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The author of this blog is a software architect by profession !

IT, POET Technologies
Pellegrino rated POET with $ 2.3 billion - The stock moves rollercoaster
2014-08-10 Rainer Klute Leave a comment

Last Wednesday (6 August 2014) published POET Technologies that created by Pellegrino & Associates evaluation of its intellectual property. The report ("Pellegrino 2") looks a fair market value of $ 2.3 billion. Converted to each share corresponds to the fully-diluted basis at a theoretical value of over $ 10.

The real stock price might not understand this assessment. He rushed on Wednesday after a friendly start with rates up to 1.47 CAD in depth and went 1.06 CAD (-17.83%) from trading. The first Thursday saw more panic selling with lows of 0.90 CAD. Thereafter, the stock rebounded significantly and ended trading with an impressive closing price of 1.37 CAD (+ 29.25%) - to give way on Friday to 1.26 CAD (-7.35%).

Not for the faint of heart

POET Technologies Shareholders can not complain about boredom. The performance of recent weeks is like a fast-paced roller coaster ride. Or a ride on the ghost train. For the last course was really the creeps. Thank tugged the such to the nerves that they threw in the towel or to limit their stock to market losses. A good decision? I think not, because the operating business is in order. Anyway, there is no information on any trouble.
Fizzle Good News

In contrary, POET Technologies published a whole series of very positive news:

The targeted customer order structure resizing to 100 nm was achieved. Further reductions to the range from 10 to 15 nanometers holds POET-chief scientist Dr. Geoffrey Taylor for basically straightforward.
With Ajit Manocha POET Technologies has won a heavyweight in the semiconductor industry. As an ex-boss of the world's second largest semiconductor manufacturer Globalfoundries he is networked throughout and is in itself contribute through his good name and his contacts significantly to the establishment of the POET Technology.
Now is also the Pellegrino-2 report available. It approves the intellectual property of the company to a multiple of the value that suggests the share price.

Unfortunately fizzle this good news today, one and all. The share price in the short jerks height to quickly fall back to the old level or below.
Technical Development Kit

Apparently let investors only with a single type of good news to motivate: the above sales. But he is not expected before October.

Until then POET Technologies is still busy, the Technical Development Kit (TDK) for the electronic components POET-complete (PET = POET without optics) finish. The PET / TDK summarizes these components together as a library of computer models. Chip designers need the TDK to so - surprise! - To design chips. Foundries need the TDK to integrate the electronic description of the PET components in their process and tool chains and thus to control the production of chips.

Dimensions of Lego bricks
Dimensions of Lego bricks (Source: Wikimedia Commons)

To compare with the familiar: If Lego is a certain number of basic elements from which everything else is composed. The figure shows two of them. Who knows the dimensions, other physical properties and the manufacturing process can theoretically produce even Lego blocks - apart from the legal issues once.

POET Technologies has developed the basic building blocks of POET-art and are described in the TDK documentation. This documentation is POET customers since April. Who wants to pay and, therefore, can play it. However, it would be a complicated and time-consuming affair, based solely on the TDK documentation to develop chips.

Create Lego models on the computer
Lego models on the computer develop (Source: Mike's Lego CAD)

Who wants to design a Lego model that does indeed not only a description of the blocks, even if that would be possible in principle. It takes real stones laying, to see if and how it all fits together. Or you can use a modeling software. All the basic elements are in any quantity is available, and you can assemble them into arbitrarily complex objects.

TDK is a library with the POET components or initially only with the PET components. This library can be of use TCAD software (TCAD = Technology Computer Aided Design), with which to model and simulate integrated circuits. TCAD is a must for chip designers, but chips may consist of billions of primitives, which are to form a meaningful whole together and apply to the complex physical constraints. Without TCAD is nothing there.

Dimensions of Lego bricks
City of Lego bricks (Source: Wikimedia Commons)

This also applies to the foundries that can produce with the help of TCAD and PET / POET TDK chip developed by chip designer on their production lines.

In comparison: The computer-designed Lego model moves into production, and out comes the finished Lego railcar or the finished Lego city.
licensing program

POET will initially benefit from the licensing of the PET / TDK to customers. Thus, they can develop and manufacture chips. When selling the finished chips a revenue share for POET Technologies falls on.

Since the PET / TDK but needs more time to the end of September, can now even smoother and no money, it can now be even no news about initial revenues. Helpful for the stock price partnership agreements could be the future sales anticipate or at least made ​​more likely. Such agreements could convince that this technique has hand and foot and can generate more revenue investors - a prerequisite for a sustainable and significant price increase.
Pellegrino 2

Pellegrino 2, the second conducted by Pellegrino & Associates valuation of intangible assets of POET Technologies, based on the following POET-business model:

POET Technologies developed to about the end of September 2014, the PET / TDK.
Customers acquire licenses to use the TDK. POET Technologies receives recurring payments for the use of licenses and probably also for consulting services. First money is loud POET CEO Peter Copetti from the end of 2014, beginning of 2015 flow.
Customers design POET chips using the TDK and a TCAD software.
Customers produce POET chips in foundries, again with the help of TDK and a TCAD software.
Customers sell POET chips. POET Technologies receives pro rata royalties.

Pellegrino two looks for this business model a fair market value of $ 2.3 billion after the income capitalization approach. More:

The valuation model suggests that the fair market value of the evaluation object is located at a confidence level of 90 percent between $ 851,235,961 and $ 4,271,102,920. The mean value is $ 2,415,029,242, the median $ 2,330,489,354.

For comparison: In 2010, P & A came to a vote of more than one billion dollars ("Pellegrino 1").

The Pellegrino-2 report itself is not publicly available because of the confidential and sensitive information contained herein, but is only the management before. Were published only a summary written by P & A of the report and the POET-media communication.
conservative assumptions

Opposite Pellegrino 1, the basic assumptions of Pellegrino two have become more cautious and conservative. I like that. The purpose of the report, it's not to cheer the stock by absurd assumptions in the sky. In general, it's not about the stock at Pellegrino 2. The report is not intended for investors, but for management, which can use it as a basis for their strategic decisions. Since it is reasonable to entertain rather low expectations. If you prima comes with it to make ends meet, the better! If you even with pessimistic assumptions, a more than twice as high as the rating achieved in the first round, that speaks for itself.

For the evaluation of the POET intellectual property P & A appealed to the income approach. It is calculated from the future profits of a property, a business, etc. the present value (NPV). In a fixed rate loan that is easy, not at POET. For the future earnings are based on numerous assumptions, estimates, uncertainties and probabilities. When and to what extent the market entry will succeed? What proportion which markets will be able to win POET in what time? How much the company will grow? Some questions are easier to answer: How long which patents are still valid? Until when POET Technologies can benefit from it?
key factors

A P & considered hundreds of such factors in two different models, and thus led through 10,000 simulations. Not all factors have the same influence on the overall result. The crucial problem is these three turned out:

Key licenses ("key licenses"), thus licensing the POET technology to major customers,
Ability of the Company to implement its strategy,
useful life of the patent portfolio.

The idea of ​​a corporate sale plays no role in the calculation of the income value. In a sale may occur at a completely different price. This is especially true for a bidding war, which can significantly drive the price up. But that's not in Pellegrino 2.

In the following, I take out the key points in my opinion the summary. This may own reading in particular to the actuarial aspects of course not replace.
demarcation

For the assessment of P & A looked at the use of POET in the following markets:

Computers (servers, desktop computers, notebook computers)
Smartphones and Tablets
Armor supplier
memory
optical Transceivers
Baseband processors
Graphics Processing Units (GPU)

Further applications in other markets are possible, for example, laser communication, infrared sensors or pixel arrays. These applications go but about Poets basic licensing scenarios out and are not fed into the review.

P & A does not mention the more recent patents for quantum computing in the summary of the report and also not talking about the as yet unpublished projects in which POET Technologies works. One may assume that these things also go beyond the basic licensing scenarios and were not taken into account.
deadline

Date for the assessment is March 1, 2014 facts that occurred later, were not taken into account.

Reaching the 100-nm target that the company could announce until early July, so is no longer incorporated in Pellegrino 2. I suspect that P & A has modeled a certain probability of achievement, say 70 percent. With a further simulation P & A could now start from 100 percent - or for that matter, 95 percent, if you will let the 100 percent apply only after an external validation. In any case these parameters would now provide a greater contribution and increase the overall evaluation accordingly.

Not taken into account is the setting of Ajit Manocha, which should massively improve market opportunities for POET Technologies. On the other hand, reduced his salary by Manocha the range of the existing capital.

Also does not include:

the current state of negotiations with potential partners and customers,
the completion of the POET / TDK documentation,
the current state of development of PET / TDK,
the grant of new patents,
the current state of the prototype initiative.

Who will determine the value of POET Technologies, shoots at a moving target. Pellegrino 2 are valued at the date 1 March 2014 again. Today the value is different. And by that I mean: higher. The current share price is not starting. He is currently moving away completely detached.
Differences Pellegrino 1

Format, content and conclusions of Pellegrino 2 differ according to P & A "dramatically" from the previous review. The Agency called the following significant differences in the assumptions:

Pellegrino 2 does not account for income by funding more. Thus, the funds should be meant from the SBIR program of the U.S. government.
For royalty payments, a lower percentage than that of Pellegrino 1 is applied.
It will be assumed longer development and validation processes. Given the milestones always achieved with a reasonable delay and realistic choice!
In the computer market, the modeling takes into account only 10 to 20 percent of the computers sold. Pellegrino 1 went from being able to equip most computers with a POET processor.
Closer customer base and a revenue model that more on-time payments recognized in the first phase as a royalty payment for finished products.
Improved charging scheme with the University of Connecticut. (See also my article "Reducing risks at POET Technologies" from 2014-03-09. (
additional markets

new Management

Go critical P & A with the management of the former OPEL Solar to court. It was not able to go the the necessary steps to implement the Pellegrino-1 rating. 2010 POET was anyway only the more or less unpopular appendage of a solar manufacturer. Who has long POET shareholder, the lows recalls by the OPEL Solar debacle. All others will know which crisis the solar industry is.

Today the situation is entirely different, praise & P A. The company had repelled the solar business and focusing consistently and exclusively on the POET technology. Management Board and Supervisory Board of Leon Pierhal existed apart from loud new people and were characterized by more realistic estimates than the old Management. Noteworthy are:

a clear vision for the commercialization,
to build strategic partnerships,
disclosure and manifestation of knowledge in the form of TDK documentation,
the much stronger commitment to market the POET technology since December 2013
the greater technical certainty, not least thanks to the validation of the POET process by BAE Systems on the basis of an optical thyristor infrared detector arrays,
financial stability, which is sufficient for the implementation of the commercialization and no new round of financing requires.

These two additions:

The point financial stability Ajit Manocha Also taken into account are not, the content fails with $ 500,000 per year to book. The shorter the period, the POET Technologies can hold out without income. But the money goes significantly beyond the start of 2015 also. And by then, yes ringing at the box office the first income.
The strategic partnerships that talk of a "leading company for design automation of electronic systems is" electronic design automation (EDA), which cooperates with all major semiconductor designers and manufacturers. What is meant is obviously a manufacturer of TCAD software. The world's largest TCAD manufacturers are Synopsys, Cadence Design Systems and Mentor Graphics. Together with Globalfoundries could POET Technologies and a TCAD partners offer a POET Developer Alliance (PDA) form and comprehensive services in all vertical markets.

risks

The point risks takes a broad space. The reason: The authors need to cover themselves legally against any potential claims.

For each commercial projects can indeed always something go wrong. A Delivery delayed a hurricane destroyed critical equipment, a customer enters into a contract later than expected or not at all unexpected technical difficulties to do - and, and, and. Known, it is yes firstly differently and as you think. Authors of reviews, prognosis and plans are well advised to protect themselves legally, so that later not any investors come with claims for compensation for their losses, according to the motto: "But you have told ..." authors like to have a question on the smallest risk towards and describe it in the most horrible colors. Then afterwards nobody can claim he did not know it.

How big or how small a concrete risk is and whether and how the authors estimate that is not usually tell, because so yes you can also put in the nettles. Since the thinking investor is even required. In order to assess the risk properly, he would like to know

how high is the probability of occurrence (eg fifty-fifty or virtually impossible),
how large the maximum damage (eg demolition project with total loss or only a week delay).

Such information can be derived from the most general context, if at all. But they should be incorporated in the P & A-modeling.

With the aspect of the legal protection of authors in mind the long list of risks on pages 7 to 9 of the Pellegrino-2-Summary reads in any case much more relaxed. However, one of the following passage to miss the beginning of the summary quite a shock:

It is Important to note that a third party valuation is not to indication of interest by any party, nor does it represent to actual offer to purchase the POET intellectual property. As Indicated in the report, the POET technology is quietly under development, and no assurances can be givenName did seeking development will be successfully completed, did the technology will be brought` to commercial realization or did the Company's target markets will adopt this technology. Commercial applications of the technology will likely not be available for several years, if ever.

Probably for years to come not commercially available, maybe never? Good to know that this paragraph already appears just as in Pellegrino 1 and that word for word. There is evidently a standard text block. This qualifies the statement, because we know now that the technique works very well. The launch is not yet done, but now considerably more likely than 2010 Well, with such formulations keep P & A legally on the safe side.
More opportunities than risks

In my view, show Pellegrino 2 and the other developments in the POET Technologies, that the chances are much greater than the risks. The share price which does not reflect the time. It apparently just change the number of shares of shaky in strong hands, so the future should look better.

As we have seen in the last week, the price fluctuations on the Venture Exchange may fail exceedingly sore. The trader might like that. The long-term investor should not be fazed by panic and irrationality of the market, but to lead the fundamental situation in mind:

The POET technology still works, even if BAE Systems has conducted no additional validation after the course low on Wednesday.
The achieved structure size is completely independent of the stock price still at 100 nanometers and has not risen. Further reductions will be at hand.
The development of PET / TDK goes forward. The published deadline of the end of September I dare not yet, but there are fundamental difficulties here. It is mainly hard work.
The industry is still unable to continue with silicon and is desperately seeking solutions. According to Geoffrey Taylor, there are currently no alternatives to POET.
With Ajit Manocha professes a heavyweight in the semiconductor industry to POET Technologies. In his eyes, this technology has enormous potential. Why should we see it differently?
The value of intangible assets of POET Technologies is loud Pellegrino 2 to around $ 2.3 billion ($ 850 million to $ 4.3 billion). That makes just over $ 10 per share, and even the lower value corresponding to even $ 4 per share.

The assessment assumes that the business model based on licensing actually works. Pellegrino & Associates find it in any case plausible. To the practical proof of this risk remains for us to receive. And the volatility of the stock also.

Please note the information on risks and liability!
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