Hidden potential: could this UK-listed growth stock be the next Nvidia?

Based in Canada but listed in London, I think up-and-coming chip designer could be the next big thing to drive AI adoption in the UK.

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Investment in AI is skyrocketing, driven mostly by US chip producers like Nvidia and AMD. But the UK may already have its very own AI hero – albeit one that’s headquartered in Canada. 

Despite a £1.03bn market cap, Toronto-based Alphawave Semi (LSE: AWE) isn’t well-known in the UK. Until recently it was trading as Alphawave IP and has remained fairly under the radar. Yet somehow I think the world will be hearing a lot more about this AI-focused semiconductor company soon. 

Major partnerships

At first, I thought it was just another computer company jumping on the AI bandwagon. But as an IT geek, I’m in awe (pun intended) after looking at its product line. It designs the most cutting-edge 7nm process nodes used in semiconductor production, forging partnerships with tech giants like TSMC, Samsung and Intel.

However, unlike these companies, it doesn’t manufacture and market its tech. Rather, it uses a capital-light licensing model allowing companies to use its designs.

Subsequently, I think this relatively small company has all the early signs of the next big thing in tech: 

  • a volatile share price that’s massively overvalued.
  • a volatile accounting history (trading was temporarily suspended last year after auditors delayed issuing its final accounts)
  • major brokers like Blackrock and JPMorgan shorting the stock
  • earnings forecast to grow 108% in the next year

Call me contrarian but that sounds like the chaotic early days of every major tech stock that made it big.

Europe’s best AI play?

Now, before I get ahead of myself, the company is currently unprofitable. Its earnings per share (EPS) fell sharply throughout 2023 and are now deep in the negatives. What’s more, shareholders recently got diluted when the company issued 4% more shares to the pool. And the cherry on top? Revenue missed expectations by 8% in the recent full-year 2023 earnings report

So what makes me think this stock is going anywhere other than straight down the toilet?

Well first and foremost, I’m not the only one. Major broker Jefferies recently described the stock as “Europe’s best AI play”. Whether or not that pans out remains to be seen. But there are some signs to support it. The company is forecast to become profitable within the next 18 months and revenue is expected to double by the end of 2026.

Either way, sentiment around the stock appears to be net positive and people are starting to take note. But at the same time, it’s high-risk.

Risk vs reward

The bloated share price is now four times larger than its revenue per share – considerably higher than the industry average of 2.5 times. This number is forecast to decrease as sales improve but buyers at this price may be paying too much. And although earnings are forecast to improve, return on equity (ROE) will likely remain below the industry average for the next three years. 

The company’s also put a lot of money into R&D lately, leading to an operating loss of £42m in 2023. If the gamble doesn’t pay off it could spiral into debt.

Overall, I think it’s an exciting stock that could go either way. Certainly, it’s one to keep an eye on!

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool UK has recommended Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. 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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