The downtrend in BrainChip Holdings Ltd (ASX: BRN) shares shows no signs of exhaustion with the ASX artificial intelligence (AI) stock hitting three-month lows on Tuesday.
Winding back to 27 June, a little less than three weeks ago, shares in Brainchip were fetching 22.5 cents. Since then, investors have continued to sell shares at lower and lower prices.
They finished the session on Wednesday at 19.8 cents, down 15% from this mark.
With the continued selling pressure, one can't help but wonder, what's next for Brainchip shares?
Brainchip's struggles in FY24
Brainchip shares underperformed by a wide margin in FY24, plunging by nearly 39%. The stock peaked at 49 cents per share in February but has since fallen dramatically.
A post-mortem analysis shows that there were a couple of factors behind this volatility. Here's the lowdown:
1. AI stock mania driving BrainChip shares
BrainChip's significant rise in February was likely influenced by the soaring stock of US-listed AI giant Nvidia Corp (NASDAQ: NVDA).
For anyone who missed it, Nvidia's stock price went vertical from around US$475 on 3 January to more than US$1,000 per share by May. This speculative trading drove up BrainChip shares despite the company's unproven financial performance.
But it wasn't long before the market snapped back to economic reality. Unlike Nvidia, which grew earnings by more than 600% in Q1, BrainChip reported a net loss of US$28.9 million for FY23, with sales declining by 95% year over year.
2. Disappointing fundamentals
BrainChip specialises in neuromorphic computing, a niche area within AI that replicates the human brain's processing power.
The company released the second generation of this technology, Akida, in FY24. But despite this innovation, BrainChip has yet to secure significant royalty agreements for its intellectual property.
In the wake of declining revenues, this may have been a fan to the flames already charring BrainChip shares. Investors were expecting more.
As my colleague James said in a separate analysis, Brainchip "has promised the world and delivered nothing in a market dominated by a US$3 trillion behemoth". That behemoth is Nvidia.
At the recent AGM, BrainChip CEO Sean Hehir said the company was in licensing discussions that could lead to potential sales in the audio and microcontroller segments.
However, as my colleague Rhys noted, "Investors will need to see that translated into real sales" first to get behind the company.
3. Sentiment is flat in BrainChip shares
Analysts are hesitant, too. Peak Asset Management recently recommended selling BrainChip shares following the lacklustre financials.
At the end of Q1 CY24, the company's cash reserves decreased from US$14.3 million to US$13 million, with rising operating cash outflows and lower cash inflows from customers.
"Cash inflows from customers were lower in the March quarter compared to the prior quarter", Peak AM said, noting it "prefer[s] other stocks at this stage of the cycle".
Foolish takeout: What does this mean for investors?
AI has become somewhat of a mania in 2024. BrainChip alone faces stiff competition from major players like Nvidia.
This increased competition and the company's financials have added to investor concerns about BrainChip's ability to compete in this rapidly evolving market.
I'd say that's why BrainChip shares have had a volatile year, and why the road ahead remains uncertain. While the company's innovative technology holds promise, it needs to deliver on its revenue potential to regain investor confidence.
Investors might want to weigh the potential rewards against the risks.
