Quarterly Commentary

3Q 2024

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NEAGX 
NEAIX 

MARKET REVIEW & MACRO OBSERVATIONS

  • In 3Q24, the Russell 3000 returned 6.23% and the Russell 2000 Growth returned 8.41%, with positive contributions from most sectors. For the year-to-date ended September 30, the Russell 3000 and Russell 2000 Growth returned 20.63% and 13.22%, respectively.
  • The Russell 3000 provides exposure to the largest 3,000 U.S.-listed companies. Effective June 30, mutual funds are required by the SEC to issue Tailored Shareholder Reports (TSR). As part of the TSR, funds must compare themselves to a broad-based market index. Needham chose the Russell 3000, which includes the largest 3,000 investable U.S. equities. We note the ten largest companies total about 1/3 of the index and include Microsoft Corp. (MSFT), Apple, Inc. (AAPL), NVIDIA Corp. (NVDA), Alphabet, Inc. (GOOGL), Amazon.com, Inc. (AMZN) and Meta Platforms, Inc. (META).
  • The third quarter included volatility in U.S. equities from the Japanese Yen carry trade. In a surprise move, the Bank of Japan raised interest rates in late July to 0.25%, and the Yen strengthened to 143 to the dollar, from 160.1 Speculators had been borrowing in Yen and buying securities, including U.S. equities and bonds with a higher return. As long as the Yen remained stable, it was a good trade. The rapid strengthening of the Yen led these speculators to margin calls and required selling.
  • The Federal Reserve cut rates by 50 bps to 4.75% to 5.25%2, stating its confidence that inflation was moving toward 2.0%. The Federal Reserve dot plots of future expectations indicate another 50 bps of interest rate cuts by the end of 2024.

IMPACTS ON PORTFOLIO PERFORMANCE

  • In 3Q24, the Fund’s Institutional (NEAIX) and Retail (NEAGX) classes detracted -0.67% and -0.79%, respectively, underperforming the Russell 3000 and the Russell 2000 Growth.
  • The Fund’s top contributors in 3Q24 were:
    • Unisys Corp. (UIS) – reported good bookings, revenue, and progress on operating margins.
    • Genius Sports Ltd. (GENI) – provides sports data to gaming companies and sports viewing technology to leagues. Genius reported strong revenue and EBITDA growth. Genius also extended its agreement with Football DataCo (UK) through 2029 and signed technology agreements with the English Premier League, including to be the technology behind semi-automated off-sides officiating. We estimate strong growth in revenue and margins in 2025.
    • Aspen Aerogels, Inc. (ASPN) – reported strong earnings and outlook. Aspen serves the electric vehicle (EV) and energy/industrial markets with aerogel-based insulation. Both markets are seeing strong demand. Aspen’s products are standard on General Motors’ (GM) Ultium battery platform. We are watching GM’s Equinox EV, which starts at $33,600. This is the first GM EV to address a large market. Early sales are encouraging.
  • The Fund’s top detractors in 3Q24 were:
    • Super Micro Computer, Inc. (SMCI) – Super Micro reported strong revenue, but gross margin was below expectations. We believe the margin was low in order to capture the largest yet installation of a liquid cooled data center. Super Micro reported strong guidance for FY25. The company was also hit with a short report from Hindenburg Research, citing ideas already in the public domain. Finally, Super Micro reported a delay in filing its 10-K to “assess its controls over financial reporting.” Importantly, it does not expect audited financials to be different than previously reported. We remain positive on Super Micro’s prospects and the future of spending for AI compute.
    • ThredUp, Inc. (TDUP) – reported disappointing U.S. and European results. While the U.S. was EBITDA-positive for the fourth quarter in a row, Europe was negative. ThredUp announced plans to exit Europe, which could result in an EBITDA-positive business, with over $30 million in net cash and just a $75 million enterprise value.
    • Veeco Instruments, Inc. (VECO) – supplies semiconductor capital equipment used for low power, advanced semiconductors. Veeco reported an in-line quarter and guidance.
  • With 8% turnover, the Fund does not rotate into or out of sectors but invests in companies we believe may outperform over the long term.

PORTFOLIO CHANGES

  • The Fund ended the quarter with an 8% cash position, down from 15% on June 30. We had a productive quarter with additions to existing positions and new investments.
  • The three largest new holdings could all benefit from our thesis that U.S. infrastructure spending will grow:
    • Quest Resource Holding Corp. (QRHC) – provides waste and recycling services. It focuses on the waste streams and recyclables from big box retail, food chain, automotive repair, truck and bus fleet operators, manufacturing plants, commercial properties, and construction projects. It has an asset-light model and could benefit from regulation and increasing concern about proper handling of waste streams.
    • MYR Group, Inc. (MYRG) – provides electrical construction services. The Transmission and Distribution segment serves electric utilities and large commercial projects. The Commercial and Industrial segment includes the design, installation, maintenance and repair of commercial and industrial wiring, and the installation of bridge, roadway, and tunnel lighting.
    • Bentley Systems, Inc. (BSY) – provides software for design, construction, and operations of roads and bridges, rail and transit, water and wastewater, public works and utilities, buildings and campuses, mining, and industrial facilities.
  • The Fund’s largest additions to existing positions were to PDF Solutions, Inc. (PDFS), Vishay Intertechnology, Inc. (VSH), and Vishay Precision Group, Inc. (VPG).
  • Positions Sold:
    • Copperleaf Technologies, Inc. (formerly CPLF.CA) was acquired by Industrial & Financial Systems, IFS AB. We owned Copplerleaf since its IPO in 2021. We also exited Fortrea Holdings, Inc. (formerly FTRE) after a year of disappointing results after its spin-out from Labcorp Holdings, Inc. (LH).

OPPORTUNITIES & LOOKING FORWARD

  • Our major investment theme remains the importance of U.S. infrastructure—the lesser-known “pick and shovel” providers. Our portfolio companies sell into data centers, life sciences labs, semiconductor and other manufacturing plants, roads, airports, airbases, power plants, and more. The U.S. has underinvested in these areas, so we believe there could be long tailwinds.
  • Four areas present throughout our investments:
    1. Semiconductor Manufacturing
    2. Data Centers/AI Processing
    3. U.S. Manufacturing
    4. Defense Technology
  • We believe the AI buildout is still in an early stage. Economic returns on AI projects could be a big deal for productivity and the
    economy. We are hearing from companies about increases in sales from the application of AI.