Cerebras IPO has ‘an excessive amount of hair’ as chipmaker tries to tackle Nvidia

AI chipmaker Cerebras is attempting to be the primary major venture-backed tech company to go public within the U.S. since April and to capitalize on investors’ insatiable demand for Nvidia, now valued at $3.3 trillion.

While its position in artificial intelligence infrastructure represents a significant tail wind, Cerebras has challenges — most notably a hefty reliance on a single Middle Eastern customer — that will prove too weighty to beat in the corporate’s try to ride the Nvidia wave. Valued at $4 billion in 2021, Cerebras is reportedly in search of to roughly double that in its IPO.

“There’s an excessive amount of hair on this deal,” David Golden, a startup investor at Revolution Ventures who led tech investment banking at JPMorgan Chase from 2000 to 2006, said in an interview this week. “This is able to never have gotten through our underwriting committee.”

Cerebras launched in 2016 and three years later unveiled its first processor. The corporate, headquartered in Sunnyvale, California, claims its current chip is quicker and more efficient than Nvidia’s graphics processing unit, or GPU, for training large language models.

In 2023, Cerebras’ sales greater than tripled to $78.7 million. In the primary half of 2024, revenue climbed to $136.4 million, and growth appears poised to ramp up significantly, as Cerebras says in its prospectus that it’s signed agreements to sell $1.43 billion price of systems and services, with prepayment expected before March 2025.

But probably the most glaring red flag in Cerebras’ filing pertains to customer concentration. One company based in Abu Dhabi, United Arab Emirates, accounted for 87% of revenue in the primary half of the 12 months. The shopper, G42, is backed by Microsoft, and it’s entirely chargeable for the $1.43 billion purchase commitment.

Cerebras doesn’t list every other clients in its prospectus, nevertheless it does name just a few on its website, including AstraZeneca, GlaxoSmithKline and the Mayo Clinic. Cerebras says within the filing that, in expanding its customer base, the corporate plans to “aggressively pursue opportunities in relevant sectors equivalent to healthcare, pharmaceutical, biotechnology” and other areas “where our AI acceleration capabilities can address critical computational bottlenecks.”

Along with its reliance on G42 for business, Cerebras counts the corporate as an investor, and it’s in search of clearance from the Treasury Department’s Committee on Foreign Investment within the U.S., or CFIUS, to offer the Middle Eastern firm an even bigger position. G42 has agreed to buy a $335 million stake by April that, at current levels, would make it the biggest owner. G42 can pick up $500 million more in Cerebras shares if it commits to spend $5 billion on the corporate’s computing clusters.

CFIUS has the authority to review foreign investments in U.S. firms for potential national security concerns. Cerebras said in its filing that it doesn’t imagine CFIUS has “jurisdiction over G42’s purchase of our non-voting securities” but added that “there isn’t any guarantee that CFIUS will approve” it. Reuters on Tuesday reported that Cerebras was more likely to delay its initial public offering and call off its roadshow, scheduled to begin next week, on account of a national security review. Reuters cited people aware of the matter.

U.S. lawmakers have expressed unease about G42’s historic ties to China, through each past investments and customer relationships. G42 said in February that it had sold its stakes in Chinese firms after Rep. Mike Gallagher, R-Wis., chairman of the Select Committee on the Chinese Communist Party, wrote a letter of concern to Commerce Secretary Gina Raimondo about what he called G42’s “extensive business relationships with Chinese military firms, state-owned entities and the PRC intelligence services.”

G42 didn’t reply to a request for comment.

Even when it achieves CFIUS approval, Cerebras has loads to beat in attempting to sell this deal to investors following a protracted stretch of suppressed valuations for smaller tech firms and a shortage of IPOs because the end of 2021.

Also, Nvidia is trading near a record. Mizuho Securities estimates that Nvidia controls 95% of the marketplace for AI training and inference chips used for models like OpenAI’s GPT-4. Enterprise capitalist Peter Thiel said on the All-In Summit last month that Nvidia is the one company within the space that is being profitable.

“Nvidia is making over 100% of the profits,” Thiel said in an on-stage interview on the event in Los Angeles. “Everybody else is collectively losing money.”

Cerebras continues to be within the money-losing column, reporting a second-quarter net loss of virtually $51 million. Nonetheless, excluding stock-based compensation, the corporate is near breakeven on an operating basis.

Retail investor Jim Fitch, a retired homebuilder in Florida, is amongst those excited in regards to the opportunity to get in early. Fitch, who said he sold out of his Nvidia stock years ago, told CNBC that the advantages outweigh the risks. He noted that Feldman, Cerebras’ co-founder and CEO, sold his prior company, SeaMicro, to Nvidia rival Advanced Micro Devices for greater than $300 million over a decade ago.

Fitch is drawn to the promise of Cerebras’ technology, particularly its WSE-3 chip, which the corporate calls “the fastest AI processor on Earth,” filled with 4 trillion transistors.

“It’ll do the work of 100 Nvidias,” Fitch said.

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