Is BrainChip (ASX:BRN) the real deal?

Is BrainChip worthy of its multi-billion dollar valuation?

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The BrainChip Holdings Ltd (ASX: BRN) share price had an eventful week.

The artificial intelligence technology company’s shares were up as much as 56% at one stage to a record high of $2.34 before closing the day 17% higher for the week at $1.76.

When the BrainChip share price reached its peak, it took its market capitalisation to approximately $4 billion.

Why did the BrainChip share price rocket?

Investors were bidding the BrainChip share price higher following the release of a couple of announcements.

One was the granting of a new patent in the US which protects the company’s neuromorphic processor. In particular, it covers a function that revolves around performing complex tasks on a digital input data, which allows artificial intelligence to process images.

Another announcement that got investors excited revealed that the company has begun taking orders for the first commercially available Mini PCIe board leveraging its Akida advanced neural networking processor. It notes that this rounds out its suite of AKD1000 offerings.

Is BrainChip the real deal?

Given how the BrainChip share price rise last week took its valuation to approximately $4 billion at its peak, investors may be wondering if BrainChip is the real deal. Particularly given its tiny revenues and competition with some of the biggest tech companies in the world on only a relatively small research and development (R&D) budget.

In respect to competition, a few of the company’s most prominent rivals are tech behemoths IBM, Intel, Nvidia, and Qualcomm. They are among the leaders in their fields, have a combined market capitalisation of over US$1.1 trillion, and spend billions of dollars each year on R&D.

For example, in 2020 Intel spent US$13.56 billion on R&D, in FY 2021 Nvidia spent US$3.9 billion on R&D, IBM spent US$6.33 billion on these activities, and Qualcomm put US$7.2 billion into R&D in FY 2021. As a comparison, BrainChip spent just $5.15 million on R&D during 2020.

Among the most exciting chips under development is Intel’s Loihi 2 neuromorphic chip.

Late last year, the company stated: “Advances in Loihi 2 allow the architecture to support new classes of neuro-inspired algorithms and applications, while providing up to 10 times faster processing, up to 15 times greater resource density with up to 1 million neurons per chip, and improved energy efficiency.”

“Benefitting from a close collaboration with Intel’s Technology Development Group, Loihi 2 has been fabricated with a pre-production version of the Intel 4 process, which underscores the health and progress of Intel 4. The use of extreme ultraviolet (EUV) lithography in Intel 4 has simplified the layout design rules compared to past process technologies. This has made it possible to rapidly develop Loihi 2.”

Why hasn’t BrainChip being taken over?

Another concern that some investors have about BrainChip’s technology is the lack of M&A interest. The theory goes that if BrainChip’s technology is a game-changer like management suggests, then why didn’t its larger rivals acquire the company 18 months ago for a fraction of today’s valuation?

For example, both pre and post the emergence of COVID-19 in 2020, BrainChip’s shares were trading at a lowly 5 cents per share. As its technology was no secret then to those in the industry, see here, the company could have been picked up for chump change in comparison to today’s valuation.

Only time will tell if these tech giants missed out with BrainChip.

Should you invest $1,000 in BrainChip right now?

Before you consider BrainChip, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and BrainChip wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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