EnSilica LON:ENSI, the AIM-listed, Oxfordshire-based integrated circuit designer and manufacturer, is our ‘penny stock to watch’ pick of the week.
Nvidia NASDAQ:NVDA, a favourite stock at The Armchair Trader, has gained a lot of newsflow in the last few weeks, as it briefly overtook Microsoft NASDAQ:MSFT and Apple NASDAQ:AAPL to take top spot globally as the most valuable company in the world.
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Although EnSilica is by many, many degrees a much smaller company, with a market capitalization of just GBP46m, it plays in a similar field to Nvidia, and is at 47.7p much more affordable stock that could have a similar trajectory (although it is unlikely to ever displace the American stocks at the top of the tree).
#ensilica multibagger in front of everyones eyes,still trading below 50p IPO price whilst everyone is busy overpaying for Nvidia. https://t.co/0XCuMvkdk1
— Freedom (@Freeyourmind888) June 26, 2024
Design and development
Founded in 2001, EnSilica designs ‘fabless’ Application-Specific Integrated Circuit (ASICs), which are tiny, custom-made computer chips designed for very specific tasks. In essence, tiny, specialized tools built for one particular job. Fabless companies focus on chip/circuit design, developing the chip’s architecture, writing the code that makes them function, testing the design to make sure the chip does what it is supposed to do, and then outsources their designs to foundries for manufacturing. Building a chip fabrication facility is hugely expensive and requires specialist expertise and equipment.
The fabless model allows designers to bypass massive costs, focus on the ‘value-add’ which is customizing chips (often in smaller batch consignments) for their own customers, and get their product to market quickly. Even Nvidia and Apple run fabless models.
EnSilica supplies ASICs, RF (Radio Frequency components used in communications applications such as smartphones, wireless routers, radar and GPS), and mmWave (millimetre wave, a specific band of radio frequencies within the electromagnetic spectrum. This band ranges from roughly 30 GHz to 300 GHz, with wavelengths measured in millimetres often used for shorter-range communications like 5G and vehicle-to-vehicle comms) components to customers in the automotive, industrial, healthcare and communications sectors.
Flexible and scalable model
The company is very flexible, supplying components to start-ups as well as multi-million system-on-chip consumers and although headquartered in Oxfordshire, has a range of labs in the UK, India and Brazil.
The company has made specific inroads to the automotive industry, winning a EUR3.8m (GBP3.2m) contract to supply Advanced RISC Machine (ARM)-based contract with a European automotive and industrial semiconductor supplier in March and a USD20m (GBP15.8m) custom ASIC contract with an American electronic component company in February.
These and other contact wins in the financial year led EnSilica’s management to annonce that it is expecting record revenues this year (to end-May) of at least GBP25m, up some GBP5m from 2023 with earnings of at least GBP1.8m, up from GBP1.6m in 2023, despite, what management said was a slowing economy and harder trading conditions.
Management is confident that the current interest in the company’s design will continue through to 2024/25 and highlighted a sales opportunity pipeline of more than USD500m. The company has been reducing its debt, knocking off GBP900,000 of the company’s loans, which at the end of April was around GBP2.1m
Strong financial position
The company had a healthy cash pile of GBP1.3m at the end of April and completed a GBP4.9m fundraising campaign through a placement and subscription in May followed up with a GBP300,000 retail offer giving the fabless chipmaker plenty of ammunition for working capital, investment in R&D and ability to make new engineering hires.
The company’s shares opened the week (24th June) at 47.29p. Over one-year shares are down 30% and over the year-to-date up 18.25%. Shares have ranged between 29p and 75.75p.
EnSilica might not be a household name yet, but the chip designer is making waves in the tech industry. Despite being a minnow compared to giants like Nvidia, EnSilica occupies a similar space, designing custom-made chips for a variety of applications. The fabless model allows it to focus on what they do best – crafting innovative chip solutions – while keeping costs down. The company’s recent success speaks for itself: contract wins, revenue growth projections, and a healthy cash pile position them for an exciting future. Although the share price is down over a year, the longer-term prognosis looks healthy.
EnSilica’s focus on cutting-edge technologies like mmWave and its inroads into the booming automotive sector are particularly promising. With a recent fundraising round and a strong sales pipeline, it has the resources to fuel further growth. Trading at a fraction of the price of industry leaders, EnSilica could be an intriguing opportunity for investors looking for a chip design champion with big potential. So, keep an eye on EnSilica – this tiny titan could be a future tech giant in the making!
