Published on August 26th, 2020 📆 | 4309 Views ⚑0
After Researching Atomera, We Don’t Believe Its Technology Works – $3 Price Target (NASDAQ:ATOM)
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Atomera (ATOM) has a unique semiconductor chip manufacturing technology called Mears Silicon Technology (“MST”) that is supposed to solve “one of the biggest problems facing the $400 billion semiconductor industry today, the slowdown in Moore’s Law”, as stated in ATOM’s Q118 earnings call. Semiconductor chips go into electronic devices such as cell phones and computers. A chip is built by layering different types of material on a silicon wafer. MST would be a part of that process – if it was ever used.
ATOM claims that its MST improves performance and power efficiency while potentially reducing costs. But they are trying to sell it into a very dominated field and have been trying for a long time without success. The company was formerly known as Mears Technologies and was founded in 2001.
In its 19 years of existence, ATOM has never received any license fees or royalty payments, only miniscule engineering services fees. A look into the history of the company already shows that these alleged ‘customers’ that ATOM signs on never go past the testing/integration stage, thus resulting in no production revenue. We also believe that these new ‘Joint Development Agreements’ (JDA) that investors are excited upon are simply just corporate buzzwords. In reality, a JDA is just a plain old licensing agreement that the company has been doing for the last 19 years which has proven to have no traction.
We found it humorous that even after 19 years of failure to earn production revenue, in its recent Q220 earnings call ATOM management had the audacity to blame its zero revenues on the coronavirus.
Why Atomera’s Technology Likely Will Never Be Used By Semiconductor Manufacturers
Our research shows the technology likely doesn’t work, likely will never be used, and is far behind the latest semiconductor manufacturing technology used today. Most of its direct competitors, semiconductor capital equipment companies, have $50B+ market caps and spend over a billion dollars in R&D every year to solve the same issues that ATOM is trying to solve. Yet ATOM spends a fraction of that amount in R&D, a miniscule $5-$10M per year. How can anyone expect ATOM to successfully compete with behemoths like Lam Research (NASDAQ:LRCX), Applied Materials (AMAT), and ASML Holding (ASML) with such a huge disparity in R&D expense?
Furthermore, even if ATOM’s technology was effective, we don’t believe a semiconductor chip manufacturer like Intel (INTC) or Taiwan Semiconductor Manufacturing (“TSMC”) (TSM) would take a risk working with a tiny company like ATOM. TSMC, a massive $120B company, works with AMAT’s process because they know that if one of AMAT’s machines has a problem, AMAT immediately fixes it. But TSMC wouldn’t work with a small company like ATOM, because ATOM doesn’t have the resources to be able to instantly fix a problem that could arise. Then TSMC would risk a supply disruption that could cost billions of dollars.
Atomera’s Empty Rally On Retail Investor Hype Is Due For A Crash
ATOM stock has increased over 300% over the past six months, which we believe makes it a good short/sell opportunity:
ATOM 6 Month Chart
As shown in the chart above, ATOM started rallying with the rest of the market in late March. It went from a low of $2.50 on March 23rd to a high of $12.94 on 8/6/20.
The stock price move of ATOM has nothing to do with fundamentals. The company still hasn’t received any license fees or royalty revenues for its technology, and we don’t believe it ever will. It’s too far behind the competition.
Atomera’s Bull Case
ATOM bulls will say that all ATOM has to do is find one big customer to use the MST in their chip manufacturing process. However, it’s rare for a company with cutting edge technology to only have one customer. If it’s good enough for one customer, it’s good enough for many customers. The technology is either used by everyone or not used at all. There’s usually no middle ground. And as of now, ATOM is in the “not used at all” category.
Atomera’s Management Has A Long History of Not Fulfilling Its Promises To Investors
Atomera Management Talks The Talk, But Doesn’t Walk The Walk
Constantly “dangling the carrot” in front of investors, ATOM management has made many promises that haven’t come true. Management has constantly painted a picture of a bright future right around the corner, but this bright future remains elusive. In an efficient market, this should cause skepticism among investors and cause the stock to go lower. However, in today’s bullish market, the opposite has happened. Investors have pushed the share price to all-time highs.
ATOM management talks a big game, which has successfully attracted retail investors, pushing the stock price up. But ATOM has never achieved any results to back it up. This can be illustrated by the classic “carrot on a stick leading the donkey” image below.
Source: Google Images
As metaphorically shown above, the ATOM investor is carrying the weight of ATOM’s management in the hopes of someday getting fed. Their pitch is – “we are getting very close to meaningful revenues” which is the carrot metaphor. Meanwhile, management gets paid high salaries and lives well while investors starve.
In the 2016 IPO prospectus, the company targeted 2017 as the year to star generate MST-enabled product revenue. No such revenues yet. ATOM also wanted to start a full-scale industrial production of devices incorporating MST – it also didn’t happen. From ATOM’s IPO prospectus:
Our plan of operations for the 12 months following the completion of this offering will focus on securing one or more foundries, IDMs or fabless semiconductor manufacturers to qualify and license our MST® technology and start full-scale industrial production of a device that incorporates our MST® technology.
Assuming the timely and successful completion of process and subsequent product qualification by customers and partners, we expect MST® enabled product revenue in 2017.
In 2017, A Customer Installed Atomera’s Technology In Their Factory At Their Own Expense – But It Still Wasn’t Adopted For Commercialization
In ATOM’s Q4 2017 earnings call, the company mentioned a recent development that would get customers excited. It mentioned that one of its customers began the process of installing ATOM’s MST technology in their factory. However, this wasn’t commercialization. As stated in the earnings call, the customer wanted to install the technology to conduct integration testing faster.
A traditional customer looking to try out the technology ships wafers to Atomera, who uses their tools to apply the MST and then sends it back to the customer for evaluation purposes. This process of evaluation takes between 6-9 months per wafer lot.
However, this customer had an epitaxial deposition tool in their factory to support the MST technology. This allowed them to literally process and put their technology on the wafer in a few hours. This was at the customer’s expense.
For ATOM investors this was a good sign. During the call, Bibaud stated:
A customer who wants to try our technology, in order for them to change their tool, it’s a very big impact. These tools cost 6, 7 million dollars each. To modify them to support our technology would cost another half a million dollars or so and then they have to put engineering resources dedicated to installing it and learning how to run it. So, you know, generally I would say any customer who is doing an installation with us, it’s a very, very strong statement above their commitment to making this technology work and to ultimately getting to a business agreement with us.
It’s telling that despite this big investment on this evaluation tool by ATOM’s customer, this agreement never amounted to any production. Bibaud incorrectly judged this investment as being a very positive indicator for their technology’s adoption. This is the only customer that spent resources altering their production facilities to support the MST technology. Could it be that ATOM’s technology actually doesn’t provide the benefits that management says it does or perhaps the customer found better alternatives in other technologies?
Throughout ATOM’s history, its technology is inspected and tried out from time to time, as the semiconductor industry is extremely competitive and any new technology will be looked at. But it never reaches the finish line of commercial production.
Atomera’s Licensing Agreements Were Announced In 2018 But Still Have not Born Fruit
During Q318, ATOM announced two licensing agreements. On 9/25/18, ATOM announced its first commercial license agreement with Asahi Kasei Microdevices, or AKM. That same quarter, on 10/2/18, ATOM announced its second commercial license agreement with STMicroelectronics (STM).
In the Q318 earnings call, ATOM’s CEO, Scott Bibaud, raved about these commercial license agreements. He said:
Atomera is particularly pleased to have AKM as our first licensee, since we have worked with them for several years and they have an exceptionally deep understanding of how MST can benefit their products.
This license with ST shows how quickly a customer can adopt our technology since it took less than 2 years from our — the start of our work with them until they signed up for a license.
With the completion of our first 2 revenue bearing license agreements, Atomera has officially entered our commercial phase.
We have been speaking about our model of upfront license fees and production royalties for some time, and these first 2 agreements validate the acceptability of our model to the industry. It is important to understand that customers do not sign a license agreement casually. In both cases, these investments in MST had to go to a very senior level of management, accompanied by a plan on how they would ultimately take this technology to production before receiving approval for license execution.
Both ST and AKM have executed an integration license with Atomera. In order to conduct EPI deposition on wafers in their own facilities, customers need a manufacturing license with us. Typically, this installation process will take about 3 months. Customers would then qualify their production line, a process which takes approximately 9 months, and must add distribution rights before they can sell product using MST. At this point, they will be in production and will start providing royalties to Atomera.
The last 3 months have been the most significant for Atomera since we were first established. We have closed on our first 2 customer license agreements, which will make each additional one easier. Already we can see that these announcements have given us a new level of credibility in the industry.
Based on the reality of things, the following statements from Bibaud quoted above sure look doubtful:
- Atomera has officially entered our commercial phase.
- these first 2 agreements validate the acceptability of our model to the industry.
- these investments in MST had to go to a very senior level of management, accompanied by a plan on how they would ultimately take this technology to production.
- We have closed on our first 2 customer license agreements, which will make each additional one easier.
On 10/30/19, ATOM announced a third license agreement that it will license its MST to an RF semiconductor solution provider. In the PR, Bibaud is quoted:
With the powerful combination of our partner’s RF technology expertise and their foundry’s manufacturing capabilities, we believe MST can enable new, higher performance devices and products for the 5G cellular market. We are proud to make our breakthrough technologies available to leading fabless semiconductor solution providers and to support them in delivering compelling products around the world.
Again, despite the big, triumphant words, today, almost a year after this license agreement was made, MST has not been used by this partner to create any devices for the 5G market or any market for that matter.
Other Failed Partnerships
On top of the larger examples we outline above, ATOM has a history of other smaller partnerships that were disclosed yet failed to create any significant business:
- As stated in their IPO prospectus from 2016, in 2010 ATOM partnered with K2 Energy Limited, an Australian energy company. ATOM granted K2 an exclusive, worldwide, royalty-bearing license to commercialize MST in the field of photovoltaic devices and all solar energy applications. As part of the license agreement, K2 Energy invested $1m in ATOM and funded $2.7m of R&D into the solar applications of MST technology. Nothing came out of it. K2 Energy is now a penny stock on the ASX that trades at AU$0.025 and a market cap of just ~$7.22M
- Also shown in the prospectus, in 2006, ATOM entered into a license agreement with ASM International, NV, a semiconductor OEM located in the Netherlands, according to which ASM has granted to ATOM a non-exclusive, worldwide license to make, and sublicense others to make, semiconductor devices using some ASM patents. Nothing came from this either, the ASM license expired in January 2019.
- As stated in ATOM’s 2017 10-K, in March 2017 ATOM announced a collaboration with Synopsys (a provider of the technology computer-aided design, or TCAD, simulation software) which allows for modeling of MST into a semiconductor device. Another collaboration that didn’t lead anywhere. Of course, there was triumphant language in the 10-K, stating:
Synopsys’ software now supports modeling of MST, which enables semiconductor manufacturers and designers to model the interaction of MST with other process steps. We have begun to use our modeling capabilities to demonstrate to potential customers the likely benefits of MST on the performance of a completed semiconductor device. We believe these capabilities are helping us focus integration efforts for potential customers more quickly on those areas most likely to deliver benefits, thus shortening test cycles and, we believe, accelerating the time to a license decision.
When Atomera Was Getting Licensing Agreements, The Stock Was Trading Much Lower Than Today
During this period over the past two years when ATOM announced these three licensing agreements, the following chart shows where the stock was trading:
ATOM 2 Year Chart
As shown in the chart above, during the period that ATOM’s first licensing agreements were announced, in late 2018, the stock was trading around $6. Bibaud said in the above earnings call quote that it would take about 12 months total to “be in production and start providing royalties to Atomera”. It has now been 24 months since those licensing agreements were announced, and there is no royalty revenue in sight.
ATOM had 12.4M shares outstanding as of 9/30/18. At $6, the market cap at the time was around $75M. Later that year in December 2018, the above chart shows that the stock slipped down to below $3 per share. The market cap went below $35M. And that was even before Bibaud’s production revenue promises proved to be false.
Compare that to today, the total number of shares outstanding has ballooned to 19.8M as of 6/30/20. At an $11 share price, the market cap is about $218M.
Now that ATOM has failed to generate meaningful revenues from any of its three license agreements, if the market was efficient, then we believe the stock should have a lower market cap than it had at the end of 2018 and 2019. About $25M seems like the correct market cap value. We came to the $25M because it was below $35M before when the company claimed that the licenses would lead to production revenue. Now that the company has failed in this regard, a smaller cap would be appropriate in our estimation.
This would make the fair price of ATOM today around $1.25 per share. We believe that’s a fair price even with the company’s $18M cash balance on 6/30/20 because that cash will dwindle away in less than two years as the company burns between $2M-$3M per quarter.
Atomera Has Created A New Type of Collaboration Called the “Joint Development Agreement”
In its Q419 earnings call, the company first mentions the Joint Development Agreement (JDA). This idea is created seemingly out of nowhere. ATOM mentioned that the JDA is more suited to newer customers. In its Q120 earnings call, Bibaud stated:
What a JDA would typically do is that a central organization would evaluate our technology and then approve it for going to production. And then all of the different business units who are interested in using it could kind of take advantage of that early work and maybe even get it to production faster since it would be pre-approved.
As shown in their May 2020 investor presentation below, the JDA is still an evaluation stage agreement, not commercial.
Source: ATOM May 2020 Investor Presentation, page 7
However, it has appeared to have gotten some investors excited. From the ATOM stocktwits chat:
Source: ATOM stocktwits chat
Atomera’s Revenues Have Been Immaterial For Many Years
The following is the company’s quarterly revenues, losses, and shares outstanding since it went public in 2016:
Source: ATOM Quarterly Filings
As shown above, ATOM losses are growing, its shares outstanding is rapidly increasing, and revenues remain at or close to zero. This shows that their technology isn’t being used for commercial production.
Notice that ATOM has made some revenue in previous quarters, but it hasn’t been meaningful. It was from the delivery of engineering services. It hasn’t been licensing or royalty revenues from its technology, which is the revenue that matters.
ATOM reported zero revenues in Q220. For its Q320 guidance, ATOM’s CFO, Francis Laurencio, stated in the Q220 earnings call transcript:
License agreement and engineering services discussions have been impacted by coronavirus travel restrictions and the backlog of work at customers gradually coming back to normal work schedules. Accordingly, we are not expecting to recognize any revenue in Q3.
Laurencio is blaming its Q320 guidance of zero revenues on the coronavirus in the quote above.
Bibaud said in the call:
But it’s hard to convince a potential customer to sign up for a multi-hour Zoom call and it is harder still for our sales team to gauge reactions for follow-up. Needless to say, we are anxious to start traveling for in-person meetings again.
We don’t buy this excuse. Business meetings have changed today, Zoom sales calls are the norm. If a potential customer doesn’t want to meet an ATOM sales rep for a Zoom call, then they probably aren’t interested in the technology for a face-to-face meeting either. Face-to-face meetings haven’t worked for ATOM either as after many years of doing them they still haven’t been able to sell anything.
Bibaud said in the call:
So collecting all the data can take weeks and analyzing it takes even longer. But early indications from this customer’s results, although not perfect, are exceeding expectations of both the customer and Atomera, and validate some of the early projections we are making on the benefits of MST SP technology.
Notice the subtle hints that Bibaud is stating that the technology isn’t quite working yet. He says “although not perfect” and “validate some of the early projections”. In other words, they validate “some” but not all of the early projections.
Atomera Excessive Management Compensation
As shown below, management has been paid excessively for failing to show any results year after year.
Source: DEF14A SEC Filing
Despite not ever being able to sell their technology to a semiconductor manufacturer, all three of ATOM’s top executives are being handsomely rewarded off the backs of investors. Their total has been over $5M in two years. They all have received $500K+ salaries in 2018 and 2019, with the CEO receiving over $1M per year, and they will get a similar amount in 2020.
We aren’t against company executives being paid high salaries and being rewarded for their success. But we believe it should be for running a company that is doing well and demonstrating solid revenue growth. We believe ATOM management shouldn’t be paid high salaries until they have proven themselves.
Atomera’s Technology Cannot Compete With The Latest Semiconductor Process Technology Evolution
In terms of technology, ATOM’s pitch has been that it aims to combat the slowdown in Moore’s law. The company claims that its technology can be additive (work with other technologies) rather than replace a whole process. Commercially, ATOM’s technology has never gotten validation or support. And with constant improvements, all production processes become outdated. Any technology gets older and more irrelevant over time without improvement, ATOM’s tech is no exception.
For example, let’s look at TSMC’s semiconductor process technology. TSMC is one of the largest semiconductor manufacturers in the world, always on the cutting edge. This is shown on its website here. It shows its evolution from 3-micron chip technology from 1988, and each generation technology all the way to its 5nm node technology which just started volume production in the first half of 2020. The following are TSMC’s latest process technologies starting with the 28nm:
The following table shows TSMC’s process technology evolution over the years.
On ATOM’s website, there’s a publication page. That page shows technical publications from the company over the years, many from 2012 and 2013. In fact, one publication was even published as far back as 2007. It’s titled: Silicon Superlattice on SOI for High Mobility and Reduced Leakage.
The publication states in the abstract:
The technology, which is termed MST-SOI, has demonstrated in excess of 20% mobility enhancement, up to 30% drive current enhancement and significant gate leakage reduction compared to a baseline SOI process.
The company may make these claims in its own lab. But in the real world, other issues arise. If the process was really superior, then manufacturers would’ve started using the MST many years ago.
Mobility enhancement and leakage have been transistor performance issues for many years. Back in 2007, TSMC had the 40nm process technology. As we show in the table above, to combat leakage, TSMC developed the 22nm ultra-low leakage process in 2018. For the MST to be relevant, it would have to be updated for the 5nm process technology used today.
TSMC has the factory to produce the semiconductor chip. So do companies like Intel (INTC) and Samsung (005930.KS). These companies work with semiconductor capital equipment companies who provide the production equipment.
The following are the R&D spend of ATOM versus the R&D spend of its semiconductor capital equipment competitors. ATOM’s main competitors are Lam Research (LRCX), Applied Materials (AMAT), KLA Corp (KLAC), Tokyo Electron (OTCPK:TOELY), ASM Pacific Technology (OTCPK:ASMVF), and ASML Holdings (ASML):
Source: Yahoo Finance
As shown above, ATOM’s R&D spend is incredibly small compared to its competition. It’s clear that there’s no way the company can possibly get ahead of companies like LRCX and AMAT who are discovering the latest cutting-edge transistor manufacturing processes. Naturally, the more money that a company spends on R&D, the more progress it will have.
The following are alternatives to ATOM’s technology:
New Material: Godfrey Cheng, head of global marketing at TSMC, said in 2019, that maintaining Moore’s Law will require creative ways of approaching processor design.
One possible path forward is the use of transistors made of two-dimensional materials instead of silicon as the channel-we are raiding the periodic table.
These 2D materials include materials such as graphene that offer prospects of unprecedented advances in device performance at the atomic limit. 2D materials can be shown to tackle challenges such as doping, contact resistance and could radically improve memory and data storage devices
EUV: Extreme Ultraviolet (EUV) Lithography has been in development for close to a decade. In 2018, Samsung announced they would be the first ones to produce chips using EUV and TSMC / Intel are both following their path. This technology aims to use smaller wavelengths of light (closer to 13.5 nm) compared to the traditional 193 nm used in lithography. According to some, using this technique could lead to microprocessors that are up to 100x faster than current chips and effectively increase Moore’s law.
Strained Silicon: In 2002, Intel introduced another type of material, called strained silicon to its 90-nm transistors. As the silicon is strained (through tension and other forces), more electrons can pass through the lattice, allowing for increases in performance between 10-25 percent. To this day, this has allowed chipmakers to uphold Moore’s law.
High K Gate: Introduced in 2007, High K Gate replaced the gate dielectric (traditionally made up of silicon dioxide). Instead, Intel uses a hafnium based dielectric layer, which resulted in better transistors as it allowed for a reduction in gate leakage.
In the semiconductor business, a company either uses a machine in the factory a lot, or not at all. It’s very binary. And the technology keeps changing and improving. That’s why there are no small companies like ATOM who are thriving in the semiconductor world. They just can’t compete in R&D spend, it’s too competitive.
If Atomera’s Technology Was Useful, It Would Have Been Acquired By Now
ATOM has been around for 19 years, and public for four years. All the semiconductor capital equipment companies have known it exists. If it had a winning technology, we believe it would’ve been acquired by now. Instead, it has been ignored and is still without meaningful revenue. ATOM’s CEO has never mentioned the possibility of ATOM being acquired.
Acquisitions have been happening a lot in this industry. For example, ASML, one of the world’s leading manufacturers of chip-making equipment and one of ATOM’s competitors listed above, has been acquiring a lot of smaller companies. In early 2019, it acquired Mapper for its E-beam technology. In late 2016, it acquired Hermes Microvision to enhance its holistic lithography product portfolio. In 2013, it acquired Cymer, an industry leader in developing lithography light sources, used by chipmakers worldwide to pattern advanced semiconductor chips.
As mentioned earlier in this report, ASML had a license agreement with ATOM in 2006 that didn’t go anywhere.
Atomera Was Taken Public By Liquid Venture Partners – An IP Driven Investment Bank With A History Of Failed Investments
ATOM became public in 2016 with the help of Liquid Venture Partners. ATOM sold 3.2M shares at $7.50 per share in the IPO.
Prior to starting Liquid Venture Partners, its founding partners worked at MDB Capital, an IP-driven investment bank launching disruptive technologies into the public markets. Although stocks from MDB Capital/Liquid Venture Partners often do well initially, the end result is usually a disaster.
The following group involves any companies MDB executives were involved in and any company MDB advised in a financial capacity. It’s the return of each one from their peak price. They all trade on US exchanges.
Liquid Venture Partners helped ATOM to raise at least $78M in capital:
Atomera Rushed To Do An Offering In May Through Liquid Ventures
ATOM appreciated considerably from March to May. It was trading below $3 in mid-March, then rose to over $6 in May. On 5/13/20, ATOM announced they did a 1.76M share offering at $5 per share through Liquid Ventures. The company didn’t need money at that time, it reported $11.4M in cash as of 3/31/20. As the company burns $2M-$3M per quarter, that amount of cash would’ve lasted more than three quarters. Yet the company decided to immediately do an offering when the stock reached $6.
Why Now Seems To Be The Right Timing To Short/Sell Atomera
It has been a while since ATOM had their $5 stock offering in May. The company hasn’t made any progress since then, so we think shareholders might be becoming impatient, and some are up a lot who may want to take profits. Also, since the stock has doubled since the May $10M offering, and the company is burning cash, we think the company will likely be getting ready to do another offering soon. Perhaps by next quarter. The market cap is well over $200M now which is very high for a company with a history of failure.
ATOM’s borrow rate is only about 4% on Interactive Brokers, so if a short seller has conviction like we do that the company will never make production revenues, then it’s an easy long term hold in any short portfolio. ATOM options are also more liquid than one might expect.
ATOM is a great example of a “story stock” that fits Keyne’s Castle-In-The-Air Theory. Retail investors have created a castle in the sky where ATOM’s technology is being used by large semiconductor manufacturers. With several competing/alternative technologies available and the company struggling to move its customers into licensing, and even when they do, beyond licensing into production, the stark reality is: ATOM has yet to build a castle on the ground.
We believe the stock has reached a peak at this level and won’t go higher unless the company earns production revenue. Since we don’t believe that will ever happen, we believe ATOM is an excellent, safe, short at its current level.
Disclosure: I am/we are short ATOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.