Alphawave: Not Enough Value To Mitigate The Risk (OTCMKTS:AWEVF)

Shutthiphong Chandaeng/iStock via Getty Images In my opinion, there could be a chance of Alphawave (OTCPK:AWEVF) delivering significant returns over the next 1-2 years. However, because I believe the value in the stock is not ideal, despite a contracting P/S ratio since its IPO, I am putting out a Hold rating rather than a Buy rating. Alphawave has the potential for strong growth in the semiconductor connectivity sector and is particularly involved with AI and data infrastructure markets. However, the company has faced accusations about its accounting practices, and there are profitability concerns, including a loss at this time, as it continues to invest in R&D and growth. In addition, its position in the AI and data center ecosystem is not secure enough to warrant a large allocation at the moment. My overall sentiment is that while the reward could be high from this investment, the risk is also very high and makes an investment in the company somewhat speculative right now. Operational Analysis Alphawave has expanded its IP product portfolio to over 235 IPs, which cover interfaces required in data centers. Management has also announced successful tape-outs on TSMC’s (TSM) 3nm process and joined the Arm Total Design ecosystem. Management has also been developing its partnership with Samsung (OTCPK:SSNLF) Foundry, focusing on advanced semiconductor nodes and high-speed connectivity solutions for AI and HPC systems. These areas of progress position the company well for future growth, although its market position is not yet fully secured, and investors need to be careful because of the valuation. Alphawave has also faced accusations surrounding its accounting practices, leading to the company having to suspend its shares due to audit delays. These areas of fiduciary concerns are likely to deter investment in the company. In 2022 and 2023, Alphawave had to delay the publication of its annual accounts due to audit-related issues; in April 2023, the firm was forced to suspend its shares after KPMG auditors requested more time to complete their internal oversight and assurance processes before issuing a formal audit opinion. These delays in financial reporting have unfortunately put the company more at risk of violating FCA disclosure deadlines, which has the potential to lead to regulatory scrutiny. In response, CFO Daniel Aharoni stepped down immediately following the release of the company’s delayed annual results in 2023. In my opinion, these delays and issues in financial conduct should be taken seriously, a bad track record in this regard spells trouble in the near future for investors who are looking for high levels of growth. As I mentioned in my introduction, the growth opportunity for the company here is quite large, but because of these issues, I and other investors will be cautious about allocating capital because concerns of further delays due to financial misconduct are likely to have negative reputational impacts both from investors and industry partners and clients. That being said, Alphawave’s new CFO, Rahul Mathur, has a strong track record, and I believe there is some reason to believe he could lead the company successfully through a turnaround here. These concerns being addressed, the company does have operational positives, with the company’s revenue-generating end-customer base up from 80 in 2022, to 103 in 2023. As it is positioned in high-growth sectors like AI, HPC, data networking and 5G/6G infrastructure, investors are correct to be excited about the potential for the business to scale in results. The company’s efforts in creating and testing designs using TSMC’s advanced 3nm semiconductor manufacturing process have allowed it to offer smaller, more efficient, and more powerful chips. Alphawave’s notable next-generation technologies include: PCIe 7.0, the latest version of the PCI Express standard, allows for the faster transfer of data between components inside a computer. 112G and 224G Ethernet, which are high-speed networking standards that enable extremely fast data transfer rates, are crucial for data centers and HPC. UCIe is the new standard for connecting different chiplets (small chips) within a larger system, allowing for more powerful and versatile chip designs. The company has a distinct first-mover advantage because it was the first company to announce a UCIe Physical Layer Intellectual Property that supports data transfer rates of 24Gbps per lane. This positions Alphawave as a leader in the field of high-speed connectivity solutions. Customers using Alphawave’s technology can build more powerful and efficient systems, which is particularly crucial in AI and data center applications. The company is on to something here, and I believe that part of what investors may have a tendency to overlook is that the operations are strong in the invention and IP domain, but the business and financial management appear to be weaker. Therefore, if long-term investors are willing to ride any short-to-medium term volatility as a result of the company finding its feet in corporate due diligence, the firm may have a very strong future ahead as one of the foundational components in AI and data centers scaling in efficiency and capability at the chip IP level. Financial Analysis There has been a 74% increase in revenue as of FY 2023 end. In addition, at the end of the financial year, Alphawave’s backlog reached $355 million, which, although down from $380 million at the end of 2022, is still highly promising as it indicates high current demand. Cumulative bookings reached $877 million by the end of 2023, up from $580 million in FY 2022. Q4 2023 saw record quarterly bookings up 36% YoY, and Q1 2024 saw bookings up 20% YoY. However, the big issue investors face at the moment is that the company is operating at a loss. For FY 2023, the company reported an operating loss of $19 million, compared to an operating profit of $38 million in FY 2022. Several factors contributed to this loss, including an accelerated transition away from China: This is mainly due to the accelerated transition away from China, and changes in expected revenue recognition of long-term contracts in advanced nodes.” In addition, the company has increased its R&D investment, reflected in an adjusted EBITDA margin of 17% in H1 2023 compared to 41% in H1 2022. This reduction in profitability has also been caused by the addition of silicon business through acquisitions that have impacted the firm’s profitability in the short term. Despite these current concerns, management has expressed confidence in the future profitability of the company and the potential for this is evidenced in revenue growth versus net income: Author, Using Seeking Alpha Management is guiding toward profitability with an adjusted EBITDA margin of 20%, estimated in 2024. For 2025, the company is guiding for an adjusted EBITDA margin up to 25%. While the company has not provided a specific date for when it expects to achieve overall profitability, the current EBITDA guidance is a good sign that the company is looking to ease its R&D and operational changes to return to a focus on profit. In my opinion, now could turn out to be an incredibly opportune time to invest if the company begins to scale its earnings reliably moving forward. However, there could be further development costs that arrive, which means that the company faces further periods of loss as it invests to stay competitive and current. I think this is somewhat likely because AI and data center capacities and capabilities are expanding so quickly, and the demands from AI users are scaling so exponentially that the likelihood of further periods of high R&D to meet demand is high. Valuation Analysis The company began its IPO at a P/S ratio of 92.5; now, the ratio is around 4.2. The company has a median P/S ratio over the period of 11.17. Therefore, the company is arguably undervalued if we take into account the entire history. However, it is more likely that the company has been significantly overvalued for most of its history, and we should also take note that the sector median P/S ratio is around 3. Data by YCharts I think investors are taking on valuation risk despite the fact that the P/S ratio is much lower than historically. Because of the high R&D costs that the company could face in the future to remain competitive, it is unlikely that AWEVF stock is undervalued at this time. The opportunity rests in that the company could deliver exceptional growth if its partnerships and IP become more popular as data center demands increase and AI scales, but there are likely to be multiple headwinds, which include the financial and accounting issues that have caused suspensions previously, and concerns that I have about whether the new CFO will have enough of a stringent focus on profit and efficiency within the company to drive financial success. The results received by shareholders significantly rest on how the company manages its profitability moving forward – there are likely to be further hurdles, and I am concerned about investing because there is no upside here based on value alone, which makes the future for investors highly uncertain and purely based on the ability of the company to scale its revenue and manage this efficiently. To date, there is not enough evidence that the company will manage this, including the fact that the accounting scandals show some lack of financial prudence. Analysis of Competitive Risks There are multiple large and new-entrant competitors to Alphawave, which could inhibit its future success. Broadcom (AVGO) and Marvell (MRVL) are two high-threat competitors who both focus heavily on AI and data center applications. In addition, while Nvidia’s (NVDA) threat is less acute, its focus on AI and data centers could overlap with Alphawave’s target markets. It is likely that if Alphawave scales its operations, larger big tech companies focused on semiconductor solutions will seek to acquire it, in my opinion. There are also the newer entrants, which include three I have identified as potentially the highest threat. Black Semiconductor works on graphene-based optical interconnects for chips, aligning closely with Alphawave’s focus on high-speed connectivity solutions. NanoBridge Semiconductor has a novel NanoBridge switch technology for more efficient chip designs – it is a Japanese startup with key connections in Asian markets, which Alphawave is now moving away from. Skycore is less developed, but its work on switched-capacitor integrated circuits is relevant to high-performance chip design and high-speed connectivity. Of these, Black Semiconductor, which recently secured €254 million in funding and focuses directly on chip interconnects, is likely the highest threat, in my opinion. There is also Arm Holdings (ARM), which is a significant competitor to Alphawave, with a strong focus on AI and data centers. However, the company is also Alphawave’s collaborator, as I mentioned in my operational analysis above. While the ARM Total Design collaboration is likely to be accretive to both parties, the competitive dynamic is likely to grow because they both operate on a licensing model, competing for the same customer base in the semiconductor industry. ARM has a competitive edge here because it has a more established reputation and an extensive ecosystem. In summary, Alphawave has niche areas of USPs in specific semiconductor IP, but investors must recognize that there are many other players who could fulfill the roles Alphawave is playing in the semiconductor industry related to AI and data center semiconductor IP. Alphawave must continue to compete in innovation while crucially managing the line between growth and profitability. Over the long term, this is unlikely to be as easy as management is guiding for in the near term, in my opinion. Conclusion I was initially optimistic when I first discovered Alphawave. However, on further analysis, I have become more cautious and am currently not allocating capital. Primary to my thesis here is that the future growth of the company is dependent on its ability to sustain profitability and grow this over the long term. It has not proven this reliably yet, and there is not any deep value in the stock to warrant an allocation despite the future growth uncertainty. I have also grown concerned that during future periods of high R&D to remain innovative, the company may require more debt financing and equity raising, which it has already been prone to in the past. I think that if management can fix the accounting and financial issues that have been present in the company and generate a more reliable profitability strategy moving forward, this could be a high-growth investment. However, there are multiple areas of uncertainty in this, which include competitive threats and a potentially consolidating AI and data center ecosystem with major players like Nvidia, Broadcom, and other technology leaders potentially blocking out major growth from competition. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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