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Does Alphawave’s disastrous IPO present a buying opportunity for investors?


The recent IPO of microchip designer Alphawave (LON:AWE) did not go according to plan. The company’s shares declined by as much as 25% on their first day of trading. However, they have sharply rebounded since then to trade a more modest 10% lower than their 410p listing price.

Of course, a turbulent first few days of trading is somewhat typical in the aftermath of an IPO. Further volatility in the company’s share price would therefore be unsurprising.

In addition, concerns regarding inflation expectations and fears surrounding the rich valuations currently present among technology stocks may prompt weaker investor sentiment towards the wider market. This could limit the stock’s capital gain prospects in the short run.

Alphawave is firmly positioned in the middle of the booming chip sector

However, in the long run, Alphawave’s business model and strategy look set to deliver an improving financial performance. The Canadian firm designs semiconductor parts called chiplets that are used in a wide range of applications to allow data to travel at a faster pace while using less energy. The company also claims that its designs result in greater reliability and higher performance.

Their uses are extremely varied and include smartphones, data centres and even autonomous vehicles. As a result, the company could be in a strong position to capitalise on a future where the prevalence of new technology is likely to increase significantly.

Interestingly, Alphawave does not manufacture any of its designs. Instead, it sells them to customers including Samsung in return for a licensing fee and royalties that are typically linked to chip production. This has the potential to create a significant amount of recurring revenue for the business that may provide greater stability than would perhaps be expected for a technology company that was only established four years ago. In this sense, its business model may be reminiscent of previous successful technology companies such as ARM.

Growing order backlog but look out for that valuation!

In addition, the firm’s revenue visibility is high because of a growing order backlog. This rise in orders has propelled Alphawave’s financial performance over the past few years. Indeed, it generated just £2.05m in revenue in 2018 versus a figure in excess of £26m in 2020. Over the same time period, net profit increased from £560k to £9.7m.

An operating margin of 54% in 2020 highlights the long-term profit growth potential of the business. However, its investment appeal could be compromised by an extremely rich valuation. Even though it trades 10% lower than its listing price, the company’s £2.5bn market capitalisation is 96x its revenue from 2020. Moreover, it has a price-earnings ratio of around 257. This suggests that a large proportion of its future growth prospects have been priced in by investors.

Therefore, Alphawave may be a sound business that delivers extremely strong sales and profit growth in the coming years. However, its valuation is difficult to justify even in an era where ultra-low interest rates have prompted high valuations across the stock market. As such, waiting for an even lower price than its current level may be necessary to obtain a favourable risk/reward opportunity.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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