Dependence On North American HPC Will Hinder Diversification Despite Improvements

Key Takeaways

• Extreme reliance on a small set of North American HPC customers, coupled with limited diversification, creates significant vulnerability to client loss and revenue shocks.
  
• Rising process complexity, heightened global competition, and geopolitical shifts threaten margins, market access, and the ability to sustain technological leadership against larger rivals.
  
• Diversification into North America, advanced node leadership, and strategic expansion position Alchip for higher margins, reduced geopolitical risk, and long-term growth.

Catalysts

Engages in the research and development, design, and manufacture of fabless application specific integrated circuits (ASIC) and system on a chip (SOC)in Japan, Taiwan, and China.

• The overwhelming dependence on just two major North American HPC customers, with 95% of revenue concentrated in this segment and extremely limited diversification, exposes Alchip to the risk that any reduction or loss of orders could lead to a precipitous drop in revenue and earnings in coming years.
  
• Despite recent gross margin improvements, rising costs of advanced process node migration (from 7nm to 5nm to 3nm and 2nm), coupled with intense competition from larger, better-resourced design houses and product companies, are likely to exert downward pressure on net margins as process complexity increases and pricing flexibility diminishes.
  
• Intensified chip supply-demand imbalances and the cyclical nature of the semiconductor industry may produce inventory oversupply, delayed customer ramps, and lower utilization rates, which threaten to depress both backlog and revenue recognition-especially during years where new mass production ramps are delayed or customer orders are scaled back.
  
• The global trend toward onshoring and localizing semiconductor production in the U.S. and Europe, paired with tightening export controls and growing geopolitical rifts, could further erode Alchip's access to key customers and markets, undermining its business development pipeline and constraining revenue growth potential.
  
• As cutting-edge HPC designs increasingly require large-scale, resource-intensive project execution and deep partnerships with foundries like TSMC, Alchip's limited R&D and engineering capacity risks falling behind global peers, raising the likelihood of future loss of technological leadership, higher operating costs, and stagnating or declining earnings power in a sector driven by rapid innovation.

Alchip Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alchip Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alchip Technologies's revenue will grow by 23.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 12.9% today to 14.4% in 3 years time.
• The bearish analysts expect earnings to reach NT$14.0 billion (and earnings per share of NT$172.98) by about July 2028, up from NT$6.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.2x on those 2028 earnings, down from 43.6x today. This future PE is lower than the current PE for the TW Semiconductor industry at 24.2x.
• Analysts expect the number of shares outstanding to grow by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

Alchip Technologies Future Earnings Per Share Growth

Risks

• Strong demand for high-performance computing and AI-related custom chip design in North America, along with multiple secured projects on advanced nodes like 3-nanometer and 2-nanometer, could lead to significant revenue growth from 2026 onwards as these products ramp into mass production.
  
• The company's gross margin is improving due to a shift towards more advanced process nodes and a favorable product mix, which, if sustained, is likely to enhance operating income and net profitability in the coming years.
  
• Alchip is successfully diversifying its customer base beyond China, with North America now accounting for the vast majority of revenue and limited exposure to tariff or export control risks, improving the long-term stability of its revenue streams.
  
• Robust Non-Recurring Engineering (NRE) pipeline in advanced nodes and a track record of timely delivery with key customers bolster Alchip's reputation, increasing the likelihood of repeat business, sustained revenue, and higher-margin design service income.
  
• Strategic investments in engineering talent and geographic expansion, particularly in Southeast Asia and Japan, may enable Alchip to scale operations and win additional high-value projects, supporting both top-line revenue growth and technological competitiveness over the long term.

Valuation

• The assumed bearish price target for Alchip Technologies is NT$2480.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alchip Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$4400.0, and the most bearish reporting a price target of just NT$2480.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NT$96.8 billion, earnings will come to NT$14.0 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 8.8%.
• Given the current share price of NT$3600.0, the bearish analyst price target of NT$2480.0 is 45.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.