Innoscience Rockets 70% After Securing Nvidia Supplier Role; Jefferies Projects $2.5 Billion Market

TradingKey - Last Friday, August 1, Chinese chipmaker Innoscience (02577.HK) saw its shares soar over two consecutive trading days after being named a supplier by Nvidia. The stock rose 31% on August 1 and gained another 30.47% to reach HK$75.15 on August 4, marking a record high and a total two-day increase of 70%.

Inclusion on Nvidia's supplier list for its 800 VDC (800-volt direct current) power architecture has fueled this surge. This architecture is designed to power increasingly energy-intensive AI data centers, with gallium nitride's advantages of higher transmission efficiency, frequency, and lighter, smaller devices making it crucial in high-voltage AI racks.

Previously, Nvidia announced a collaboration with Navitas Semiconductor to develop the next-generation 800V high-voltage DC architecture. However, in July, Navitas' key partner, TSMC, declared it would gradually exit the gallium nitride foundry business over the next two years.

Jefferies noted that TSMC's closure of its gallium nitride foundry could accelerate Innoscience's integration into Nvidia's supply chain. Public data shows that in 2023, Innoscience holds a 31% share of the global gallium nitride power device market, leading globally, with continuous capacity expansion in recent years. Jefferies believes one of the key factors for Nvidia choosing Innoscience as a partner is the company's foundry capacity advantage.

Jefferies roughly estimated the total addressable market (TAM) for the current AI server gallium nitride market, highlighting that Nvidia's portion alone is $1.5 billion, and including ASICs from cloud service providers, it reaches $2.5 billion. Assuming Innoscience captures a 50% market share with a 25% net profit margin, the $1.5 billion market cap increase last Friday only capitalizes potential profits at a 5x PE ratio, indicating significant long-term upside.

Jefferies also cautioned that given the recent substantial stock price increase, there may be profit-taking. Additionally, potential uncertainties remain as Nvidia's 800 VDC architecture and the Ruben chip it supports are not yet finalized, with mass production expected to start in 2027. The firm maintains a "Buy" rating on Innoscience with a target price of HK$54.29.