This Arm-Backed Chipmaker Just Soared 98% on Day One -- Should You Buy the Hype?

Key Points

• Ambiq Micro specializes in low-powered semiconductors for edge AI applications, such as personal devices.

• The company's technology looks promising, but its sales indicate that Ambiq Micro is a minor player in the broader market.

• The stock is reasonably priced, even after its exciting IPO, but there are risks.

• 10 stocks we like better than Ambiq Micro ›

The booming demand for artificial intelligence (AI) has opened the door for up-and-coming companies to enter the public markets.

Ambiq Micro (NYSE: AMBQ) is the latest initial public offering (IPO) stock success story. It recently began trading and jumped a whopping 98% on day one. The company's low-powered semiconductor technology has garnered interest, including from Arm Holdings, the renowned chip design company, which has already invested in Ambiq Micro.

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AI chips have become a booming industry, and Ambiq is still a tiny company, worth less than $1 billion.

Here is what you need to know about this relatively unknown AI chip stock, and whether investors should consider buying into the hype today.

Image source: Getty Images.

The AI opportunity beyond the data center is at the edge

At the moment, artificial intelligence revolves around data centers, massive clusters of chips and computing resources that pool together to train and operate AI models at scale, where millions of people can simultaneously prompt and utilize the technology.

But over time, AI must move further into the real world to realize its potential. The smart watch you wear, the machines in factories, and the smart collar around an animal's neck are localized uses, also referred to as the edge, where AI must shrink down to a bite-sized version. Ambiq Micro specializes in low-power semiconductors for such applications, where devices must balance performance with low power consumption to be practical.

Ambiq Micro's core end markets are currently in personal devices, healthcare, industrials, and smart buildings and homes. To date, the company has shipped chips powering over 265 million devices. Management estimates that its core end markets will create a $22.5 billion addressable market by 2028. Ambiq Micro generated just $76 million in total revenue last year, so this is a wide-open growth opportunity.

Ambiq Micro is a promising company, but it has some red flags

The company claims that its proprietary platform, sub-threshold power optimized technology (SPOT), is its secret sauce that will enable it to continue to build and capture this addressable market. Arm Holdings is a world leader in chip designs and other intellectual property, so its backing speaks positively to Ambiq Micro's technology.

At the same time, Ambiq Micro is still a small company compared to the leading chip stocks, so it's fair to wonder why a company hasn't simply acquired Ambiq Micro if its SPOT platform is such a game changer for the broader AI landscape. It could be due to the competition in the low-powered semiconductor space from numerous companies, including some deep-pocketed incumbents, like Texas Instruments, who may feel they can beat it with their offerings.

The company's primary end markets totaled $12.8 billion as of 2023, so Ambiq Micro's $76 million in total sales last year signals that it's currently a minor player in the broader market and must make that ground up over time. Ambiq Micro's top 10 customers also contributed nearly all of its sales last year, despite having over 200 total customers. Losing any of those key relationships would likely devastate growth, and Ambiq Micro's sales grew by just 16.1% from 2023 to 2024. That's not bad, but it's also not remarkable when talking about base numbers under $100 million.

Ambiq Micro will need to prove, through many quarters of strong business results, that it genuinely has special technology.

Is the stock worth the hype?

There are enough red flags that investors must be careful not to let the hype get out of hand. Fortunately, it doesn't appear to have reached that point yet. The stock's valuation is fairly reasonable despite its impressive gains on its first trading day.

Ambiq Micro has a $673 million market cap, at the time of this writing, valuing the stock at under 10 times last year's revenue. That's reasonable for a growing semiconductor company with AI opportunities. For comparison, Nvidia trades at a price-to-sales ratio of 29. One could expect Ambiq Micro to trade at a significant discount to that, given Nvidia's industry leadership and growth.

Investors shouldn't feel compelled to chase the stock if it continues to soar higher, but it may be worth nibbling here if you believe in the technology. The big-picture opportunities favor Ambiq Micro -- it simply must prove whether it will be among the companies leading the way as edge AI materializes over the coming years.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Texas Instruments. The Motley Fool has a disclosure policy.