Is it time to give up on BrainChip shares?

Many are asking the same question.

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BrainChip Holdings Ltd (ASX: BRN) shares have had a turbulent first half of the year. Despite showing a 16% gain this year to date, nearly all of this occurred in the first two months of the year.

After reaching a 52-week high of 54 cents per share in February, BrainChip shares gradually descended to a series of new lows.

They trade at just 20 cents apiece at the time of writing – a 63% decrease in market value from the February high.

With the rapid wind-down in share price, many question whether speculation rather than solid business developments drove the surge earlier this year.

Many are also wondering if it's time to give up on the ASX tech stock. Here's a closer look.

What's behind the drop in BrainChip shares?

As a reminder, BrainChip is an Australian technology company. It has gained attention this past year, given its exposure to artificial intelligence (AI).

BrainChip specializes in neuromorphic computing, which aims to mimic the human brain's efficiency in processing information. The technology uses AI to analyse and interpret data.

In February this year, BrainChip reported its full-year results for 2023. Investors were not impressed by the numbers.

Revenues were down an eye-watering 95% year over year, which took many by surprise. The company produced a net loss of around $29 million on these sales, with reasonably flat growth in accounts receivable. During the year, it also released its second generation Akida technology.

But the company also failed to secure royalty agreements for sales ties to its intellectual property (IP), instead turning its focus to customer engagement.

As my colleague Bernd reported, investors weren't "overly enthusiastic about those foundations". The stock has fallen from 38 cents per share since that date.

Expert opinion on BrainChip

Experts are turning more cautious on BrainChip shares. Niv Dagan from Peak Asset Management suggests selling BrainChip. He points to the company's disappointing financials and stock performance, as per The Bull. Dagan said:

This artificial intelligence company ended the recent March quarter with US$13 million in cash compared to US$14.3 million in the prior quarter. Net operating cash outflows in the March quarter were higher than the prior quarter. Cash inflows from customers were lower in the March quarter compared to the prior quarter.

The asset manager's views reflect the concerns many investors have about BrainChip's ability to turn its innovative technology into earnings growth (and higher stock prices).

Dagan's advice also underscores the importance of considering alternative investment options during uncertain markets. "We prefer other stocks at this stage of the cycle", he concluded.

What's next for BrainChip Shares?

At the company's annual general meeting (AGM) in May, BrainChip CEO Sean Hehir acknowledged the disappointing revenue numbers but expressed optimism about future prospects.

He cited ongoing licensing discussions with potential customers in its audio and microcontroller segments, which had been in evaluation for over a year at the time.

For BrainChip to regain investor confidence, it needs to translate its "strong levels of interest" and "encouraging pipeline" into actual sales, according to my colleague Rhys' recent analysis.

As Rhys also reported, the company has a "huge addressable market and few viable competitors", which could provide "a strong economic moat" if it successfully commercialises its technology. However, the challenge lies in convincing customers to adopt its technology.

Foolish takeaway

BrainChip shares have had a volatile year, and the road ahead remains uncertain. While the company's innovative technology holds promise, it needs to deliver on its revenue potential to regain investor trust in my estimation.

For now, cautious investors might want to consider whether the potential rewards outweigh the risks. Some experts certainly think they do currently.

Motley Fool contributor Zach Bristow 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 Scott Phillips.

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