focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
Credo has more than 2x the market cap of AWE despite only generating half the revenue. They compete with AWE in the connectivity space but have more focus on AECs (Active Electrical Cables) which amounts to approximately half their revenue. Like AWE, Credo are ploughing back a lot of cash into R&D and are not net profit making. Credo may appear to have a healthy cash balance sheet but only due to having done a recent cash placing. They are in partnership with Effect Photonics for the development of Coherent DSPs but I believe are behind the curve compared with AWE in bringing these to market.
Marvell has a market cap more than 37x greater than AWE’s. They are AWE’s main competitor in terms of data centre connectivity products. Last Thursday was Marvell’s Q4 results which gave a very upbeat performance in the data centre sector. Unfortunately, this was offset by a shockingly downbeat performance in their carrier infrastructure and consumer sectors neither of which AWE compete in so far as I’m aware. That probably explains the market’s reaction to the Q4 results that brought about a more than 11% fall in share price on Friday. Similarly to both Credo and AWE, Marvell are also not currently net profit making. Again, mainly because a large amount of cash is being ploughed back into R&D and product development.
While the two above-mentioned NASDAQ peers have in my view excellent growth prospects, I think AWE’s growth prospects are at least equally as good. As mentioned in my previous post they should be due at some point later this year to announce their first revenues coming from their Opto-electronics range which will include coherent DSPs, AECs and AOCs. While Marvell appear to be slightly ahead of the curve having already brought coherent 800 Gbps DSPs to the market and are introducing 1.6T Gbps DSPs later this year, I suspect that AWE are not too far behind. The revenue stream expected from this is expected to ramp up quite quickly in the following years.
According to a fairly recent Whitepaper from IPnest, in what’s called the High-End interface silicon IP segment, AWE already command a quarter of that particular addressable market. Back in 2021 this segment was valued at about $370 million and is thought will have grown to around $1.4 billion this year. Assuming no increase in market share, this translates to about $350 million of revenue from that segment alone, add to that, revenue from custom silicon, chiplets and the new opto-electronics range, we shouldn’t be surprised if the company up their 2024 year end guidance by a significant amount, hopefully in excess of $400 million. By 2026, the high-end interface IP segment market is forecast to exceed $2 billion. The whitepaper predicts the company’s revenue will be between $500 million and $800 million. Total product revenue is expected to exceed $1 billion. All the above products have high profit margins.
Just over 12 months ago on 24th Feb, Alphawave closed at an all-time low of 89.3p. From that baseline, the share price is up 110.3%. If we take the price of its Peers on that same date of 24th Feb last year and compare with their respective closing price on last Friday, Rambus is up 134.41%, Broadcom is up 126.57%, Credo is up 111.2% and Marvell is up 72%.
So, one can argue that Alphawave has performed equally as well as its peers over this time frame.
Another interesting comparison I like to make is the price to sales ratio (P/S).
If we take Alphawave's 2023 midpoint guidance revenue of $350 million, last price of £1.878, and 727 million shares in issue. We get a P/S ratio of 5.02 which is significantly lower than its peers.
Based on the absolute latest data from the peers last reports and £to$ conversion of 1.287:
Rambus P/S = 15.25. If AWE were trading on this P/S, its share price would be £5.71
Broadcom P/S = 16.94. If AWE were trading on this P/S, its share price would be £6.34
Credo P/S = 19.7, If AWE were trading on this P/S, its share price would be £7.37
And Marvell P/S = 11.86. If AWE were trading on this P/S, its share price would be £4.44.
Taking the average P/S ratio of these four peers, AWE share price would be £5.97.
Even though AWE has been on a price surge since January 17th and risen 72% since and no doubt various technical indicators are currently screaming "overbought", but regardless of whether a price correction is due or not, at this current price of £1.88, it remains significantly cheap compared to its peers. I'm not a technical analysis fan, but I've seen that the future growth indicator on this stock places it at the top end of the growth shares table.
At some point this year, the company are expected to announce its first revenues from its opto-electronics range including coherent DSPs for its hyperscaler with whom it has a non-binding agreement for at least $300 million worth of product sales in the pipeline. All things data centre connectivity product wise have fairly high CAGR expectations over the coming years but I believe the coherent opto-electronic aspect for intra data centre connectivity applications especially so.
"Absolutely. It is pleasing. Such low volumes though. It only takes a 30k buy or sell to move the price significantly."
If you are comparing with US NASDAQ stocks then yes volumes are low, but if you compare to typical LSE stocks of similar market cap it's actually high. The LSE seems like a second class exchange compared to US markets.
AWE's volume on Friday was 4.8 million, say at an average of about 1.76 = £8.5 million.
Thursday's volume was 9.5 million, at an average of about 1.65 = £15.6 million
This compares with Direct Line Group, which had a volume of 7.7 million at an average of 2.06 = £15.9 million.
Yet Direct Line has nearly 3x the market cap.
There are many others with similar market caps to AWE on LSE with way less volume.
NASDAQ however is a different ball game altogether.
Credo, AWE's nearest equivalent competitor has a market cap of $3.69 billion (AWE's = $1.65 billion), managed a volume yesterday of 2.3 million at an average of about $22.7 = $52.21 million (£41.2 million) which is 3 to 5 times more than AWE's volume.
Nvidia's volume on 22nd Feb was 86.51 million at about $760 average = astronomical $65.75 billion.
Incidentally, if AWE was priced similarly to Credo on P/S ratio, AWE share price would be £4.02 today...
And just in case any reader here knows the history of Nvidia share prices well, I should clarify my Nvidia example in the previous post takes into account the four for one share split that happened in July 2021. In reality, in March 2020 the shares were trading around $200 not $50 and by July 2021 they were around $750 but reduced to $187.50 while the holding of 50 shares was automatically increased to 200. Personally, I’ve never bought Nvidia shares (unfortunately).
“Thank you. Timeframes it appears.”
You’re welcome. My own two pennies worth on this matter is that it is important to remember that as individual private investors we tend to be far more emotionally involved in the stocks that we choose to invest in while the likes of JP Morgan analysts are just doing their job. It is far easier to hedge on a stock that the analyst may not have a personal investment in. Alphawave Semi has increased by more than 60% in the space of month and a half, so even if the stock has amazing fundamentals and brilliant future growth prospects, based on the average performance of stocks in the wider market, any stock that rises by a significant amount in a short time frame tends to get treated as being overbought regardless of its fundamentals which is why you’ve seen an increase in short positions on Alphawave in the last week or so.
Consider that Nvidia on 20 Mar 2020 was a little over $50. Twenty months later it was trading at almost $330. That’s a 760% increase, And yet from that mighty height it declined to almost $110 less than 11 months later on 14 Oct 22. Imagine if in Mar 2020 you bought $10,000 at $50/share, how euphoric you might have felt in Nov 2021 having stock worth $66,000 and then being deeply dejected seeing it dwindle down to $22,000. At this point you may have decided to sell and preserve the 120% profit you still had.
And then fast forward 16 months to today you see your once beloved stock is now worth almost $800 per share and you’re thinking if only you had left it well alone you’d be sitting on $160,000 worth of Nvidia stock. And all that time in between you considered several times about getting back into the stock but didn’t for fear it had already reached it’s optimum.
These are the kind of emotions and psychology you have to deal with when investing in volatile growth stocks like this. Alphawave Semi will be no different and it’s vital to take that potential volatility into account when considering what your strategy should be.
Yes we've discussed before. Rather than impart my own foolish wisdom I thought it would be fun to get my friendly AI CoPilot to answer this question for you:
An appointed broker analyst who provides both a buy recommendation with a high target price and simultaneously places a significant short position on the same stock might seem contradictory. However, let’s explore potential reasons for this apparent inconsistency.
1. Diverse Roles and Perspectives:
Broker analysts wear multiple hats. They analyze stocks, provide recommendations, and manage portfolios. Their roles can be compartmentalized.
The buy recommendation could be based on long-term fundamentals, growth prospects, or undervaluation.
The short position might reflect a short-term view, technical analysis, or hedging against market volatility.
2. Market Timing:
Analysts consider different time horizons. A buy recommendation may focus on the long term, while a short position could exploit short-term market movements.
The analyst might anticipate a near-term decline (e.g., due to overvaluation) but still believe in the stock’s long-term potential.
3. Risk Management:
Analysts manage risk for their clients. A short position can act as a hedge against potential losses from their buy recommendations.
By shorting, they protect their portfolios in case the stock’s price falls unexpectedly.
4. Conflicting Interests:
Brokerage firms have various divisions (research, trading, investment banking). Conflicts arise when these divisions have opposing interests.
An analyst’s buy recommendation benefits clients, while a short position may serve the firm’s trading desk.
5. Market Sentiment and Timing:
The buy recommendation might align with positive market sentiment or upcoming catalysts.
The short position could be a tactical move to capitalize on short-term market fluctuations.
6. Complex Strategies:
Sophisticated strategies involve both long and short positions. Analysts may employ pairs trading, market-neutral strategies, or sector rotation.
These strategies aim to profit from relative performance rather than absolute stock direction.
Remember that financial markets are intricate, and analysts’ actions can be multifaceted. The apparent contradiction may stem from different perspectives, timeframes, and risk management considerations.
Hopefully this helps.
George and Tony talk generally about the future of AI chips: 56 minutes
https://www.youtube.com/watch?v=VYx1rGieDmE&t=12s
For those without the time to listen to the whole podcast a summary of the discussion can be found on George's website here:
https://linkeddataorchestration.com/2024/02/13/the-future-of-ai-chips-leaders-dark-horses-and-rising-stars/
Tony doesn't do too much bigging up of Alphawave in this discussion but he does highlight that the major challenge facing AI moving forward is not compute. His view is that the ability to design and implement compute is already there. The challenge is the connectivity needed to connect the compute in order to process all of the data. This is what AlphaWave is focusing on.
"Their revenue guidance for 2023 is $340m -> $360m. If they do no more than hold their own $355 compounded by 23% would get them to $1000m by the end of 2027. I'd like to think they could do better."
Absolutely! I very much suspect that they will in fact do much better than that. I don't like saying so as I try to keep a conservative mindset on my personal expectations less that I should be disappointed!
The Redgate article reminds me of the Whitepaper that Alphawave Semi have issued recently and is a highly recommended read:
https://awavesemi.com/wp-content/uploads/2024/02/LFC-Design-Booklet_1.0.1.pdf
Bearing in mind that Alphawave Semi are targeting to achieve revenue of more than $1 billion by 2027 they have recently appointed Charlie Roach as Chief Revenue Officer who carries more than 20 years of experience working with high growth semi conductor companies such as Inphi that was eventually acquired by Marvell after the company grew its revenue by more than 10x.
https://awavesemi.com/press-release/alphawave-semi-announces-appointment-of-charlie-roach-as-chief-revenue-officer/
I assume this sp will automaticlly drop approx 4% on Tuesday because of the dilution, unless the recent news bouys more rises, again offsetting the dilution. Ideas ? GLA.
It may retrace on account of the fact there's been a strong bull run recently but not because of the block listing. The block release application of 28,000,000 shares isn't immediately added to the shares issued total. Instead, the new shares will be dished out gradually over the course of time. At the beginning of every month you will see the Total Voting Rights RNS showing the total issued share capital. At Feb 1st it was 723,693,569. The new total in March won't be a sudden increase of 28,000,000 but some smaller amount depending on how many shares they awarded to employees in the month of February. Hope that helps.
"Regarding the RNS. Please explain what a block listing is….
Will it have an influence on the stock price?"
AWE like many listed companies have an employees share scheme as part of an incentive to achieve work targets etc.
In a nutshell Exchange rules require that additional shares to be listed on the market have to be authorised by the shareholders (which is done at the AGM) and applied for through the stock exchange. It basically means share dilution unfortunately. Ideally, a company should aim to minimise share dilution or avoid it altogether. For a non-dividend paying company like AWE, you should be prepared to expect a small amount of dilution as time goes on like about 1 to 2% per year. In my analysis of AWE I allow for 2.5% dilution per year. At the moment AWE are exceeding that somewhat. This will be something I will be taking up with company next time I write to them. Unfortunately , there's not a lot we can do as shareholders to stop them doing this as insiders own more than 50% of the stock and therefore can dictate almost anything they like at AGMs. We want employees to be incentivised of course, because that normally translates to better company performance which in turn should increase the company valuation - so the issuance of more shares is always a balancing act - be it for a placing to raise more cash (which for AWE should not be necessary given the progress they are making) or for employee share plans. Hope that helps.
"I think its more to do with this news story to be honest :)"
The press release on the Nubis collaboration came out last week along with a couple of others.
The upward movement today, however, is more likely related to the news that has came out of Arm Holdings last night.
https://www.reuters.com/technology/arm-shares-soar-ai-fueled-boom-brightens-growth-prospects-2024-02-08/
Alphawave Semi is one of about 12 participants that are part of the Arm Total Design collaboration that allows combination of the participants designs on to the Arm Neoverse CSS architecture.
Https://awavesemi.com/press-release/alphawave-semi-and-proteantecs-collaborate-to-provide-system-insights-and-analytics-for-custom-silicon-and-chiplets/
“As chiplets and custom silicon SoCs grow in complexity, data-driven insights and analytics play an increasingly critical role in bringing chips to market quickly and assuring their health and performance at scale,” said Mohit Gupta, SVP and GM, Custom Silicon and IP at Alphawave Semi. “Our collaboration with proteanTecs offers us a differentiated edge and enables us to bring our customer’s complex solutions to market at higher performance, at a faster pace. Mutual customers gain on-chip monitoring through the entire product lifecycle, extending all the way from production into the field.”
https://awavesemi.com/press-release/nubis-communications-and-alphawave-semi-showcase-first-demonstration-of-optical-pci-express-6-0-technology/
“AI applications are reshaping data center networks, with hyperscalers deploying increasingly large clusters of disaggregated servers distributed over longer distances. This shift has generated heightened interest in PCIe over Optics among several of our customers,” said Tony Chan Carusone, CTO at Alphawave Semi. “Through our collaboration with Nubis, we’re pleased to demonstrate how we’re leveraging Alphawave Semi’s leadership in connectivity IP and silicon to enable PCIe optical connectivity solutions that accelerate high-performance AI computing and data infrastructure.”
"Therefore I suppose it's Samsung..."
Yes absolutely it could be. Quite possibly Samsung SDS.
"Thanks for summary. Informative as always." You're welcome.
Regarding the leading APAC customer. I'm not really too sure, as I’m by no means an expert. When they use the word customer, to me that implies a business that is paying Alphawave whereas the foundries are really corroborative partners through which they can have their products manufactured. So Alphawave pay the likes of TMSC and Samsung Foundry to manufacture. I think the APAC customer is more likely to be an Asian based hyperscaler or cloud service provider. Or it could even be a data centre provider.
I'm still around and still invested here. Just been a bit busy that's all.
The update is all good and what I was expecting.
The record quarterly bookings of $128.7m brings the 2023 total to $388.8m and which is 70% up on 2022 total bookings.
The 7 design wins adds to the 9 won in Q3 to total 16 wins in H2 which brings the year total to 32 design wins.
Those wins are expected to generate $500m additional revenue commencing from 2025 and which is not yet included in the backlog figures. The backlog at the end of H1 stood at $365m.
They generated $187.2m in revenue in H1.
While they are maintaining their guidance at $340 to $360m, one can hope this is conservative and they just might be able to offer a surprise to the upside in April of somewhere just above $360m. You never know.
The things to look out for:
- A continual improvement in their margins and reductions in their one off capital costs etc.
There will always be a significant amount reinvested into R&D in order to remain competitive against larger players like Marvell and Broadcom.
- Quarterly bookings consistently exceeding $100m and continually increasing.
- Positive developments on the connectivity products front with the start of some revenue generation by year end.
- Increased guidance revenue figure for 2024 perhaps well in excess of $400m (bearing in mind they aim to be $1 billion per year revenue generator by 2027).
Remember that the highest CAGRs in the semiconductor industry are anticipated to be in the high-end performance type products which is exactly the focus area for Alphawave Semi. Significant growth is expected to continue throughout this decade and into the next. The demand for high performance computing products and AI remains very high and as Alphawave's CEO frequently reminds us, there are relatively few players able to offer the high end products.
Alphawave's revenue growth should be an inevitability but what matters most is that they can demonstrate improving margins and improved profitability.
Last week Broadcom (AVGO) stock rose 21.7% (105% increase over the last 12 months) following an upgrade by a number of analysts after Broadcom had completed its $61 million acquisition of VMWare. Last Friday’s closing price catapulted them into the top 10 largest companies on NASDAQ.
This success is despite a 12% dilution of its shares in the last year and carrying a high level of debt (104% net debt to equity).
Back in September it was reported that Google is dropping Broadcom as a partner for the TPUs from 2027. This was also mentioned at the last interims and to which Alphawave CEO Tony Pialis had this to say:
“So, first a little background, Broadcom has been a player in the connectivity space since the early days of semiconductors. I respect the company tremendously but look under its current leadership they’ve been transitioning away from a pure play semiconductor company to now including quite a bit of software with a very different business model and a very different margin profile. This software margin profile is not a great fit for semiconductors so am I surprised that there’s reports that Google is moving away from Broadcom? Absolutely not! As I told you, Microsoft, just to deploy one generation of AI within its data centres will cost it billions using Nvidia GPUs. That same cost will apply 10 times more for Google and so Google is looking inevitably for more cost and power efficient approaches for delivering AI in future generations and as I mentioned during my talk that approach is moving to a much more customised and internally driven approach and this custom and internally driven approach needs custom silicon, it needs chiplets, it needs a tremendous amount of connectivity IP, so do I think there’s an opportunity for us? – Absolutely! And hopefully everyone, you know, did take notice that I mentioned that you know we secured multiple design wins with all the leading hyperscalers, and now my job is to expand that footprint and all these hyperscalers to capture the inevitable growth that will be happening due to AI.”
There's a press release out this evening where Alphawave are touting a collaboration with Keysight Technologies on a PCIe 6.0 Subsystem solution boasting speeds of 64 GT/s.
https://awavesemi.com/press-release/alphawave-semi-partners-with-keysight-to-deliver-industry-leading-expertise-and-interoperability-for-a-complete-pcie-6-0-subsystem-solution/
The question that was actually asked was: "You mentioned that there’s a handful of companies that can execute design, manufacturing and delivery of chiplets, who do you see as the main competitors in this space and also in Optoelectronics?"
Tony's precise answer was: "So, great question. Look the five companies that I mentioned in my talk that are able to manufacture chiplets are companies like AMD, Intel and Nvidia. They implement chiplets for their own products. There is no-one today that is developing and deploying chiplets to the broader market, so there’s no competition today for that. That’s where we’re laser focused enabling the rest of 150, 250 semiconductor companies to be able to implement chiplets, not just the five stalwarts that are able to do it today. In terms of who else has great connectivity technology I think I’ve already mentioned that. The only other player that can implement PAM4 and Coherent at leading edge is Marvel. Broadcom has great PAM4 technology but not really a player in Coherent. So for us it’s Marvel and you know what, I love that competition, because Marvel is a great company with extremely long lineage and I’m honoured to be at the table with them but look, the world needs more than one player in the space especially with the explosion of AI, we need competition, we need a robust ecosystem and we’ve invested to be a strong player in the space over the next decade."
So in correct context, Tony was saying that only Marvel can implement both PAM4 and Coherent at leading edge.
I think this is arguably correct and still remains the case today. That said, Credo earlier this year announced plans to collaborate with a Dutch company called EFFECT Photonics to develop coherent DSPs. So eventually, they too will likely be a player in both PAM4 and Coherent at the leading edge .
Credo’s last quarterly report indicated that they generated $44 million for the quarter ending 28 October 2023 and $79 million for the last 6 months. So broadly equating to an annual revenue of about $160 million and which is less than half of what AWE are on track to generate for 2023.
And yet, Credo have a market cap of $2.8 billion compared with AWE market cap of $1 billion.
So Credo are valued at 2.8x that of AWE for less than half the total annual revenue.
Moreover, Credo are currently loss making with an annual net loss of around $36 million.
Their cash & cash equivalents position at the end of October was nearly $129 million.
Credo’s share price surged about 27% to $18 in the last couple of months and amazingly had absolutely no difficulty whatsoever in doing another public offering last week to raise a further $175 million at $17.5 per share merely for working capital! Clearly, on the US markets Credo are perceived to be highly investable.
Credo are presently ploughing money into R&D at more than $60 million per year.
Credo’s products, as far as I can understand, when I last checked are what you call n-1 grade products. This means one step behind the latest generation of technology, and therefore essentially less superior to the range of products and IP on offer from AWE. If Credo are fair value today, then you might argue that AWE are at least worth 3 times more.