Nvidia has quickly become a household name. The AI craze has taken over, and the stock has benefitted, returning over 1,700% to shareholders since March 2020 lows.
Yes, you read that correctly. 1,786%, to be exact (at the time of writing). To add some perspective to the figures, you would have had to invest in the S&P 500 at the beginning of 1989 to have the same return on investment.
The majority of companies that produce semiconductors, which is a key component to power artificial intelligence technology, are listed in the US. But I thought I would take a look at some of the UK listed companies and see if there is a more local opportunity.
Alphawave Semi
Alphawave Semi (LSE: AWE) is a global leader in high-speed connectivity for the world’s technology infrastructure. The company serves the global market, with customers in North America, Asia Pacific, Europe, and the UK.
Although 2023 revenue came in below estimates, the company is forecasted to continue growing revenue in the coming years.
The EV to EBITDA is 53.4, which is much higher than the FTSE Russell’s relative sector average of 6.2. That means there is a much higher premium to be paid for this stock, but the figure is not far off the likes of Nvidia and Advanced Micro Devices.
The share price has held above £1 in the last year and currently sits just above that level at £1.16. The company hit a two-year high of £1.93 in March of this year.
IQE
IQE (LSE: IQE) manufactures advanced epitaxial wafers — essentially semiconductor material — for a wide range of technology applications in wireless, optoelectronic, electronic, and solar devices.
The share price closed April up 37%, mainly due to its earnings announcement. Recent performance has not been strong with 2023 revenue falling, but a brighter outlook on future revenues helped investors to buy back into this name.
The EV to EBITDA is 11.4, which is more in line with its peers than Alphawave Semi.
A total of eight investors have a majority stake in the company with 51% ownership. Institutions’ substantial holdings in IQE imply that they have significant influence over the company’s share price.
Risks to both
Both companies are in the same sector, so they pose similar risks. Semiconductor valuations have been lofty. Any slowdown in this industry’s growth would cause investors to rethink their optimism.
A specific risk to Alphawave Semi is its transition away from Chinese customers. The firm is redirecting its focus towards other regions. This creates some risk towards revenue and the company successfully offsetting this loss elsewhere.
IQE has posted annual earnings per share (EPS) losses for the last five years. Although the sector is growing, investors will want to see bottom-line figures increase in the coming years. Any semi-annual earnings that set back these expectations will negatively impact what markets are pricing in.
Overall
I think there is some potential in these London-listed semiconductor names. With the rapid expansion and demand for chips, it is likely an area of the market that will outperform in the UK.
But I have to ask myself, “Are there better opportunities elsewhere?” Given the inherent volatility of investing in tech, I think I will keep my attention on the US frontrunners for now.
