcapital.co.za/disclosures/
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The Lunar BCI Worldwide Flexible Fund Fact Sheet can be read here.
This stocktake is prepared for the clients of Lunar Capital (Pty) Ltd. This stocktake does not constitute financial advice and is generated for information purposes only.

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Going Nuclear

Weekly Stocktake / By VCS Agency

In 2011, a 9.0 magnitude earthquake off the coast of Tohoku, Japan triggered a tsunami with waves over 15 meters high. The tsunami overwhelmed the Fukushima Daiichi Nuclear Power Plant, operated by Tokyo Electric Power Company (TEPCO), flooding critical infrastructure and disabling backup generators essential for cooling the reactors. This led to core meltdowns in three of the plant’s six reactors. A 20-kilometre exclusion zone was established around the site, and the disaster was rated Level 7 on the International Nuclear Event Scale—the highest rating, matching the severity of the Chernobyl disaster.

The immediate aftermath of Fukushima had a profound impact on the global nuclear energy landscape. Uranium prices dropped sharply as demand for enriched uranium declined.

Many countries tightened regulations around the construction of new nuclear plants, and public sentiment shifted toward caution. In the United States, only three reactors have been built since 2011. The most recent additions—two reactors in Georgia completed in 2023 and 2024—saw costs soar past $30 billion, dampening enthusiasm for future projects. Despite ambitions from the Trump administration to expand nuclear capacity, no new reactors are currently under construction in the U.S.

While the disaster initially led to a surplus of uranium in the market, that surplus is now dwindling. Supply constraints are emerging due to the high costs of developing new uranium facilities and the approaching expiration of several nuclear operating licenses over the next decade. As a result, uranium prices have been rising significantly. Technology improvements in nuclear energy reactors, using modular designs are making the lead times to develop nuclear energy plants shorter; creating additional attractiveness of nuclear energy solutions.

At the same time, demand for clean and stable energy sources is accelerating—particularly from Big Tech companies. Firms like Amazon, Microsoft, and Alphabet are investing heavily in AI infrastructure, which requires vast amounts of clean and stable power. To meet these needs, they’ve signed long-term agreements with nuclear power providers to supply energy to their data centres. As AI continues to expand, so too does the demand for a clean, stable energy source.

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Nvidia: Priced to Perfection

Weekly Stocktake / By VCS Agency

Over the past two years, Nvidia’s stock price has increased nearly 700%, bringing its market capitalization to $2.9 trillion as of Friday. This remarkable growth has made Nvidia one of the largest companies in the world, trailing only behind industry giants like Apple and Microsoft.

Nvidia’s success is largely driven by the sale of its high-performance graphics processing units (GPUs) and AI platforms, which are crucial for training data-intensive AI workloads. As companies and organizations increasingly focus on developing artificial intelligence models, they seek processing power and energy efficiency—areas where Nvidia’s GPUs are currently unmatched in the market.

Last week, Nvidia’s Q2 2025 results were among the most anticipated of this earnings season. The company reported an impressive $30 billion in revenue for the quarter, marking a 122% year-over-year increase. Operating income also saw significant growth, rising 174% year-over-year to $18.6 billion.

Nvidia’s gross margin came in at 75.1% for the quarter, down from 78.4% in the previous quarter but up from 70.1% in the same period last year. Despite this slight dip compared to the previous quarter, both gross and operating margins have been on a strong upward trajectory since early last year, driven by the immense demand for Nvidia’s AI platforms. The graph below shows the change in Nvidia’s margins since the beginning of last year.

The slight downturn in margins this quarter was primarily attributed to delays in the launch of their new AI platform, Blackwell, which is now expected to ship in Q4 this year. During the earnings call, CEO Jensen Huang reassured investors that Nvidia remains committed to releasing new platforms on a yearly rhythm, emphasizing the company’s focus on delivering faster and more energy-efficient chips.

Despite Nvidia’s impressive performance, several questions remain. How much additional efficiency is AI bringing to companies adopting the technology? Will the major tech players, who are heavily investing in Nvidia’s platforms, continue to spend at this rate? And could other companies be developing chips that might eventually surpass Nvidia’s offerings?

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Big Tech, Big Spend, Big Question

Weekly Stocktake / By VCS Agency

Over the last two weeks, mega-cap stocks such as Alphabet, Amazon, Apple, Meta, and Microsoft released their quarterly results. The theme was AI, particularly how much the cloud service providers were paying to build up their capacity and try to win the AI race. Investors were concerned that the cloud service providers were spending too much without clear indications of the large-scale end use cases of AI, the value derived from it, and whether businesses and people would be willing to pay for these products and services.

Due to the long time it takes to build these data centers and the logistical challenges in securing land, buildings, and chips, the big cloud providers stated that demand still exceeds supply for their AI capabilities. Additionally, they mentioned that the data centers being built offer optionality; if generative AI doesn’t take off, the data centers can be repurposed for other uses; although it will be at a lower operating margin.

The graph below shows the difference in capital expenditure by the big tech firms this year. Everyone but Apple has significantly increased their spending to build up their capacity for generative AI workloads—whether for training or inferencing. During the earnings calls, all the big tech CEOs indicated they would continue to spend at these increased levels to ensure they don’t miss out on the generative AI opportunity.

At the moment, the company seeing a real and significant increase in revenue and earnings is Nvidia, the designer of the high-powered chips used to train and inference the data workloads for generative AI. Nvidia is expected to release their results on the 28th of August. The search is on for the companies that will utilize AI within their own operations to give themselves the edge and gain market share in their own industry and possibly beyond.

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AI: The Energy Saga

Weekly Stocktake / By VCS Agency

Generative AI relies on supercomputers to perform complex calculations and answer increasingly intricate questions. It is thus highly dependent on advanced semiconductors (chips), large data sets and powerful algorithms (models). The energy requirements of these processors, which are typically housed in datacentres, are enormous and require stable and secure power sources.

According to the International Energy Agency (IEA), energy for data centres, cryptocurrency, and artificial intelligence accounted for roughly 2% of global energy demand in 2022. The IEA forecasts that the energy demand could almost double from 460 TWh in 2022 to about 800 TWh by 2026. However, these estimates may vary significantly depending on the actual demand for generative AI products and services over the next two years.

Cloud computing giants like Amazon, Microsoft, and Alphabet are heavily investing in their data centres to enhance their capabilities for running complex AI applications. This involves training and inferencing (producing outputs) with AI models. Consequently, their energy consumption and greenhouse gas emissions have risen. According to Alphabet’s 2024 Environmental Report, their greenhouse gas emissions have increased by 48% since 2019. The growing demand for AI, combined with Alphabet’s termination of some clean energy projects, has led to this overall increase in its emissions.

Why haven’t companies simply expanded their energy capacity? Data centres require a stable energy supply that can be adjusted instantly. Renewable energy is not always reliable due to its dependence on unpredictable elements. Nuclear power can provide the needed stability, but building nuclear plants takes more than five years. In contrast, gas-fired plants take about two years to build.

The cloud providers are exploring various ways to increase their access to stable energy sources. Earlier this year, Amazon bought a data centre from US power generator Talen Energy, located next to a nuclear power station. The data centre will be powered with energy from the station.

Microsoft on the other hand, signed a power purchase agreement with Brookfield Asset Management, to support the development of 10.5 gigawatts of renewable energy and to secure their energy requirements and offset their carbon footprint.

At the core of these new data centres are semiconductors responsible for all processing tasks. Nvidia claims that their flagship Blackwell Platform will enable organizations to “build and run real-time generative AI on trillion-parameter large language models at up to 25x less cost and energy consumption than its predecessor.” No wonder everyone is racing to get their hands on these chips.

Security Held In:

Security

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Amazon

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Microsoft

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Alphabet

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Security

Nvidia

Lunar Capital BCI Worldwide Flexible Fund

Lunar Capital Offshore Portfolio Clients

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

214.18

This Week

216.71

% Change YTD

15.07%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

80 244

This Week

80 797

% Change YTD

5.08%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

17 733

This Week

18 353

% Change YTD

22.26%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 460

This Week

5 567

% Change YTD

16.72%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.17

This Week

18.18

% Change YTD

-0.66%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

19.47

This Week

19.72

% Change YTD

-2.23%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

84.87

This Week

86.98

% Change YTD

13.01%

Source: Iress

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Our email address is: [email protected]

AI: The Energy Saga Read More »

Microsoft: On Cloud Nine

Weekly Stocktake / By VCS Agency

Microsoft unveiled their Q3 2024 results last week. Revenue for the quarter reached $61.9 billion, marking a 17% year-over-year increase. Meanwhile, net income for the same period amounted to $21.9 billion, reflecting a 20% year-over-year rise. The primary growth driver for Microsoft’s revenue was their cloud services segment, encompassing products and services such as OneDrive and Azure. Cloud services revenue for the quarter totalled $35.1 billion, increasing by 23% year-over-year. As of Friday, 26 April, Microsoft held the title of the world’s most valued stock, boasting a valuation of just over $3 trillion.

Microsoft has been among the beneficiaries of the Large Language Model hype that surged last year and this year. Microsoft has invested approximately $13 billion in OpenAI, the creator of ChatGPT. Microsoft does not have any ownership stake in OpenAI. But, they are entitled to a share of profit distributions. Microsoft’s cloud service, Azure, enables businesses to deploy their AI applications using their servers. However, Microsoft has stated that the demand for their AI services currently surpasses their current capacity. Consequently, they are ramping up their capital expenditure. In the latest quarter, they spent $14 billion on capital expenditure, exceeding the anticipated $11 billion.

Microsoft encounters formidable competition from other well-resourced rivals such as Amazon and Alphabet in the cloud computing/AI arena. As companies expand, scaling their market share becomes progressively challenging compared to their initial growth trajectory. Frequently, firms seeking to increase their market presence through acquisitions find themselves paying a premium to entice shareholders. Recently, Microsoft concluded its acquisition of the gaming giant Activision for just under $70 billion. Only time will reveal whether Microsoft has potentially overpaid for the company, or whether they were able to use their platform to create a more compelling gaming experience for users.

Microsoft not only provides cloud and gaming services, it’s Office suite of business tools is widely used in businesses and homes worldwide, it also provides on-line security, data management, virtual meeting services (Teams) and search services, amongst others.

Microsoft and Amazon held in the Lunar BCI Worldwide Flexible Fund and by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

199.38

This Week

198.44

% Change YTD

5.37%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

73 364

This Week

75 371

% Change YTD

-1.98%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

15 282

This Week

15 928

% Change YTD

6.11%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

4 967

This Week

5 100

% Change YTD

6.92%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

19.14

This Week

18.81

% Change YTD

2.79%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.41

This Week

20.12

% Change YTD

-0.25%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

87.14

This Week

89.29

% Change YTD

16.01%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Microsoft: On Cloud Nine Read More »

Balancing the Scale

Weekly Stocktake / By VCS Agency

When companies grow to become large/mega cap businesses, they face both challenges and opportunities when they try to grow further. The specific circumstances for each company’s position significantly influences the potential or the impediments for continued expansion. Below are a few examples of some of the challenges and opportunities these companies may face.

The Challenges

Acquisitions
In acquisitions, large companies face a limited pool of targets due to fewer medium and large-sized companies compared to the number of small companies. Factors like compatibility and pricing reduce this pool further. With greater financial resources, acquiring companies often pay a premium for these companies to entice them to join. This trend is evident across numerous instances. For instance, in 2014, Facebook acquired WhatsApp for $19 billion. A decade later, WhatsApp boasts over 2 billion users but generates minimal revenue, estimated at around $1.2 billion for the previous year. Warren Buffett also regularly advises the lack of potential acquisition targets that Berkshire Hathaway can make to make a meaningful difference in their portfolio.

Product line and different markets
As companies achieve significant market share in different markets, introducing new products or expanding into new markets may not provide the same revenue and profit increases they previously enjoyed. Nike is currently experiencing this. Despite Nike rolling out numerous new products Nike’s revenue has had a compound annual growth rate of 7.2% for the last 2 fiscal years.

Corporate Constraints
As companies grow, their delivery platforms and teams need to be expanded to support their enlarged customer base and higher volumes. This may have been achieved with previous generation technologies and smaller more agile and flexible teams. With a larger client base and higher volumes and a complex platform, they may not be as agile as they previously were, increasing the time and costs of rolling out new products, services, and features; and allowing smaller, more nimble competitors to steal a march on them. Google is experiencing this with the roll-out of their AI tools, for example.

The Opportunities

Platforms
Businesses built as platforms, i.e. where multiple services are provided to clients, and new products or services can be added very quickly, however have an advantage despite their large/mega size. As platform businesses Microsoft, for example can expand by adding new features and services to their platform and further entrench existing and new customers into their ecosystem. Microsoft’s 365 product suite facilitates bundling various products, making it challenging for customers to switch once integrated. Moreover, they swiftly deploy new products to a vast customer base. For instance, between 2017 and 2023, the number of Microsoft Teams users surged from 2 million to 320 million, solidifying its leadership in virtual meetings arena.

There are many opportunities for companies to grow, but as they keep on growing there are certain challenges that they face. Some companies have a better ability to deal with these challenges than others.

Berkshire Hathaway and Microsoft are held in the Lunar BCI Worldwide Flexible Fund. They are also held by Lunar Capital’s Offshore Portfolio clients.

Key Indicators

Index / Fund / Rate

Start of Year

Last Week

This Week

% Change YTD

Index / Fund / Rate

Lunar BCI WW Flexible Fund

Start of Year

188.33

Last Week

205.72

This Week

200.74

% Change YTD

6.59%

Index / Fund / Rate

JSE ALSI

Start of Year

76 893

Last Week

74 536

This Week

74 775

% Change YTD

-2.75%

Index / Fund / Rate

NASDAQ Composite

Start of Year

15 011

Last Week

16 379

This Week

16 250

% Change YTD

8.25%

Index / Fund / Rate

S&P 500

Start of Year

4 770

Last Week

5 254

This Week

5 204

% Change YTD

9.11%

Index / Fund / Rate

Prime Lending Rate

Start of Year

11.75%

Last Week

11.75%

This Week

11.75%

% Change YTD

0.00%

Index / Fund / Rate

USD/ZAR

Start of Year

18.30

Last Week

18.85

This Week

18.70

% Change YTD

2.19%

Index / Fund / Rate

EUR/ZAR

Start of Year

20.17

Last Week

20.35

This Week

20.27

% Change YTD

0.50%

Index / Fund / Rate

Brent Crude ($'barrel)

Start of Year

76.97

Last Week

86.97

This Week

90.87

% Change YTD

18.06%

Source: Iress

Click here to access your account to view statements, obtain tax certificates, add or make changes to your investments.

Our email address is: [email protected]

Balancing the Scale Read More »