Atomera Stock: Exposure To AI And The CEO Make It A Buy

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Atomera Incorporated (NASDAQ:ATOM) recently reported significant exposure to the AI industry, 5G, and the IoT sector, which may, in my view, accelerate net sales growth. Taking into account the number of customer engagements expected for the year 2024, the business connections of ATOM’s CEO, and total amount of cash standing in the balance sheet, ATOM does look like a buy. There are risks from failed sales and marketing efforts, failed partnerships with manufacturers, or lack of sufficient financing for business development. However, I believe that the company does not look expensive at the current price mark.
Atomera: Technologies For The Semiconductor Industry.
Atomera specializes in developing, commercializing, and licensing proprietary technologies for the semiconductor industry, with a strong focus on its technology, Mears Silicon Technology or MST.
MST consists of a thin film of redesigned silicon, which improves the performance of CMOS transistors, commonly used in industry. MST is expected to enable the manufacturing of smaller, faster, and more energy-efficient transistors.
It is worth noting that the company does not manufacture integrated circuits directly, but offers low-cost solutions to designers and manufacturers. Its customers include foundries, IDMs, fabless manufacturers, OEMs, and electronic design automation companies.
In the last quarterly report, Atomera noted that it is launching products for the massive semiconductor market, which is worth around $550 billion. Besides, management noted that it is creating a patent portfolio that will most likely generate revenue thanks to a licensing business model.
Source: Quarterly Investor Presentation
With all that being said, I believe that the most remarkable thing about the company is the management team. In particular, the business profile of the President and Chief Executive Officer is worth having a quick look. The CEO worked in massive corporations generating over $1 billion in sales, and was General Manager of the Mobile Platforms Group at Broadcom (AVGO). In my view, the business connections built by the CEO will most likely help the company sign agreements with large companies in the semiconductor industry.
He has successfully built a number of businesses in his career which grew to generate over $1 Billion in revenue at some of the world’s largest semiconductor companies. Most recently he was Senior Vice President and General Manager of Altera’s Communications and Broadcast Division. Prior to that he was Executive Vice President and General Manager of the Mobile Platforms Group at Broadcom. Source: Management Team There is clear evidence the company is executing on its strategy to commercialize MST. With our technology now installed at two customer fabs, we’re focusing on moving additional customers along the engagement pipeline toward the royalty phase. Source: Quarterly Press Release
Solid Balance Sheet
In the last quarter, the company reported a significant amount of cash and short-term investments. More than 70% of the total amount of assets is represented by cash in hand and short-term investments. Atomera is well-prepared to invest in sales, marketing, R&D, and hiring new personnel. The current ratio is larger than one, and the asset/liability ratio appears very healthy. In particular, the company noted cash worth $12 million, short-term investments worth $6 million, total current assets of about $20 million, and total assets of about $24 million.
Source: Quarterly Press Release
The list of liabilities does not seem at all worrying because Atomera does not report debt. With current financing lease liability worth $1 million, total current liabilities close to $3 million, and long-term financing lease liability of about $1 million, total liabilities stand at $5 million. In sum, we are talking about a company that has negative net debt.
Source: Quarterly Press Release
With that about the list of liabilities, I also reviewed the contractual obligations, which are not significant. The company has contractual obligations related to operating leases for offices in Los Gatos, California, and Tempe, Arizona.
Additionally, it has tool leases in Tempe, as well as licensing agreements and integration services for MST technology. These contracts establish specific terms and payments. Operating leases extend through 2026. For tools, there are annual adjustments to lease payments. License and integration services agreements are governed by the satisfaction of specific obligations, and may span several years.
Agreements With Manufacturers May Improve Chip Efficiency
With key agreements with leading manufacturers and foundries, MST improves the performance of CMOS transistors, enabling smaller, more efficient chips. The strategy focuses on licensing agreements and collaborations to integrate MST into manufacturing processes. The company seeks to generate revenue through licensing and royalty fees, capitalizing on its scalability and complementarity with existing technologies. As a result, I would be expecting increases in FCF margin growth and net income growth from now to 2033.
Growing Markets Like The 5G Industry And IoT
In the last quarter, the company noted that its intellectual property is expected to target growing markets like 5G Industry and IoT. The global 5G chipsets market is expected to exhibit a growth rate of close to 17.9% from 2023 to 2032. Besides, the global Internet of Things market is expected to grow at a CAGR of 26.1%. In my view, if Atomera successfully sells chips in these markets, we could see double-digit net sales growth in the coming years.
The global 5G chipsets market size was valued at USD 34.3 billion in 2022 and it is expected to hit over USD 177.25 billion by 2032, poised to grow at a compound annual growth rate of 17.9% over the forecast period 2023 to 2032. Source: Precedence Research The global Internet of Things IoT market is projected to grow from $662.21 billion in 2023 to $3,352.97 billion by 2030, at a CAGR of 26.1%. Source: Fortune Business Insights
Source: Company’s Website
R&D, And Scalability Could Bring FCF Margin Expansion
From my point of view, the company’s future strategy focuses on consolidating and expanding the adoption of its MST technology in the semiconductor industry. In my opinion, successfully strengthening partnerships with licensees as well as moving towards manufacturing and distribution agreements could bring sustainable revenues.
Under my best-case scenario, the company will continue its investment in research and development to improve MST technology, as well as to address changing industry needs. With a focus on the scalability and complementarity of MST with other technologies, the company may position itself as a leader in performance improvement solutions for transistors in various applications and technology nodes.
In this regard, in the last presentation given to investors, the company provided a list of four phases with the number of customer engagements to execute from now to 2024. The number of customer engagements is expected to reach 27 by 2024.
Source: Quarterly Investor Presentation
In addition, the company noted that the manufacturing license fee, integration license fee, and previous phases were completed. Atomera appears to be ready for the distribution license fee phase and royalties.
Source: Quarterly Investor Presentation
AI Performance Could Also Bring Significant Net Sales Acceleration
Given the recent market expectations about AI technologies, Atomera could receive significant market attention. In the last quarterly report, the company noted that its technologies may accelerate the performance of AI algorithms thanks to heterogeneous chiplet architecture and small chiplet designs. In the best-case scenario, I believe that the growth of the AI technologies could accelerate net sales growth reported by Atomera.
Source: Quarterly Investor Presentation
Best-Case Scenario Using 5G Market and IoT Sector Expected Growth
Under my best-case scenario, I assumed 2033 revenue of $69 million, with cost of revenue close to -$4 million and 2033 gross margin worth $66 million. My numbers are in line with previous net sales growth reported by management.
Besides, I also included research and development worth $2 million, 2033 general and administrative cost of $13 million, and selling and marketing of about $4 million. Finally, total operating expenses would stand at $20 million. I also assumed 2033 accretion income of about $3 million, interest expense of close to -$1 million, and 2033 net income of close to $54 million.
Source: My Financial Model
My cash flow statement expectations include the following adjustments to reconcile net loss to net cash used in operating activities. First, I assumed 2033 stock-based compensation of about $4 million, with 2033 unbilled contracts receivable worth -$7 million, 2033 interest receivable of about -$1 million, prepaid expenses and other current assets close to $2 million, and 2033 net cash used in operating activities worth $56 million. Finally, 2033 FCF would stand at about $56 million.
Source: My Financial Model
With the previous assumptions, a WACC of 8.1%, and conservative terminal EV/FCF of 9x, I obtained an implied enterprise value of $379 million. The sector median PE is close to 27x, with EV/EBITDA of 17x, however I used lower terminal multiples because Atomera is a small company.
Source: Seeking Alpha
With net debt close to -$16 million, the implied fair price would be close to $15 per share. Given the current market price and my results, I think that there is significant upside potential in the stock price.
Source: My Financial Model
Valuation Under My Bearish Case Scenario
Under this scenario, I assumed 2033 revenue of about $55 million, cost of revenue close to -$4 million, and gross margin of $52 million.
I also assumed 2033 research and development of about $4 million, 2033 general and administrative costs of about $12 million, and selling and marketing expenses worth $3 million. As a result, 2033 income from operations would stand at $31 million, if we also include interest income of close to $4 million, 2033 accretion income worth $3 million, and 2033 net income of close to $39 million.
Source: My Financial Model
My cash flow projections include 2033 net income of $39 million, with adjustments to reconcile net loss to net cash used in operating activities, including 2033 stock-based compensation of close to $4 million, changes in unbilled contracts receivable of -$7 million, changes in interest receivable of -$1 million, changes in prepaid expenses and other current assets worth $2 million, and changes in accounts payable of about -$1 million. Finally, the results include 2033 net cash used in operating activities of about close to $42 million and 2033 FCF of about $42 million.
Source: My Financial Model
With the previous results, I also assumed a WACC of 12.5%, with terminal EV/FCF of 8x, which implied a total valuation of close to $178 million. The equity valuation would stand at about $195 million, and the fair price would be far from $6-$7 per share.
Source: My Financial Model
Risks
Key risks for the company include uncertainty in customer adoption of its MST technology, as the transition from initial commitments to licensing and royalty streams may take 18 to 36 months or more.
Lack of commitments from licensees to advance to subsequent licensing phases and the possibility that MST technology may not meet customers’ performance or integration requirements also present challenges. Additionally, continued investment ahead of licensing revenue and the complexity inherent in evaluating new technologies in the semiconductor industry are significant risk factors.
In addition, I believe that a lack of investments from equity investors or debt investors could reduce future investments in R&D, sales, and marketing. As a result, Atomera may not develop technologies, or clients may not sign new agreements. In sum, I believe that we could see lower net income growth or net sales growth.
Competitors
In my opinion, Atomera, with its patented MST technology, competes in the semiconductor industry with IDMs, OEMs, foundries, fabless manufacturers, and semiconductor IP licensing companies.
Besides, the development of new technologies in this sector historically takes 10 to 20 years. Atomera seeks to stand out by offering a low-cost, additive solution, addressing key industry challenges. Although there are no known direct competitors that offer the same technical benefits, the perception of some internal engineering teams could see MST as competition for its internal process improvement solutions.
My Opinion
Atomera’s financial position reflects a significant amount of cash, which will most likely help the company focus on the development and licensing of its MST technology. With revenue coming from new deals and collaborations, the company seeks to capitalize on its competitive advantage in the semiconductor industry. I also believe that exposure to the AI industry, 5G, and the IoT sector could serve as net sales catalysts in the next nine years. Although the company faces challenges such as uncertainty in MST adoption, prudent risk management and diversification of partnerships mitigate these aspects. Future financial success will depend on the efficient execution of the strategy and the continuation of profitable partnerships in a dynamic market. With all that being said, I believe that there is more upside potential in the stock price than downside risks.