I've been warning investors off BrainChip Holdings Ltd (ASX: BRN) shares for a while now.
If you stayed away, then you've managed to save yourself from watching your wealth go up in smoke as the semiconductor company's shares dropped from a high of $2.34 to 62 cents today.
That's a decline of approximately 73%, which would have turned a $10,000 investment into approximately $2,700.
Given BrainChip shares have fallen so heavily, some investors may now be considering picking up a parcel "on the cheap". However, I believe this would be a mistake and would suggest investors avoid this meme stock.
Listed below are five key reasons I would stay away from BrainChip's shares.
BrainChip share price valuation
The first reason I would avoid BrainChip shares is the company's valuation. Although its shares have pulled back materially from their highs, that doesn't necessarily make them good value. In fact, with a market capitalisation of $1.1 billion and next to no revenue, I would argue it remains vastly overvalued.
For example, Life360 Inc (ASX: 360) has a similar market capitalisation but with US$174 million of annualised recurring revenue. Furthermore, Life360 is bordering on being profitable and has a hefty cash balance. Whereas BrainChip is burning away at its cash and has six more quarters of funding before another capital raising will be required. Raising more capital, whether it be through LDA Capital or the market, will dilute shareholders further.
BrainChip focuses on edge artificial intelligence (AI). This is the deployment of AI applications in devices throughout the physical world. However, the computation is done near to the user at the edge of the network rather than centrally in a cloud computing facility or data centre.
Competition in edge AI is fierce, with major players such as Nvidia and Qualcomm all pursuing dominance in the market. US$360 billion tech behemoth Nvidia recently unveiled the Jetson Orin Nano series of system-on-modules (SOMs). Nvidia highlights that Jetson Nano has "set the new standard for entry-level edge AI and robotics applications".
Whereas US$130 billion semiconductor giant Qualcomm's Snapdragon has been winning plaudits. Dave Altavilla, a semiconductor expert writing for Forbes, recently commented:
Qualcomm's previous-gen Snapdragon 8 Gen 1 platform led the field with respect to the various smartphone AI workloads, and its Snapdragon 8+ Gen 1 platform is currently unmatched across the board.
And with both Nvidia and Qualcomm pouring billions into their research and development (R&D) activities each year, I have serious doubts over BrainChip's ability to compete. In my opinion, big users of these technologies are more likely to go with a brand they can trust than a small player with no track record of success.
This brings us neatly to the next reason I would avoid BrainChip shares. When a small company has a game-changing technology that is going to disrupt an industry, the incumbents will often acquire it.
However, BrainChip has received no takeover interest from its larger rivals. That's despite them spending billions on R&D each year. Nvidia spent US$1.82b on R&D during the last quarter, which is enough to buy BrainChip twice. If the big boys really feared BrainChip's technology, they would surely acquire it. Particularly while the Australian dollar is so weak versus the US dollar.
We've been here before
If you've followed the BrainChip story long enough, you'll know that the company has been talking up its growth potential for many years. For example, back in 2016, the company projected the "neuromorphic chip market alone to be $4.8bn by 2022 [and] consist of abundant opportunities".
Anyone reading that presentation six years ago would likely have imagined that BrainChip would now be commanding a decent share of this huge market. Particularly given the list of its partnerships, which were supposed to create "significant" license opportunities and related revenues. A quick look at its income statement is enough to see that these partnerships didn't deliver the goods.
Fast forward and BrainChip has a number of new partnerships which open up "new global opportunities for the Akida technology". Yet, there is little revenue to speak of.
Announcements going nowhere
This leads on nicely to the final reason I am staying away from BrainChip shares. The bulls will point to its NASA announcement as a testament to the supposed quality of its product. That announcement revealed that BrainChip was collaborating with VORAGO Technologies. The ASX tech company was to support a Phase I NASA program for a neuromorphic processor that meets spaceflight requirements.
However, since the announcement of an evaluation kit order several months later in December 2020, the company has said no more. And neither VORAGO nor NASA are mentioned in its latest annual report. Furthermore, as far as I can see, the work with NASA appears to have ended after just three weeks on 18 January 2021 based on NASA data without comment from BrainChip.
This is another case of déjà vu if you've followed the BrainChip story as long as I have. Remember the French National Police evaluation of its SNAPvision technology? The countless major casinos trialling its Game Outcome solution? The "large market opportunity" for BrainChip Studio?
I suspect in a few years we could be asking the same about Akida.