Are the chips down for the Alphawave share price?
Semiconductor company Alphawave's $210m move for OpenFive will increase its customer base and its 'system-on-chip' designs. After a disappointing IPO and poor stock results, will the deal put it back on track?
April 7, 2022

This content has been produced by Opto and was originally published on the Opto Blog.

In March, Alphawave [AWE.L] announced it was acquiring OpenFive from California-based chip design startup SiFive for $210m.

The all-cash deal will see SiFive, which was the subject of a $2bn takeover bid by Intel [INTC] until talks ended in October last year, hand over the intellectual property on 75 'system-on-chip' connectivity designs.

In layman's terms, a 'system-on-chip' is essentially a microchip that combines all the functions of a computer and other electronic systems. Alphawave stated in a press release that the acquisition would enable it to become "a one-stop shop for [customers'] bundled connectivity needs" and will help it to expand its customer base, particularly in North America.

Bookings up but customer base is key

Alphawave currently relies on a limited number of customers for its revenues. The Canadian company licenses out its designs to the likes of chip factories and foundaries for use in data centres, artificial intelligence, autonomous vehicles and 5G technology.

Growing the customer base will no doubt be key to Alphawave's ambition "to conquer the global infrastructure with its wired connectivity solutions. Once the OpenFive acquisition closes before the end of June, its customer base will rise from 20 to at least 75.

In its fourth quarter 2021 trading update in January, Alphawave announced new bookings for the three months to the end of December worth $25.5m, of which $18.5m was licence-related and the rest estimates of potential future royalties. Total bookings for fiscal 2021 were $244.7m ($220.8m licence related and $24m estimates of royalties), representing a 225% year-over-year growth rate and surpassing its own forecast.

Listing debut disappoints

Alphawave has likened itself to ARM Holdings, the UK semiconductor stalwart, which operates on a similar licensing model. The decision to list in London rather than the US or Canada could be interpreted as an attempt to fill an AMR-sized hole - ARM delisted back in 2016 following its takeover by Softbank [9984.TYO].

However, Alphawave hasn't had great success in attracting investors' attention. Since debuting on the FTSE on 13 May 2021, Alphawave has seen its share price crater. On the first day of trading, shares closed at 370p, below the 410p IPO price. In September, the company saw just over 50% wiped off its value following a Financial Times report that was critical of its failure to disclose links to Chinese firm VeriSilicon [688521.SHA] in its IPO prospectus.

Following Alphawave's disappointing debut, AJ Bell investment director Russ Mould wrote in a research note: "This is a great shame, though, and no cause for celebration. Alphawave IP has a business model which investors understand and know can work well, thanks to [ARM's] time as a FTSE 100 firm, so London still seems like a good choice for the listing."

Well positioned for market share

Year-to-date, the Alphawave share price is down 9.5% to 172p at the close on 5 April. Despite the downwards trend, analysts remain bullish on the company given it is strategically placed to compete with US and Taiwanese rivals. The semiconductor IP market is expected to rise from a value of $5.5bn last year to $7.2bn in 2026.

Alphawave currently has three Wall Street ratings, according to MarketBeat data. Barclays and JPMorgan have both given it an 'overweight', while Liberum Capital rated it a 'buy'. The consensus target for the Alphawave share price is 410p, which implies an upside of 138% from its most recent closing price.

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