As wisdom dictates, Nvidia (NASDAQ: NVDA) remains the reigning champ in the AI chip market, unfazed by the onslaught of rivals emerging. One such contender, Cerebras, recently unveiled its intent to go public, sparking curiosity in the minds of Nvidia investors. But can Cerebras truly threaten the GPU giant’s dominance?

Image source: Getty Images.

Unveiling Cerebras

Established in 2016 by CEO Andrew Feldman and a team of skilled technologists previously associated with SeaMicro, Cerebras delves into the realm of AI chips. The company made its maiden AI chip sale in 2019 and has since witnessed a surge in demand, culminating in its current IPO pursuits.

The Mammoth Chip of Cerebras

Cerebras stands out by crafting colossal AI chips termed wafer-scale engines (WSEs), literally covering an entire semiconductor wafer each. While most foundries churn out numerous chips per wafer, discarding defective ones, Cerebras opts for a single mammoth chip. The outcome? A behemoth processor surpassing Nvidia’s GPU by 57 times in size, boasting 52 times more compute cores, 880 times the on-chip memory, and a whopping 7,000 times more memory bandwidth. With 4 trillion transistors, a Cerebras WSE dwarfs Nvidia’s H200 with its 80 billion transistors by a factor of 50!

The approach of creating a giant chip aims to eliminate the necessity for Infiniband or Ethernet-based networking connections linking hundreds or thousands of GPUs. This architectural shift enables WSEs to achieve over 10 times faster training and inference than an 8-GPU Nvidia setup. In recent tests, Cerebras chips outpaced Nvidia’s in inference speeds by a staggering 20 times. When queried about Cerebras’ vision to seize market share from Nvidia, Feldman boldly declared, “All of it.”

Financial Growth Trajectory

Besides making bold claims, Cerebras has showcased remarkable revenue acceleration and enhanced profitability, as evidenced below:

Data source: Cerebras S-1. H1 = first half of the corresponding year.

Between the first halves of 2023 and 2024, Cerebras experienced a staggering 1,474% surge in revenue. While the gross margin technically dipped from 50.5% to 41.1%, the decline stemmed mainly from services accounting for the majority of the prior year’s revenue. Notably, Cerebras witnessed an uptick in hardware gross margins during this period. Moreover, operating losses contracted by $40 million, indicating a path to profitability through scalability.

This exponential growth trajectory could persist into the forthcoming year. As per the filing, Cerebras’ primary client, Abu Dhabi’s G42, committed to procuring $1.43 billion worth of equipment through 2025—an astounding sixfold increase from the current 2024 run rate.

Tackling Risks in the Cerebras Narrative

Despite its promising outlook, a couple of risks shadow Cerebras. Firstly, producing a single enormous chip heightens the likelihood of defects. While traditional chipmakers can discard faulty chips, Cerebras must accept the entire wafer, exposing its WSEs to imperfections.

To mitigate this, Cerebras integrated “redundant” cores and interconnects on its chips, assuming a high defect rate. The filing mentions that flaws are designed to be identified, isolated, and bypassed successfully.

However, embracing redundancy limits Cerebras from maximizing the full potential of its chip’s surface area. Nonetheless, the management staunchly believes that the “big chip” architecture compensates for this inefficiency.

Secondly, a significant risk looms in Cerebras’ customer concentration. At present, AI entity G42 from the UAE represents 87% of Cerebras’ sales in the initial half of 2024. G42 and its affiliates are behind the forthcoming $1.43 billion order, intensifying this concentration.

Cerebras Emerges as a New Contender

The impending IPO of Cerebras is poised to shake up the AI landscape, offering investors a fresh avenue to explore. The allure of this potential new player in the AI market is palpable, with expectations of a lofty valuation upon its public debut. However, caution is advised as investors brace for the impact of this upcoming listing.

While the company’s unique architectural approach sets it apart from its competitors, it heralds a blend of uncertainty and opportunity that demands close observation. For seasoned stakeholders in tech giants like Nvidia and AMD, keeping an eye on Cerebras could prove particularly insightful.

Nvidia: A Titan to Tread Carefully With

Before plunging into Nvidia stock, it’s prudent to heed caution. Despite its esteemed position in the market, the famed Motley Fool Stock Advisor advisory team has pegged other investments as more promising contenders. This weighs heavy on the minds of potential investors eyeing Nvidia as their next venture.

Reflecting on the historical context, recall Nvidia’s inclusion in the favored stock cohort back in April 2005. Those who trusted the recommendation with a $1,000 investment at the time now marvel at a whopping $765,523 worth of returns. The meteoric rise of Nvidia demonstrates the potential for sizable gains in the volatile tech sector.

The Stock Advisor service doesn’t just throw darts at a board. Instead, it offers a structured path to prosperity, steering investors with regular updates, expert insights, and a curated selection of new stock picks each month. Notably, the service has eclipsed the S&P 500 returns by quadruple since its inception in 2002, cementing its reputation as a beacon for strategic investors.

As the financial realm grapples with uncertainty, it pays to observe the past to glean insights into the future. The tantalizing prospect of unprecedented gains interlaces with the looming shadows of risk, creating a delicate dance between opportunity and trepidation.