The Alphawave (LSE: AWE) share price was cut in half yesterday after the Financial Times published a scathing report on the company.
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.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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