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Chips are down for Alphawave

The Canadian semiconductor technology specialist endures a rocky market debut as investors take a turn against tech, but a market opportunity exists
May 17, 2021

Canadian microprocessor technology company Alphawave (AWA) honoured the tradition of recent initial public offerings (IPOs) in the City, seeing its price crash within a few hours of the start of conditional trading.

The 410p offer price per share raised £856m from new investors but fell by nearly a fifth on opening day.

However, while the IPO looks embarrassing for its promoters, Alphawave’s share price is likely to settle down over the next few months. The key questions then are 1) whether Alphawave’s technology means very much in the context of the global semiconductor market and 2) how the company intends to grow its business.   

Founded in 2017, Alphawave is based in Toronto and London and designs technology to allow faster connectivity for microprocessors. In other words, it makes them work better.

Alphawave listed in the UK in preference to the US’s Nasdaq index. However, a lack of local comparisons here made the evaluation of its offering awkward. Some fund managers opted out on pure valuation grounds.

That said, the group explicitly compares itself with the business model that ARM Holdings perfected: namely, licensing its technology to chip manufacturers on which it then intends to earn royalties. There is a sense that ARM has left a gap in the market that a similar company could reliably fill.

The onus now is on finding lots of new clients. And the composition of the board indicates who the primary customers for Alphawave’s technology are likely to be. Amid many Silicon Valley stalwarts, management’s experience leans heavily towards telecommunications, chip design and data management, with the odd banker thrown in for good measure. Its thin-on-detail factsheet claims that it generates a gross margin of 95 per cent and that sales have doubled over the past two years.

Any technology that will allow chip manufacturers to enhance their chips with higher operating speeds is likely to be welcome at a time when the semiconductor industry finds itself in a real crisis – and not by any means its first.

 

Feast and famine for semiconductors

Semiconductors have grabbed headlines in recent weeks as a global shortage of microprocessors threatens to add months of delays to the production time of a host of automotive, phone and computer products. The automotive industry alone faces lost revenues this year of $110bn unless the shortage eases.

 

Source: WSTS trade statistics

 

In fact, it is hard to think of another industry that is so inelastically incapable of matching supply with demand, and which seems to suffer from regular catastrophic outside events – from tsunamis in Japan, to Covid-19 in Korea, to worker unrest in China.

The nearest comparison, bizarrely, might be farming. Rather like farming, scale take ages to build. For example, Samsung is throwing £151bn at the problem over the next decade to try to bring more manufacturing capacity online.

The focus now then is whether existing technology can be upgraded. Intel (US:INTC) is trying to find ways of making existing technology go further, allowing time for manufacturing capacity for the next generation of products to come on-stream. This creates an obvious opportunity for Alphawave if it can convince manufacturers that its knowhow has a current application for older generations of micro-processors.

The other question is whether current unprecedented demand is a lead economic indicator for a coming downturn. That might sound counterintuitive, but demand for semiconductors always seems to come very late in the business cycle. There are clear correlations between peaks in demand and a sudden falling away of business investment over the past 20 years, causing a slump in prices of chips just as more manufacturing capacity comes online.

Anyone who remembers their school computer lab being raided in the mid-1990s by organised gangs hunting for microprocessors will understand the feeling of ‘peak chip’ – but what cost a third of the price of a computer at one point slumped to pennies within a couple of years. 

It is no surprise then that Alphawave’s IPO was not ecstatically received. But that isn’t necessarily the company’s fault. Tech is out of fashion for now as investors cash in profits on a tremendous bull run for the sector. That suggests a possible buying opportunity in the medium term as it becomes clearer how well Alphawave’s product offering is received. For the moment, allow the share price to settle down after the group’s flotation and return with the first reported results. Hold.