Thought i'd try and take a more serious go at valuing BrainChip.

It gets a lot of grief by many in the market, and really tends to divide people.

After all, this is a business with 63 employees, losing >$20m per year and barely generating any revenue, and it's being currently valued at around $2.2 BILLION by the market.

The price to sales ratio is 1400x or so!!

So it is ludicrous from that standpoint.

But, to be far, this is about the future and the company has laid a lot of groundwork in getting to where it is today.

After years of costly development, they are only now pivoting from an R&D company to a commercial one. Indeed, they are at the head of the pack, being the worlds first commercial producer of neuromorphic AI chips and the associated IP. And this is an area projected to grow significantly, offering all kinds of advantages for an increasingly connected and AI enabled world.

Production is done through manufacturing partners, and these lines have been validated and expanded to handle increased volume. The company has already sent out development kits and taking orders from OEMs.

They also license the IP to others, such as Japan's MegaChips corp, who will use the technology in its own products. Here BRN get upfront license fee and ongoing payments over the term of the multi-year agreement. Importantly, they also get royalty payments on related sales.

As such, when attempting to value this the previous years financial reports aren't especially helpful. For the record, in FY21, BRN had total operating expenses of around $21m and just $1.4m in revenues. The business has $19m in cash and in the last 4C was burning through $3.5m per quarter.

I haven't managed to find a good estimate on the addressable market, but a google search revealed that the global memory chip market was valued at $76,767 million in 2016, and is projected to reach at $247,910 million by 2023.

So let's say that this new chip has a similar sized market opportunity (it's sort of creating the market at the moment, for this specific type of chip, but we'll use this as a proxy). We'll go with a TAM for the akida chip of $100b (i could be way off here, let me know if anyone has a better estimate).

Another contrast comes from NVIDIA which today earn $46b in revenue on a massive 36% net margin.

So, for the sake of argument, let's say that the TAM for BRN in 2032 is $100b, and that it has captured 10% of this for $10b in FY32 revenue. While NVIDIA's margins are huge, ten years ago they were closer to 10-15%, so let's assume BRN are on a net margin of 10% in FY32 for a net profit of $1 billion.

Needless to say, while you can always get a higher figure on even more aggressive assumptions, this would still be an outstanding result for the business.

With 1810m shares on issue today (fully diluted), and allowing for subsequent capital raises, I'll assume a share count of 2500m. That gives an EPS of 40c. We could also assume a very high market multiple in 2032. NVIDIA is presently at 60x, so if we use that we get a 2023 target price of $24. If you discount back at 10% pa, that's a current valuation of $9.25.

Under this scenario, shares are dirt cheap at the current market price of $1.24. Although, even if things do play out like this, 10 years is a long time, and the ride will be full of twists and turns. But that's just par for the course when you invest in this kind of company.

You can also tackle the valuation question in reverse -- assuming the current market price is fair and working backwards.

Using our diluted share count estimate of 2500m SOI, the current market cap is $3.1b on a future diluted basis, and if the current price is fair we could grow this by 10%pa for a decade to get a 2032 market cap of $8b, or $3.20 per share. Compared to today's ASX listings, that would put BRN as the 55th biggest listed company.

With net margins of 10% and assuming shares trade on a PE of 40 (again, just for the sake of argument), that means the company would have $2b in revenue at that point. Put another way, that requires the company to double its revenues every year for ten years.

That's a lot of growth, but not impossible to imagine. ProMedicus is currently worth almost $5b and it only has $70m in sales -- seemingly crazy things can happen when a company demonstrates rapid industry adoption.

So, as usual, you can use whatever assumptions makes the most sense to you. But it's important to try and relate expected business outcomes with the market valuation. What this kind of analysis shows (for me) is that to buy at the current price, you need to think the company can grow sales to somewhere (roughly) in the neighbourhood of $2b in the next decade. Either that or achieve much higher margins and market multiples.

Either way, if these numbers are broadly right, you only get a decent, but not earth shattering, 10% annual return. Something you'd hope to get with a broad based ETF.

But it's certainly possible -- Afterpay went from 100m to almost $1b in revenue is just 3 years, but at the same time it's also worth noting that such examples of growth are hard to find. And putting a high conviction on this outcome requires a really good understanding of the technology, industry and an awareness of how fast things can change in this space.

So I'm not saying that Brainchip cant or wont succeed, or that the current price is unreasonable. In fact, if things go well, the price could be considered very cheap!

The other side of the coin is a future where the tech doesn't live up to expectations, or just gets trounced by another player, or is managed poorly etc etc. Maybe it goes ok, but runs on wafer thin margins. Or maybe the growth is good, but not good enough -- eg maybe it does 'only' $100m in sales by 2032. In which case, buyers at current prices could get badly burnt.

Personally i find it tough to put odds on it. Like a lot of stocks that cross my desk, i'm neither bullish or bearish, it's just in the too hard basket given what i currently understand.

So to put it crudely, for me it feels a bit like a coin flip -- Heads i could score a long-term, multi-bagger return. Tails I cop a >50% fall.

It's a fascinating company, and the technology appears genuinely significant, but i'll be watching from the side-lines for now.

I could change my mind once we see some good adoption and sales momentum. The trouble is of course, if and when that becomes obvious, i'd likely have to buy in at a much higher price. That's the thing with the market -- more certainty comes at a cost.

Apologies for the long rambling Straw -- just wanted to try some scenarios and journal my thinking.