Interactive Investor

Is this company the new Arm Holdings?

6th May 2021 15:50

Graeme Evans from interactive investor

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Similarities in expertise and business model mean comparisons are made with this great UK company.

A semiconductor firm is set to be valued at more than £3 billion when it follows in the footsteps of Arm Holdings by listing on the London stock market in the coming days.

Toronto and Cambridge-based Alphawave IP, whose technology enables data to travel faster and more reliably using lower power, operates a similar business model to Arm, the chip designer that soared in value before being taken over by Softbank for £23.4 billion in 2016.

Alphawave's advisers have reportedly set a price range for the shares of between 375p to 430p in the forthcoming IPO, which will raise proceeds for the company of around £500 million. The upper end of the price range will give the business a valuation of £3.2 billion.

Its chip technology is focused on the drive for greater wired connectivity speeds in data centres, or in cloud computing, 5G wireless infrastructure and artificial intelligence. Like Arm, the designs are licensed by makers of silicon chips and generate royalties over the long term.

The business was only founded in 2017 but is already profitable and generated operating profits of $17.5 million (£12.6 million) in 2020 on a gross margin in excess of 95%.

Analysts at Liberum said benchmarking the business to peers and against the M&A multiples used after Arm was bought by Softbank and then Nvidia last year pointed to a fair valuation for Alphawave of $4.5 billion (£3.2 billion), based on 2023 financials.

While noting that the Arm business is now fairly mature, they added that Alphawave should be trading at a premium: “Its business model is similar to that of Arm Holdings, but with significantly higher growth rates and profit margins.”

Using current company information, Liberum's team are forecasting Alphawave's revenues will grow at a compound growth rate of 92% up to 2023 with net income up by more than 100%. They said: “A strong outlook beyond 2023 is underpinned by potential growth in royalties, chiplets and underlying industry trends.”

Alphawave estimates the total market opportunity for its current products has the potential to treble to $1.5 billion (£1.1 billion) by 2025. And by 2024, the addressable market for its future products is forecast to exceed $50 billion (£36 billion).

Its three co-founders, Tony Pialis, Jonathan Rogers and Raj Mahadevan, and its executive chairman, John Lofton Holt, have worked together for nearly 20 years.

The company said it had chosen to list in London because of the UK's “incredible technology and semiconductor industry ecosystem”.

Holt added: “We are a global business and proud to be taking Alphawave IP public in the UK where the Silicon IP business model was invented by great British companies like Arm and Imagination.”

Its market debut comes on the heels of cybersecurity software company Darktrace (LSE:DARK), which began unconditional trading today. The shares rose 8% to 339.65p, giving the company a valuation of about £2.3 billion, after being priced at 250p in last Friday's IPO.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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