What does this business do?

Alphawave IP is a designer of high-performance semiconductor chips used throughout data centres, electric vehicles, and a host of other appliances.

It has been a relatively unknown company for a long time. But its technology is quite impressive, with chip-transistors getting as tiny as five nanometres. To try and put that into perspective, it’s nearly 1,200 times smaller than a red blood cell. And the company is already working on a four-nanometre version with promising initial results.

Why does this matter? The smaller the transistors, the more space to add additional modules onto the chips, granting even more processing power. And in an industry with fierce competition coming from the likes of Samsung, having a technological advantage is critical to attracting new customers.

Semiconductor chips have become a crucial aspect of most modern technology. So, I can see why investors believe the AWE share price has enormous long-term growth potential.

The crashing share price

As previously stated, the Financial Times released a fairly damming article about the company. Specifically, it flagged the firm’s close links to Chinese corporation VeriSilicon that weren’t disclosed in the prospectus or the recently published interim results. This has drawn particular attention since the chairman of VeriSilicon, Wayne Dai, is the brother-in-law of Sehat Sutardja — an executive director of Alphawave.

UK law says related parties to a public business must be disclosed. And if Alphawave has failed to meet these transparency requirements, the firm could face some substantial legal penalties from regulators. The company vehemently denied any wrongdoing, stating it has “met all its disclosure requirements before, during and since the IPO, and will continue to do so“.

Alphawave’s business relationship with VeriSilicon started in February 2021, before its May IPO. However, it’s worth noting that no revenue from this contract has been recognised yet. And as a result, disclosure may not have been legally required in this instance. If this is the case, then the fall in the AWE share price could, in fact, be a fantastic buying opportunity for my portfolio.

The bottom line

I can’t deny that the firm’s technology is impressive. And with the rise of the Internet of Things and autonomous vehicles, I think it’s fair to say the demand for high-performance chips isn’t going away any time soon. However, the disclosure situation does make me slightly concerned.

Suppose regulators decide to open an investigation and find Alphawave to be in breach? In that case, it could have an enormous negative impact on the AWE share price. Personally, I’m not interested in adding this risk to my portfolio. Therefore, I’ll be keeping this business on my watchlist while the situation develops.

The newspaper highlighted the fact that the majority of the company’s sales come from related parties. In particular, it noted that the group’s chair and co-founder, John Lofton Holt, is also the chair and founder of another semiconductor corporation called Achronix. This privately-held California business was a significant customer of Alphawave before the company’s IPO. 

According to the FT’s report, for the 12 months to May 2019, 90% of the semiconductor group’s revenue came from a “company on which a director is the chair of the board.” 

The report contained other conflict of interest claims as well. It noted that the group had failed to disclose close ties with one of its new customers, Chinese firm VeriSilicon. This company’s chairman, Wayne Dai, is the brother-in-law of Alphawave executive director Sehat Sutardja.

For its part, Alphawave has said that “all related party transactions have been properly disclosed.“

Unfortunately, it looks as if the market has already made its mind up about the business.

Alphawave share price plunge

When Alphawave hit the market in the first half of this year, many analysts compared the group to former UK market darling ARM.

There are some similarities. Both companies help semiconductor manufacturers by licensing their microchip technology to developers. This business model is both highly profitable and flexible. And Alphawave seemed to have been firing on all cylinders until this report was released.

According to its latest trading update, bookings rose 490% in the first half of 2021. However, as it now turns out, VeriSilicon and another Chinese firm were responsible for virtually all of this growth. 

On the face of it, this isn’t that unusual. It’s relatively common for tech companies to share directors. It’s also reasonably common for tech firms to work with each other to build their business. As such, the recent sell-off of the Alphawave share price could be an overreaction. 

On the other hand, it does bring back memories of other London-listed companies which have inflated revenues to try and boost their valuations. I’m not saying this is what the organisation’s been doing. There’s no evidence to support that claim at the moment. It just may be the case that the market is making this association. 

Waiting for further information 

In these situations, where an outside source attacks a company, I think it’s best to wait for the corporation to provide evidence to counter claims. Until they do, investors are in the dark. As I noted above, the group’s already said it’s reported all related party transactions as required. But the market may need more convincing. 

As such, I don’t think the Alphawave share price is an opportunity or a trap after its recent declines. I think the market needs more information before making this kind of decision. That’s why I’d remain on the sidelines for the time being. I wouldn’t buy the stock today.