Follow me on Twitter @microcapreturns
Edited on 2/13 to add section on what type of company is likely to be interested in acquiring Atomera after the next JDA is announced.
Atomera is an Intellectual Property licensing company that plans to generate royalties based on three unique revenue streams. The companies technology is used in the semiconductor materials space that currently has a Total Addressable Market (TAM) of $450b with a CAGR around 7-10% or growing roughly $35-45b/year. By 2025 the TAM should be well over $600b.
The three unique royalty revenue streams will be from the following: wafer sales, individual piece parts and specific technology patents used in specific applications.
Wafer royalties. Large wafer manufacturers, like some shown below, will pay a 2% per wafer royalty to manufacture wafers with MST technology. These wafers will then be used to manufacture parts that can take advantage of the low resistance super high performance wafers. As soon as one of the large wafer manufacturers start selling these unique wafers the rest must follow quickly in order to stay competitive. Also companies like Qualcomm and Apple will demand multiple sources for these wafers. My guess is at least 7 large fabs will be producing these wafers within the next 2 years as these become standard across the industry.
Individual piece part royalties. These will be for companies like STMicro, Qualcomm, Apple, TI etc. who are designing parts that will take advantage of the MST properties for lower power, size, voltages etc. Two example calculations will be provided for two of the companies that have licensed MST technology already. For this example Qualcomm was used as the large fabless company but it could be Broadcom, Apple, Google etc…
Licensing of specific patents for unique piece parts. The company has received many patents for specific technologies like memories, image sensors, varactors and waveguides. I suspect these will all be licensed as families and will provide another revenue stream down the road. This is not calculated here and each family could be sold to specific companies given their specific nature.
Valuation of first JDA (large wafer manufacturer)
- Atomera and Market Leading Semiconductor Company Sign Joint Development Agreement for Use of MST in Future Devices
- Announced it has entered into a Joint Development Agreement (JDA) with a leading semiconductor provider for integration of Atomera’s Mears Silicon Technology (MST) into their silicon fabrication process.
- This latest agreement is part of Atomera’s effort to develop deeper and more strategic relationships with selected customers through JDAs – an agreement format that is well suited to large customers who have multiple production nodes, process technologies and product divisions.
- As stated in PR first JDA is with leading semiconductor company
- Use mature valuation per node of $58m/year royalties
- As stated in PR this will be multiple nodes and product lines
- Use 3 nodes in model
- 3 nodes x $58m/node = $174m/year in royalties from first JDA that was just announced
Piece part estimates for STMicro and Qualcomm. These are just a few of the many companies I expect to adopt the MST technology. The royalty will be 1-3% depending on how critical the technology is for the part. For ST will use 2% and for Qualcomm 3% since I believe the new Qualcomm 5G parts will require MST to meet the power requirements of next generation cell phones.
STMicro. Use total chip sales of $9.56b for FY19. Use range of adoption of 10%, 25% and 50% with royalty rate of 2%. Brings royalties of $19m, $48m and $96m. For this example will use $48m/year possible for this license.
Qualcomm. Use chip sales of $5.3b which only covers area of QCT, RFFE and IoT chip sales. Using range of adoption of 10%, 25% and 50% with a 3% royalty rate. Royalties would be $15.9m, $39.6m and $79.2m. For this example will use $39.6m possible for this license.
Current valuation for first JDA and 2 current licenses.
The JDA that was signed would bring in $174m in royalties and the two licenses an additional $87.6m. Roughly $260m/year in the first full year of running. Given their costs of roughly $10m/year the potential earnings would be $250m/year divided by 22m shares. Since the company has $37m in cash there is no further reason to dilute. Earnings potential $11/share based on 1 JDA and 2 out of 3 of current licenses. Using a PE of 20 gives target price of $100-150 by end of year based on what is currently known. Target of $250 in 2022.
Who is most likely to buy Atomera
Many people who look at Atomera ask the question if the technology is so great a large semiconductor company would have bought them years ago. This is the least likely scenario. Just like we are seeing with SoftBank trying to sell ARM to Nvidia none of Nvidia’s competitors who use ARM are excited about licensing from a direct competitor. This is exactly the same problem a large fab would have if they owned the MST technology and another large fab wanted to license. Can you imagine Samsung doing installation on a TSMC node? Not going to happen. But companies like Apple insist that multiple companies be able to produce their parts so they force companies like Qualcomm to develop multiple companies to produce their parts. So while I expect every large fab to adopt MST over the next several years the installations will need to be done by companies that are not direct competitors to the fabs themselves in terms of making semiconductors. The list below is likely a good starting point in who would be interested in acquiring the company and the second JDA will certainly bring interest once it becomes obvious that industry wide roll out is starting.
Who would be interested in owning Atomera and why
Why would companies like Tesla and Apple be interested in an IP company? It wouldn’t primarily be because of the royalty stream but instead be leverage over the large fabs to make sure they get their parts first. The industry is seeing a shortage in fab capacity and major automobile and electronics manufacturers are seeing shortages in electronic part deliveries. Since this is probably not going to change in the future having this leverage over the fabs would insure their parts are delivered on time.
Synopsys, Inc. provides electronic design automation software products used to design and test integrated circuits. With the release of MST Cad, which is a speciality program to allow designers to design parts taking advantage of the unique properties of MST. Given they are one of the industries top simulation companies they have the unique ability to understand the value of the MST technology. They are in perfect position to purchase the IP and license to other semiconductor companies given their long relationships with everyone in the industry.
Applied Materials, Inc. provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. They have been a long time partner and are critical for modifying the semiconductor equipment that is used to make wafers to implement MST. They are in the unique position, working with all the fabs, to take advantage of selling equipment specifically to take advantage of MST. This would give them a proprietary advantage in the space. Any of the semiconductor equipment partners they are working with would also be potential acquirers.
SoftBank Group Corp. is a Japanese multinational conglomerate holding company headquartered in Minato, Tokyo. SoftBank owns stakes in many technology, energy, and financial companies. The are best known in the IP licensing space having purchased ARM holding, a processor company, for $32b in 2016 and is now selling it for $40b to Nvidia. ARM only creates and licenses its technology as intellectual property (IP), rather than manufacturing and selling its own physical CPUs, GPUs, SoCs or microcontrollers. This is the perfect company to buy or invest in Atomera. While they could just purchase they may decide to take an equity stake in the company and then help speed up adoption by providing resources and contacts within the space. I would guess they could speed adoption to 50% penetration by several years.
Large fabless companies Qualcomm and Broadcom will also be possible acquirers. While not considered in the original analysis since I did not think an individual semiconductor company can own this technology since it needs to be adopted across the industry it is possible that a fabless semiconductor company could. Since these fabless companies would not be competing with other fabs they could license the MST technology without directly competing with the fabs. In fact the fabless semiconductor companies are in the unique position of needing multiple fabs to adopt as soon as possible and this would help get fab priority for parts and also control their costs by earning royalties.
Where do I think Atomera is headed
Ultimately, as investors, what we really want to know is where is the company headed? With the first signed JDA there is no longer any doubt the company is moving forward and also little doubts about future JDAs. With this info it is going to be much easier for a potential acquirer to figure out what this is going to be worth. The majority of royalties will fall right to the bottom line as there is little overhead in counting wafers and cashing big checks. So if in a few years down the road, cash flow will be over several billion a year, the question is what can you get away with paying right now for this future payoff. My guess is between $2-3b or 100+/share. Another key piece is could an acquiring company, that is much larger, ramp this technology faster. Absolutely. 20 current employees become 200 and huge seminars every month draws in the remaining half of the semiconductor industry they have not had the bandwidth to work with. Thats one possible scenario and a company like SoftBank has entire departments that do nothing more than model these type of deals to decide who to purchase and at what price.
Special thanks to @Benph from stocktwits on royalty calculations.
- Additional Info
- Atomera (ATOM): Needham Growth Conference on 1/15 Notes
Any due diligence from this site is for entertainment only and not a solicitation to buy or sell Atomera stock. Any estimates are just examples of what is possible and should not be considered financial advise. I have not been compensated in any way and will never be compensated for my reports.