2022 BRN Discussion, page-5229

A couple of my friends whom I'd got into BRN were unsettled by this * article (my comments in blue):

https://unauthorised investment advice/tech/so-brainchip-whats-the-go-there/

So how does a pre-revenue semiconductor company tradewith a higher market cap than plenty of established, profitable ASX stocks?

“The thing with BRN is that first of all, the valuationas it stands assumes all of that (tech) is coming through,” Winchester says.

“Look, it may do — I don’t claim to have the expertiseto comment definitively on the product itself.

But Mercedes, NASA, Ford,Socionext, Megachip, Taiwan Semiconductor Manufacturing Company (TSMC), Renesea,…do.

In that sense, BRN has a neat one-sentence pitch: anAI chip that mimics the neural networks of the human brain.

That may help grab the attention of the influx of retailinvestors – now accepted as a feature of the current market – who may be lessinterested in drilling down into company fundamentals.

“If I’m someone with $5-$10k in a Commsec account, that’sprobably much more exciting than other stocks we could talk about,” Winchestersays.

Small caps are also proving adept at building a narrativethrough off-market channels such as social media and press releases.

Clearly Winchester has notthe slightest understanding of the technology or its potential. There is a lotmore technical detail published by the company. Winchester has chosen theminiscule selection he think’s he understands. As well as the extensivetechnical detail and proven customer uses of the technology published on theBrainChip website, there are patents which explain the operation in detail.

The tech tech has been provenby world leading semiconductor manufacturers (TSMC, Socionext, Renesas) andindustry leaders (NASA, Mercedes, Megachip).

BrainChip has done verylittle spruiking of the tech, and none that is not fully provable in court.

However, the heat in early-stage semiconductor plays alsoreminds him of the 2018 cannabis boom, or the original lithium bubble (in2017).

The cannabis boom, or as muchof it as he can remember.

Is BRN the odd one out? “Maybe, but I think a lot ofpeople right now are there for the share price, not the fundamentals,”Winchester said.

There were 80 million sharessold on 25 January 2022 – that’s less than 5% - hardly a panic. And who knowshow many of them may have been trades by share price manipulators.

“For me as an investor if I have conviction in a stockand it falls 20%, that’s not fun but I’ve done the research to have convictionin the business behind it. And I do wonder how many new buyers in BRN wouldactually have that.”

Winchester admits he has hasnot done the research to understand the technology or the competitivemarketplace for the technology.

Going back to his earlier point, Winchester says thatwhen he looks at BRN’s capital markets activity, he sees a company “not toodissimilar to a lot of microcaps”.

… except that it hasworld-leading artificial intelligence technology.

When I see a company with a billion-plus shares on issueit means they’ve carried out dilutive capital raises to fund via equity,”Winchester explained.

As all start-ups do.

“That’s fairly common at this end of the market. Exceptthat business is usually worth 1-2c (per share).”

Instead, BRN is worth almost $2. And when you multiplythat by its shares on issue you get some “ridiculous multiples”.

“I think most people that have come to story —particularly recently — don’t understand that dynamic,” Winchester said.

“They see a share price – a number on a screen that cango up or down based on money flowing into it.”

Is BRN tightly held? A small free-float where investorscan drive the price higher at the margins?

Actually, far from it.

“Looking at the register, you’ve got to give themcredit,” Winchester says.

The founder (Peter Van Der Made) still has a 10-11%holding. After that there’s a couple of nominee banks, which hold shares onbehalf of different institutional investors.

One of them is well-known Australian firm Regal FundsManagement.

Regal became a substantial investor when it bought 82.65mBRN shares on April 2020 at just 3c (BRN has gained ~6,000% since then).

Two weeks later, it sold 10.84m of them between 4.6c to5.2c — a handy short-term gain, although it’s fair to say Regal may have leftsome $$$ on the table.

(That sale brought Regal’s holding back below 5% of totalBRN shares outstanding and because the fund isn’t a substantial holder anymore,its activity in the stock isn’t reported).

“Beyond that, there’s not a holder above 1%,” Winchestersays. Former CEO Louis DiNardo holds around 0.7%.

Untrue – Anil Mankar, thecompany’s chief chip designer also has a major shareholding (over 100 million).Other company executives also have substantial holdings. This man can’t even bebothered to get a proper understanding of the company’s shareholding beforetrying to use it as a rod to beat the company.

And while it has the option to buy more under its equityfinancing arrangement, Brainchip’s US investor LDA Capital only holds around 1%of the total stock on issue, Winchester said.

LDA is a financingorganization whose main interest is in making a quick buck.

So what ultimately stands out about Brainchip’s registeris that it’s wide open. It’s also not much of a short target.

“There’s not much borrow on the stock because it’s notinstitutionally held, which means there’s less borrow available to short,” Winchesterexplained.

Shorting a stock is just aform of gambling.

With a register constructed like that, retail can play akey role in volumes and trading activity.

In that context, Winchester returned to his greater fooltheory. [… and he won]

He’s loathe to dusting off tired investing clichés, butwhen a pre-revenue company has +1bn shares on issue and a market cap of +$2.5bn“over the long term markets are a weighing machine, rather than votingmachine”.

In other words, eventually the business metrics will haveto catch up to support that valuation.

“Maybe it can – that’s the caveat to it all; they’redoing really interesting stuff in a really interesting market,” Winchestersaid.

Does he really believe thatthe long term holders do not understand the long term commercial potential ofthis technology.

Whoever carves out big piece of the edge/AI market willbe big – I agree. But when I look at space already and the dollars being thrownat it, I struggle to think BRN is one of them.” [5 words too many]

Tying that through to his last point, Winchesterconcluded that one way he assesses the outlook for semiconductor chiptechnology is through what’s happening at the big end of the market.

“I looked at this area a while back. (US giant) Intel isinvesting in neuromorphic chips and made some acquisitions in theUS$200m—US$300m range,” Winchester said.

… and does Intel have acommercial product?

Intel has Loihi 2, a researchchip, not a commercially applicable chip.

Intel has spent most of itsR&D funding pursuing “analog” neuromorphic technology which has manytechnical flaws and is not capable of on-chip learning. BrainChip uses digitalneuromorphic technology which is capable of on-chip learning.

“Apple acquired one, Nvidia is developing technologyinternally. So it’s a space that has lots of eyeballs on it withwell-capitalised companies behind it.”

… and they are allfloundering in BrainChip’s wake.

Is Brainchip a possible takeover target? At a $2.5bnvaluation?

The top 1000 holders have acontrolling interest and are not interested in selling.

Looking at BRN’s R&D spend to the June half-year,Winchester said it came in around $4.4m, but around half of that gets paid tothe partners that manufacture the chips.

“So your actual R&D budget to develop this concept isa bit over $2m – let’s call it $5m for the full-year,” Winchester said.

“That’s Intel’s coffee budget.”

Hope they enjoyed the coffee.Unfortunately Intel spent the rest on red herrings.

“Fair play to the investors that got on BRN early,” hesays. “But from my vantage point, if you’ve got tech that’s genuine andhead-and-shoulders best in class, you get bought out.”

“From my vantage point” saidthe ostrich with its head stuck up its arse.

“And that’s where I get a bit sceptical because ifBrainchip had a market-leading solution, we already know Intel’s acquisitive.Apple, Nvidia etc – they don’t miss you.”

“You don’t go under the radar of these businesses becausethey know where cutting-edge technology is and they’ll go and find it”

But it’s not for sale.