Cerebras IPO has ‘too much hair’ as AI chipmaker tries to sell Wall Street on Nvidia alternative

AI chipmaker Cerebras is trying to be the first major venture-backed tech company to go public in 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 major tail wind, Cerebras has challenges — most notably a hefty reliance on a single Middle Eastern customer — that may prove too weighty to overcome in the company’s attempt to ride the Nvidia wave. Valued at $4 billion in 2021, Cerebras is reportedly seeking to roughly double that in its IPO.

“There’s too much 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 would never have gotten through our underwriting committee.”

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

In 2023, Cerebras’ sales more than tripled to $78.7 million. In the first 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 worth of systems and services, with prepayment expected before March 2025.

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

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

In addition to its reliance on G42 for business, Cerebras counts the company as an investor, and it’s seeking clearance from the Treasury Department’s Committee on Foreign Investment in the U.S., or CFIUS, to give the Middle Eastern firm a bigger position. G42 has agreed to purchase a $335 million stake by April that, at current levels, would make it the largest owner. G42 can pick up $500 million more in Cerebras shares if it commits to spend $5 billion on the company’s computing clusters.

CFIUS has the authority to review foreign investments in U.S. companies for potential national security concerns. Cerebras said in its filing that it doesn’t believe CFIUS has “jurisdiction over G42’s purchase of our non-voting securities” but added that “there is no guarantee that CFIUS will approve” it. Reuters on Tuesday reported that Cerebras was likely to delay its initial public offering and call off its roadshow, scheduled to start next week, due to a national security review. Reuters cited people familiar with the matter.

U.S. lawmakers have expressed unease about G42’s historic ties to China, through both past investments and customer relationships. G42 said in February that it had sold its stakes in Chinese companies 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 companies, state-owned entities and the PRC intelligence services.”

G42 didn’t respond to a request for comment.

Even if it achieves CFIUS approval, Cerebras has a lot to overcome in trying to sell this deal to investors following a long stretch of suppressed valuations for smaller tech companies and a shortage of IPOs since the end of 2021.

Also, Nvidia is trading near a record. Mizuho Securities estimates that Nvidia controls 95% of the market for AI training and inference chips used for models like OpenAI’s GPT-4. Venture capitalist Peter Thiel said at the All-In Summit last month that Nvidia is the only company in the space that’s making money.

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

Cerebras is still in the money-losing column, reporting a second-quarter net loss of almost $51 million. However, excluding stock-based compensation, the company is close to breakeven on an operating basis.

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

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

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

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