The wind in the sails of computer chip designers and manufacturers has dissipated in 2022. Most household names, such as Nvidia Corporation (NASDAQ: NVDA) and Advanced Micro Devices Inc (NASDAQ: AMD), have suffered scathing share price corrections this year. Yet, local chip hopefuls like BrainChip Holdings Ltd (ASX: BRN) shares have suffered a more minor retreat.
Waning demand has pushed the industry into oversupply following a spike in chip production during the early stages of COVID-19. Knowing this, it might be favourable that most ASX-listed chip companies are still working towards commercialisation — meaning no impact from supply overhang.
Right now, Weebit Nano Ltd (ASX: WBT) is possibly the most comparable tech company on the ASX to BrainChip. But, is it a cheaper alternative to its larger listed peer based on fundamentals?
Which cash furnace is burning hotter?
If you're an Aussie investor searching for a profitable chip developer — you're out of luck. Creating new intellectual property with economic potential is a costly business by nature.
These companies pour tens of millions of dollars into research and development for the chance to strike silicon-coated gold. Unsurprisingly, Weebit and BrainChip are no different, both forking out small fortunes to fund development efforts.
As of 30 June 2022, the key difference between the two companies is that BrainChip is pulling revenue, where Weebit is not. However, BrainChip's revenue is almost completely comprised of licensing income.
Unlike BrainChip, Weebit is yet to make a cent of operational revenue. This might explain the more severe cash burn taking place over at ReRAM memory developer. At the end of FY22, Weebit posted a net loss of $27.7 million compared to BrainChip's $19.94 million outflow.
Although, working to its advantage, Weebit holds considerably more cash on its balance sheet. Where BrainChip boasts $28.4 million in cash reserves, Weebit touts a tasty $50.2 million.
Based on these figures, the former has approximately one year and five months cash runway. While the latter has approximately one year and 10 months ahead of it before running dry.
Are BrainChip shares fundamentally cheaper?
It's hard to discuss 'fundamentals' when neither company is making a profit. However, there are still a few ways of comparing the valuations of these two businesses.
Firstly, a price-to-book (P/B) ratio can indicate whether a company might be relatively cheap or expensive based on its 'book'. In other words, how does the market capitalisation compare to the company's net assets? The P/B ratios of the two companies are as follows:
- BrainChip — 24.1 times book
- Weebit Nano — 10.3 times book
Another metric for valuation pre-profit is the price-to-sales (P/S) ratio. This provides a way of comparing companies based on their revenue. The P/S ratios for BrainChip shares and Weebit are:
- BrainChip — 133.3 times sales
- Weebit Nano — infinite (dividing by zero)
As you can see, it is still unclear which of these ASX chip shares is the cheaper option.
For your consideration, BrainChip shares have fallen 16.5% since the beginning of the year. Meanwhile, Weebit shares have jumped 20.6%. Ultimately, a more accurate comparison of value will only be possible once both companies are generating meaningful revenue and are at least cash flow positive.
