Could this British AI stock be a future NVIDIA?

This British AI stock has seen revenues soar, but so far its share price has been a bitter disappointment for early investors. Will our writer invest?

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Chipmaker NVIDIA was already doing very well, before the growth opportunities associated with AI sent the stock into the stratosphere.

It has soared by over 2,000% in the past five years!

While I missed that gain on NVIDIA, I am still interested in investing in AI stocks if I can find what I think is a strong business at a good price.

A British contender

And while much of the AI action may be taking place on the other side of the pond, not all of it is.

Indeed, one London-listed firm that has been making strides in this space is Alphawave Semi (LSE: AWE). With its market capitalisation now less than 10% away from the billion pound mark, clearly investors have been paying attention.

Alphawave Semi (the company recently changed its name from Alphawave IP) develops a range of products that help to underpin digital applications such as AI.

These include proprietary silicon building blocks that customers license and can integrate into the design of their chips, chiplets, and customised solutions for specific client needs.

Business is booming

This has proven to be a popular offering, well-timed for the soaring demand from AI clients that has lifted chipmakers and designers like NVIDIA.

Revenues last year came in at $321m, 74% higher than the prior year. In fact, Alphawave’s revenues grew almost tenfold in the past three years.

Still, those revenues pale in comparison to the $60bn NVIDIA booked last year. There looks to be plenty more space for Alphawave to grow into.

It is hard to value the shares

However, despite the rapid sales growth, Alphawave shares have performed weakly.

So far this year, they have lost just under 1% of their value. More alarmingly, they are down by two-thirds since they floated on the market in 2021.

That does not mean there are not still enthusiastic buyers. Indeed, this week saw the company’s chief financial officer report that his family trust had bought 100,000 shares.

But I think one of the reasons behind the fall is a gap between investor hopes and financial reality. Sales have been soaring – but so too have losses.

What was formerly a profitable company with a much smaller turnover reported a $1m loss in 2022. Last year, that ballooned to $51m. There is a risk that if the company continues to lose money, it will dilute existing shareholders to raise more.

Chip on my shoulder

The valuation here bothers me – it is hard to know how much Alphawave Semi is worth, given the inconsistency of its recent financial performance. Similarly, I would rather it had a more proven business model before investing.

That arguably goes with the territory, though.

Developing the chips and organisation to keep up with burgeoning AI client demand is expensive. That could end up being money wasted, but it could also be the sort of investment needed today to help keep growing the business in future.

For now I do not see this as the next NVIDIA — but that could change if the investments in growth pay off.

So I will keep this AI stock on my watch list, but for now it is not on my shopping list.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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