Two separate markets, one similar industry. That's an easy way to categorise this pair of interesting tech names that are currently triangulating around the scene.
Each of Archer Materials Ltd (ASX: AXE) and Brainchip Holdings Ltd (ASX: BRN) has been beaten down in the last month whilst the broader tech sector has jumped into the green.
Tech names, in general, have snapped back over the last month, with the S&P/ASX All Technology Index (ASX: XTX) – a proxy for the ASX tech sector – shooting up 5% in that time.
Why don't we do a quick comparative analysis on both of these shares to get a better understanding of what's driving each name, and then we'll see what the market is saying.
Brainchip versus Archer – descriptive analysis
Whilst both companies operate in the same industry, each has fairly different addressable markets. First, let's look at a brief description of each security.
Brainchip operates as a holding company. Through its subsidiaries, it provides neural computing technology solutions. It also provides artificial neural networks, software and digital hardware solutions in both the US and Australia.
It currently trades at 93.25 cents, well off its 52-week high of $2.34, but above its yearly low of 36 and a half cents. It has a market capitalisation of around $1.6 billion, and printed revenue of $1.6 million in 2021, up from $120,000 a year prior.
Archer Materials on the other hand operates as a technology company. It develops and then commercialises advanced semiconductor devices. The application of its chips ranges from quantum computing to medical diagnostics to mineral exploration. It has a global footprint.
Archer is trading down today at 88.5 cents and that's a hefty slice off its 52-week high of $3.08 and actually closer to its 52-week low of 66.5 cents, set back in May 2021.
Archer's market capitalisation of just $217 million places it in the small cap category as well. The company hasn't secured revenue yet but recorded a net loss after tax of $2.8 million last year.
Fundamental flavour
There's plenty that can be said about each company's operating lines and the strengths and weaknesses of various product offerings. That's not for this analysis. Here we'll look at some of the numbers for a more informed and objective take. All measures are per Bloomberg data.
Ratios are a great way to bring two companies into the same line to make this comparison. We can use data obtained from the ratios to examine whether each name is performing well or not.
For instance, both companies aren't profitable right now, in the sense they've both recorded after-tax losses in the last reporting period. That has an impact on certain measures of profitability.
Even still, Brainchip's return on common equity (ROE) came in at -114% in H2 FY21, whereas Archer saw a -30% ROE.
Elsewhere, Brainchip's gross margin of 82% stands out, as Archer hasn't printed or recognised revenue from its operations just yet.
Instead, Archer recorded other comprehensive income of $1.72 million in 2021, mainly due to the sale of assets of $1.7 million to Chem X Materials Pty Ltd.
Both companies were also cash flow negative in their last half-yearly set of accounts, spending more on operations than earning in customer receipts.
Archer has a debt ratio of just 0.08% whereas its competitor here has a ratio of 8.6%. But that doesn't mean to say it has an unhealthy balance sheet – both of these figures show each company is lowly geared with little debt. That could be a good sign in a world of rising interest rates.
In fact, Brainchip has ample liquidity, as short-term obligations are covered around 7x from and 6x from cash on the balance sheet.
Also, both companies appear to have a sufficient cash runway to last over the next 2 years, as determined by a funny little metric that analysts use, called the Altman's Z-score.
The score takes various metrics from the financial statements and is used to predict a company's likelihood of going bankrupt in the next 2 years, with surprising accuracy. A score of 2.99 or more indicates this safety. Brainchip and Archer are at 94.5 and 338 respectively.
Share price performance
Archer shares have compressed down in the last 12 months and have shaved 21% in that time. From their peak, shares have lost exactly two-thirds of their value at the time of writing, and are down another 8% this past month.
Brainchip shares on the other hand have had a similar outcome albeit a little bit further down the track (see below). Except, the company has held onto gains and is now up 70% in the past year and 37% in the past month of trade.
Whilst shares have retreated heavily in 2022 after going vertical in January, they are still quite top heavy and are floating well above 3 and 5 year highs.
Both stocks have also moved largely independently of each other over the last 12 months. Even more curious is, that Brainchip has moved pretty much on its own, despite what's happened in the tech sector over this time. Let's explain.
A commonly used term in finance is a statistic known as the stock's 'beta'; simply a measure of how closely it moves in unison relative to moves in the market (or an index).
A beta of 1 means the stock is perfectly correlated. It and the index move directly in unison, whilst minus 1 moves directly inversely to the index. A score of zero has no correlation whatsoever.
In this case, we'll use the S&P/ASX All Technology Index, and what we're trying to examine is what direction each stock moves when the index spikes up or down, and by how much. Typically, tech stocks move almost in unison with the wider tech sector and are called 'high-beta' stocks for that reason.
But not Brainchip. For the last 2 years its beta is -0.156, meaning that, on average, each move in the tech index has had little to no impact on the Brainchip share price.
In comparison, Archer has moved more closely. Its beta score is 0.87 – closer to 1 – meaning it has a much higher correlation to movements in the index.
Important to note, is that correlation doesn't equal causation – these measures don't show what's causing the share price to change, rather how closely it moves compared to another benchmark.
These calculations, drawn from historical data, have implications on factors like diversification in portfolios, and also security selection – particularly at the professional level (think fund inclusion etc).
Valuation
Analysts haven't glossed over both of these companies in enough detail to provide a comprehensive discounted cash flow valuation based on future cash flow projections.
Instead, we can look at valuation multiples for an apples-to-apples here. Archer is trading at 6.9x its book value of equity (P/B) but hasn't printed sales, so P/B is what we need to focus on.
Brainchip on the other hand is trading at a P/B of 62.5x – but it has printed revenue, unlike its foe here, and warrants the premium. Although, it is trading at more than 750x sales – hardly a bargain.
Checking growth of these measures compared to each company's enterprise value (EV) growth is a method that analysts use to assess the value of early-stage players with little earnings data to go by.
Brainchip's EV has climbed 128% since 2020 and over 1,500% since 2018, compared to P/B growth of 106% and 612% in the same periods.
Meanwhile, Archer's EV has grown 51% since 2020 and 950% since 2018, with P/B expanding just 25% and 538% in those times respectively.
Compare this to the benchmark S&P/ASX 200 Index (ASX: XJO), whose market cap has grown by 19% and 47%, whilst its P/B has grown by 9.5% and 21%.
Therefore it could be that Brainchip has created more value for its shareholders, outpacing Archer and smashing the benchmark in growing the book value of its equity. This has come alongside growth in its share price. What this means in terms of valuation – the market will decide.
Has it created more value for shareholders? I'll let you be the judge.
Foolish takeaway
Both shares are running at different paces this year, but it's interesting to know that they aren't necessarily dancing to the tune of the tech sector.
Analyst opinion on each is very light and there are a lot of assumptions baked into each company's forward revenue projections.
Nevertheless, whilst both shares have garnered serious attention over the last 12 months, there's no telling in what direction the market will move next, let alone these two individual names.
