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Date : 17/12/2021

BrainChip, an unrivalled Neural Network Processing Technology

Brainchip, an unrivalled neural network processing technology

Just take a moment to think about a computer chip that can genuinely learn all by itself in a way that is like how we people can learn, for instance, by processing sound, vision, and touch, not just through the usual binary data such as zero and one, but through neuromorphic processing of these data which is named spikes, would that be a tech revolution? Know more about Brainchip, a new revolution.

Well, that is the technology that BrainChip (ASX: BRN) is developing right now. BrainChip is pushing the boundaries of Artificial Intelligence (AI). its flagship product, Akida is a Neuromorphic System on a Chip or in short NSoC. This technology has turned a few heads in various emerging industries, including the Internet of Things (IoT), self-driving car, and data centres to name a few. Thus, BrainChip is eyeing a wide array of applications with its unrivalled technology.

Since 2011, BrainChip focuses on the development of software and hardware-accelerated solutions for advanced artificial intelligence and machine learning applications. However, one product has emerged as the cornerstone for BrainChip, it is its star product named Akida. Akida is a Neuromorphic Processor. It emulates a similar concept to the human’s neural network to provide a complete ultra-low power and fast AI Edge Network for vision, audio, and smart transducer applications.

BrainChip shares have been a darling on the ASX for over a year now. The momentum has been taking BRN shares to new highs. Recently, BRN shares have hit $1.48 a share. This time, it may be a case of too much love. With history on our side as we make this recommendation, we believe it’s time to book profits and exit positions from BrainChip. The valuation seems too stretched at these prices and a similar pattern has emerged as it did in 2020 – suggesting that it can lead to a correction.

Why are BrainChip Shares Surging?

First let’s look at why BrainChip shares are surging over 100% in the past month and over 58% over the past 1 week. While there were no market sensitive announcements made since the New Year to trigger a price rise of over 106% in 2022, BrainChip did point towards the appointment of a new non-executive chairman and a new customer for their Early Access Program to have been the cause for the recent spike in volume.

On the 4th of January, BrainChip announced that Pia Turcinov has been appointed as a non-executive director effective 04 January 2022. Pia Turcinov is an accomplished executive and non-executive director with broad and strategic experience across a range of industries. Ms. Turcinov manages a portfolio career, holding several positions with the common focus on the opportunities that innovation, technology, and diversification offer.

With more than 30 years’ industry experience, she has qualifications in law and business management, and shares her expertise as a strategic commercialisation advisor, innovation champion, mentor, facilitator and public speaker on topics relating to entrepreneurship, technological disruption and Science, Technology, Engineering and Mathematics (STEM). While this is a fantastic appointment, it does not warrant a 100% surge in the stock price in our opinion.

The second possible catalyst could have been on the 10th of January when the company issued a press release stating that an “Early Access Program” customer, Information Systems Laboratories, is using BrainChip technology in an artificial Intelligence-based radar research project for the Air Force Research Laboratory.

BrainChip went on to confirm that this does not materially impact its fundamentals as there is no commercialisation agreement in place with Information Systems Laboratories at this time. Therefore, this piece of news/information did not have to be announced to the ASX. This second possible catalyst looks to have just increased the hype and speculation around BrainChip, rather than materially impact its valuation/fundamentals.

Finally, in recent days BrainChip itself mentioned that there has been an increase in editorial tech media coverage regarding the AI market in various market segments where they operate. This coverage has grown since the completion of their chip. This increase in coverage could be a factor regarding increasing market confidence in their technology. While these media coverages do put an added positive spin on the stock’s potential, we would like to emphasize that their commercialisation potential has been accounted for in our valuation of BrainChip’s fair value.

To sum up, there is no catalyst for the 105% surge since the New Year. In fact, we can go on to add that the speculation has only increased during this time – leading to wild bets being made on BrainChip.

Small Cap stocks hardly trade on fundamentals in the short-term. But BrainChip is no longer a small cap stock on the ASX. At current levels, BrainChip is demanding a market capitalisation of $2.02 billion following recent surges. However, it seems that BrainChip shares are ignoring what is happening in the rest of the markets. Especially as technology stocks continue to be under pressure with the threat of interest rates pushing higher leading to higher risk-free rates and decreased valuations.

Why BrainChip’s Akida is a revolutionary product?

One key question arises from the market? What exactly consists of the Akida technology and how it will drive substantial earnings growth?

BrainChip is developing a solid-state architecture that resembles the neuron in the human brain. The company has assembled 1.2 million of these neurons accompanied by synapses on a computer chip named Akida NSoC. The technology processes events or spikes. This differentiates from conventional data processing which made Akida so different from its competitions. Hence, this concept has some big advantages. The technology, known as the Spiking Neural Network (SNN) is much faster and consumes only a fraction of power whilst processing events compared to traditional technologies processing data.

BrainChip expects to mass commercialise the technology at a considerably lower price point. The company has many design wins and more than five hundred commercial prospects for its solutions. What we like about the Akida product is that it has the potential to generate three rock-solid revenue streams.

The first one is through its Intellectual Property (IP) license. BrainChip is expected to selectively license its IP associated with Akida to other players in the semiconductor industry. These licensing revenues will be non-recurring in nature. The second approach to revenue is via the collection of royalties. Once the licensing is completed and customer’s transition into commercial production, royalties will be paid to the company by chip manufacturers for each chip they sell which includes Akida IP. These royalties are a percentage of the selling prices and will be recurring in nature. And last but not least is the revenue from direct sales. BrainChip also intends to sell directly to end customers in select locations.

Overall, what we like about BrainChip’s Akida cutting edge tech is its differentiation as opposed to most chips used in AI applications today. Generally, in the industry, central processing units need frequent communications with the data centre. On the other hand, Akida functions in a similar fashion as the human brain, hence, operates as an event-based processor. This way, the chip consumes very little electrical power. As such, we have recognised that Akida’s largest market opportunity could be the Edge Computing sector. In our view, most Edge devices rely heavily on sensors that capture and process real-world data with limited power sources. Edge devices are pieces of equipment that provide an entry point into enterprise or service provider core networks, for instance, routers, routing switches, integrated access devices etc.

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Fig.1 BrainChip’s Akida key product differentiations

Most of the chips used in Edge applications today are power-hungry general-purpose chips, such as Graphics Processing Units (GPUs) that consume approximately 1,000 times more power than the Akida chip. Or they are low-power Digital Signal Processors (DSPs) that use a similar amount of power to Akida, but with about 1/60th of the performance of Akida. And these DSPs have very high latency, so they can only perform relatively simple tasks. Akida’s low power consumption, reduced need for internet bandwidth and improved latency provides faster response times within a system, making Akida an ideal solution for Edge devices and for the use of the Internet of Things, such as sensors in autonomous vehicles.

As of today, there are three key technological challenges which we believe BrainChip’s Akida could solve. Akida will address these technological issues through its four key differentiations (Fig.1), (1) Low power consumption, (2) Small and lightweight, (3) On-chip fast learning and interference, and (4) Low heat generation.

BrainChip is on the verge of mass commercialisation of its flagship Akida chip

BrainChip is very active and keen to accelerate its Akida chip commercialisation. Hence, the company has been active in discussions with various prospective customers to deploy its technology, including tier-1 automotive suppliers and manufacturers and smart home equipment manufacturers. Furthermore, BrainChip is also partnering with other chip companies. A few deals that we have seen since last year are the evaluation deal with Ford, and the NASA deal. These are perfect examples of what future applications could look like. With Ford, it is the implementation of neuromorphic computing technology to cars to propel autonomous vehicles. With NASA it is to test the use of Akida chip in spaceflight.

But one of the major milestones BrainChip has reached is the recent deal made with the Japanese semiconductor firm, MegaChips. Hence, BrainChip has just signed a four-year licensing deal with its Japanese counterpart that should bring in at least two million us dollars in the next twelve months. It is also worth noting that this will come along with royalties and additional license fees in the years thereafter.

As part of this new business relationship, MegaChips will utilise BrainChip Akida IP to support the development of AI-based solutions for edge computing.

MegaChips is a notable brand within the tech industry. The company maintains a reputation for designing microchips with low-energy consumption and powerful performance. Brainchip recently gained notoriety as well, due to the success of the Akida platform, which allows developers to create applications for a few smart devices and highly advanced IoT tech across a diverse range of industries.

Through this partnership, MegaChips developers are now capable of developing a wider range of sophisticated solutions and applications. This is made possible through the scalability and flexibility of the Akida technology.

We believe the recent deal with MegaChips is a mega step in the right direction, but the market will want to see a few more deals before it can value BrainChip for a dollar-per-share in our opinion. Although, we could see the shares starting to creep up. This might be the market expecting additional deals to materialise soon. However, many investors will continue to consider BrainChip as a “Speculative” bet for a bit longer in the absence of at least a handful of commercial deals.

How is BrainChip valued vis-à-vis its competition?

Despite BrainChip is in fact a unique business that has developed an unrivalled technology, we have assessed the company against what we believe to be competitors that operate in the same space (Fig.2).

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Fig.2 BrainChip FCF valuation, and relative valuation, DUG and SMX

When we look at BrainChip’s multiples we can realise how the company has a solid foundation for further growth. Hence, BrainChip (BRN) has an EV Long-term revenue above its peers. Furthermore, its Price to book is 43.3 times which is much higher than DUG Technology (DUG) and Security Matters (SMX) which P/B are -3,382 times and 4 times, respectively. According to our projection, we forecast BRN’s free cash flow to reach $127 million by FY25 and a terminal FCF at circa $33 million. This led us to conclude an implied FCF Fair Value of $1.06 per share, which is an impressive 50% upside potential. On the other hand, the EV/REV and P/B brought a more conservative valuation. Overall, we are projecting BrainChip share price to be valued at 75 cents per share, which is a conservative 7% upside potential.

Now, we are not saying that BrainChip will rerate to that valuation level just like that. The company will need to close a lot more commercial deals. This should comprise outright sales of its Akida product, license income, and royalties. We believe the deal with MegaChips is a big step in the right direction, but the market will want to see a few more deals before it rerates BrainChip. We can see recently that BRN shares are starting to gain momentum, though, in anticipation of these additional deals. Furthermore, based on the company’s announcements around discussions it is having with prospective customers in various industries, we think that BrainChip is definitely on the right track, which is why we love this stock.

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At the time of writing, BrainChip shares are changing hands for 70 cents apiece. Year-to-date, BRN gained an impressive 67% largely outperforming its peers SMX and DUG which shares lost 34% and 55%.

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