With its shares up by 225% over the last 12 months, Poet Technologies(NASDAQ: POET) has been yet another stock market winner in the generative artificial intelligence (AI) infrastructure boom. Investors continue to pour money into the companies that can play roles in supplying the data centers to power this new technology.
That said, Poet’s recent rally isn’t guaranteed to continue. The company is still struggling to ramp up its business, and the loss of a major client could set its growth story back for years.
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What is Poet Technologies?
After the launch of OpenAI’s ChatGPT in late 2022, leading technology companies quickly realized they would need to spend billions of dollars to build data centers capable of running and training large language models (LLMs) of their own. Analysts at McKinsey & Company estimate that total global spending on the build-out of AI infrastructure could reach $7 trillion by 2030. That’s a huge addressable market for the businesses that supply computing hardware.
Poet doesn’t supply the most talked-about types of AI infrastructure, like GPUs or memory chips. Instead, it’s a developer of photonic and optical interconnect technology designed to rapidly move data between servers, processors, and other components within an AI or cloud computing data center.
Traditional copper-wire connections transmit data in pulses of electrons. Photonic technology converts that data into pulses of light. That allows photonic systems to transmit higher volumes of data faster, over longer distances, and with lower power consumption. These characteristics make the technology ideal for boosting the efficiency of AI data centers, which operate at extreme scales.
What is the catch?
There is a large and growing market for photonics-based data center solutions. But that doesn’t mean Poet’s success is guaranteed. In April, the company revealed that semiconductor manufacturer Marvell Technologies had canceled a purchase order (made through its subsidiary Celestial AI) forPoet’s photonics solutions.
Marvell said it terminated the deal because of contraventions of confidentiality agreements. However, it is also possible that Marvell aims to move in a different strategic direction. Its recent acquisition of photonics specialist Polariton suggests that the chipmaker may actually be planning to directly compete with Poet in in-house solutions. Poet’s fourth-quarter results also highlight some glaring challenges.
While revenue grew from $29,032 to $341,202 year over year, that’s still a minuscule amount of sales for a public company with a market cap of $2.3 billion. The sum also pales in comparison to Poet’s expenses — particularly research and development, which totaled $4.62 million in the quarter, and financial advisory fees, which totaled $4.63 million. With all of its various outflows added up, the company posted a net loss of $42.7 million. And it will need to scale up rapidly to demonstrate a pathway to profitability.
Image source: Getty Images.
In the meantime, Poet is issuing new units of stock like they’re going out of style. Stock-based compensation totaled $2.24 million in the fourth quarter alone. And in May, the company closed a $400 million investment that involves issuing a combination of new shares and warrants that give the buyer the option to buy shares at a preset price in the future.
These financing activities will allow Poet to stay in operation and fund its research without relying on risky debt. However, the equity dilution could hurt current investors. Consistently high levels of stock issuance can also suggest that management sees shareholders as a resource to be harvested for the sake of the business instead of seeing the business as a tool to maximize its shareholders’ wealth.
Where will Poet Technologies be in five years?
Over the next few years, investors should expect Poet’s management team to continue diluting shareholders as it seeks to scale up its business model. Success is far from guaranteed, considering the rising competition from Marvell Technologies and other photonics specialists.
Particularly considering all these challenges, Poet’s stock is too expensive. And trading at a price-to-sales (P/S) ratio of more than 1,100 compared to the S&P 500‘s average of 3.7, there is plenty of room for downside over the next five years.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Marvell Technology. The Motley Fool has a disclosure policy.
