The AI tech that's "truly revolutionary"
Every once in a while, a stock comes along that truly captures the attention of retail investors. Whether it’s lithium mining, baby formula, or ‘Buy Now, Pay Later’, these stocks all have a few things in common. A huge addressable market, a revolutionary product or technology, and financial metrics that make institutional investors extremely sceptical.
Not all these stocks end up being world-beaters. But one ‘Afterpay’ can make up for a few ‘Blackmores’.
For the final entry in our reporting season coverage, I speak to Marc Kennis from Pitt Street Research about a stock with a “truly revolutionary” technology in the Artificial Intelligence sector that’s just started earning licencing fees from its product. And it was one of Livewire readers’ most-tipped small caps in our annual reader survey.
He tells us why he likes the stock, where his current valuation stands, and what it would take to move that valuation higher.
What were some of the and key points from the report that BrainChip recently published?
There was really just one because mostly the annual report is backward-looking if you're just talking about numbers. The interesting thing for me was that out of the $1.6 million in revenues, half of that was from licencing income. That's the first time that they're reporting licencing revenue, so that's a good start.
The really interesting thing about BrainChip in the long term is the royalty revenues that will start to kick in once its technology goes into commercial production. That's what we're looking for and that's still a year out, at least. We want to see that tick up over time.
So this was the first report that they achieved any kind of revenue?
They had some revenues before, but it was all these smaller demo packages of Akida. The first step is licence income from licences, and then the next step is royalties once customers have embedded their technology into their own products. They only had very small revenues before, this is the first time we're seeing these licencing revenues come through in a big way.
What was the market's reaction to the result? Was it in line with what you'd expect, considering what was in there?
Well, not really. If you look at what happened last week, the events in Ukraine were dominating the market. The share price response was in January. Initially, they announced the MegaChips deal late last year, and then you had the announcement by Mercedes itself that they're using Akida in their EQXX concept electric vehicle. This is, hopefully, a sign of good things to come later as the technology gets implemented in commercial production cars. That was when the share price started to spike.
There was a lot of noise in the market last week, so I don't think we really saw a response in the market from this particular announcement. Usually, with these early-stage tech companies, it's about the announcement of an actual deal, same with BrainChip. That's when the share price moves. When you're still early-stage, news of revenues is not really what moves the share price. Unless it's a huge surprise, but you hardly ever see that.
Based on what you are seeing now, would you buy, hold, or sell BrainChip?
When the stock was in the five to 10 cent range, we said 45 cents was realistic in our reports at Pitt Street Research. We got there. Then we upgraded the price target to $1.50, which we've reached.
In the broad technology selldown, we’re seeing at the moment, BrainChip has come down as well. So, I think it's around $1.25 at the moment. We definitely see upside to about $1.50, and I suspect we'll need additional commercial announcements for the share price to go higher than that.
It's the same thing we've seen with Weebit Nano – you need announcements. You get a spike, the market gets carried away, and then the big sell downs from people that have been in early. That’s the way these early-stage tech companies trade on the market.
What are your expectations and outlook for the company, but also for the AI industry that BrainChip operates in more broadly?
I'm very bullish on this one because if you dig into the technology, it's truly revolutionary. What BrainChip has achieved in hardware, so far, other companies have only achieved in software. That means if you're software-based, the parameters are set by the person or team that programs the algorithm. If you're looking at software-based AI, it's all down to what are you trying to achieve with that particular algorithm and the imagination of the coder.
What BrainChip is doing is creating an environment where the chip can learn for itself. It can pick up trends and patterns that whoever would've programmed something like this would never have thought of. So it's truly revolutionary. A very dynamic type of technology.
You can implement it in all sorts of Edge applications already. But I think the application range is probably much broader than that.
We called the report back in August, "Welcome to the Revolution," because I think that's what they have, and I think down the line, they'll have a whole host of licences, and with the revenue stream to accompany that at some stage. I'm pretty bullish on BrainChip.
Are there any other points that you want to make about the company?
Stocks like BrainChip are not always well understood by the market. You see a lot of commentary out there that doesn't really bear any sort of proper relationship with what we're trying to achieve.
I think over time, the Australian market, especially the institutional investors (instos) – initially the small-cap instos, and then as the company grows, larger cap instos - will need to get their heads around this technology. That's really the interesting part, and I think that's where the opportunity is for BrainChip.
The logical place for a stock like this is to be traded in the US or Europe. As we've seen with other companies – Afterpay is a good example – people are trying to get their heads around this sort of technology. Then you see overseas companies who are interested in the technology, and in the case of Afterpay, there was an acquisition.
I think there's a good chance that BrainChip will be acquired at some point.
But until that happens, as the company grows in market cap, these instos in Australia will need to get their heads around the technology. And that's really where the opportunity is for BrainChip, as well as the challenge.
I think a lot of insto. investors still consider BrainChip as speculative and not really serious, and I'll think they'll be proven wrong at some point.
The technology is proven, they've got the commercial deals to back that up, and there will be more to come, I suspect. That growth will be very interesting to watch in the next couple of years.
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Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.
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