The artificial intelligence (AI) boom, ignited by ChatGPT's release in November 2022, has sparked a capital frenzy in the tech sector. Nvidia, led by Jensen Huang, has emerged as a primary beneficiary, with its market value soaring nearly 600% since the chatbot's debut. Now, Cerebras Systems is attempting to ride this wave of enthusiasm with its initial public offering (IPO), but investors should approach with caution.
Cerebras, a venture-backed startup, is positioning itself as a potential rival to Nvidia's dominance in AI chips. The company's IPO documents, filed on October 1, 2024, reveal impressive revenue growth, with $136 million generated in the first half of 2024 – nearly doubling its entire 2023 revenue. While still unprofitable, Cerebras has managed to reduce its operating losses to about one-third of its top line.
However, a closer examination reveals potential red flags. Cerebras' growth is heavily dependent on a single customer, G42, an Abu Dhabi-based AI developer. G42 has purchased 97% of Cerebras' hardware this year, essentially driving all of the company's growth. This concentration risk is further complicated by G42's role as a major investor in Cerebras, with options to purchase additional shares at a discount based on large order volumes.
"Circular relationships are no oddity in AI, but this one is particularly existential. G42 promised to spend $1.4 billion with Cerebras itself or through third parties, an arrangement that practically guarantees meteoric growth."
While Cerebras has recently signed an agreement with Saudi Aramco, the world's largest oil company by revenue, significant risks remain. U.S. national security regulators could potentially block exports, as the technology is subject to screening by the Commerce and Treasury departments. Currently, G42 is only deploying Cerebras technology within the United States.
The company's targeted valuation of up to $8 billion, as reported by Bloomberg, raises eyebrows. At 29 times annualized first-half revenue, this valuation appears steep, especially considering the company's reliance on a single customer. Moreover, Cerebras' research and development spending remains relatively modest at an annualized $155 million, paling in comparison to Nvidia's quarterly R&D budget of $3 billion.
Investors should be wary of the AI hype surrounding Cerebras' IPO. While the 128% gain in Arm's shares since its IPO a year ago may tempt fund managers, it's crucial to distinguish between genuine technological advancements and inflated expectations. The history of AI is punctuated by periods of excitement followed by "AI winters," as seen in the 1970s when overhyped promises led to disappointment.
As the AI industry continues to evolve rapidly, with roots tracing back to the 1950s and the work of pioneers like Alan Turing and John McCarthy, it's essential to approach investment opportunities with a discerning eye. The Cerebras IPO may represent a significant milestone in the AI chip market, but investors should carefully consider the company's dependence on a single customer, regulatory risks, and the sustainability of its growth trajectory before jumping on board.