Artificial intelligence (AI) is already turning into the biggest investing theme since the internet. And some US tech stocks, notably Nvidia, have created mind-blowing wealth for investors in recent years. I’ve been hunting for an AI-related UK stock that might also head to the stars.
I reckon I’ve found one in the shape of Alphawave Semi (LSE:AWE). The semiconductor stock is down 61% since going public in May 2021. However, it’s up 14.5% year to date, meaning a turnaround may be brewing.
How does it make money?
As a potential investor, the first thing I want to know about a business is how it generates revenue. In Alphawave’s case, I think this can be boiled down to two main ways.
- IP licensing: The firm sells blueprints to other companies that use them to build their own chips. This is a bit like selling a recipe.
- Custom silicon: Customers can also buy a finished semiconductor from Alphawave, designed to meet their specific requirements. This is like selling the ready-made meal.
The company specialises in high-speed connectivity solutions that enable data to travel faster and use less power. This last point is important because electricity consumption is skyrocketing in data centres.
Indeed, Google just announced that its carbon emissions have surged nearly 50% since 2019 due to AI energy demand!
Rate of growth
Alphawave says: “Our technology…is an essential part of the core infrastructure enabling next-generation services in data centres, artificial intelligence, 5G wireless infrastructure, data networking [and] autonomous vehicles.“
All of those areas are high-growth, especially AI systems and self-driving vehicles. So the market opportunities are certainly there, it’s just whether the company can capitalise on them.
Mind you, growth hasn’t been a problem since its founding in 2017. Last year, revenue surged 74% to reach $322m, up from $185m in 2022. That’s a massive jump from just $7m in 2019.
However, last year’s figure was below the $340m-$360m guidance given in January. It also lost $51m during the year as it accelerated a transition away from China.
Here’s how the market currently see its top line growing through to 2026.
| 2024 | 2025 | 2026 | |
| Revenue | $352m | $442m | $550m |
Valuation
Analysts forecast a return to profitability this year. If their figures prove correct, this puts the stock on a rather pricey-looking 49 times earnings. However, we could see that multiple drop to just 16.3 by 2026.
One risk here though would be a major slowdown in AI spending, hurting the firm’s growth trajectory. This isn’t expected while data centre spending continues rising, but I’d say it’s a key risk to bear in mind.
One to watch
Overall, I reckon there’s a lot to like. Alphawave’s end customers grew to 103 last year, up from 80 in 2022. And it’s collaborating with Arm Holdings on the development of an advanced computer chiplet.
Looking ahead, more high growth seems likely as customisable AI chip demand rises. In fact, the firm puts its total addressable market at almost $40bn by 2027. For context, its market cap today is just £1bn.
With this growth stock down 61%, I reckon it’s worth a deeper look at 146p. I’ve put it on my watchlist.
