Conventional wisdom is Nvidia (NASDAQ: NVDA) will continue to dominate the artificial intelligence (AI) chip market, as it has since the introduction of ChatGPT. Yet there’s a barrage of competition coming, not just from commercial competitors and cloud giants producing their own in-house accelerators, but also from AI chip startups.
One such startup, Cerebras, just filed a prospectus ahead of an upcoming initial public offering (IPO). After reading this, I think Cerebras is a name that every Nvidia investor should keep a close eye on. But is it really a threat to the graphics processing unit (GPU) giant?
What are cerebras?
Cerebras was founded in 2016 by current CEO Andrew Feldman and a group of technologists who founded and/or worked at the company SeaMicro more than a decade ago. SeaMicro made efficient, high-bandwidth microservers and was later acquired by Advanced micro devices in 2012.
Cerebras sold its first AI chips in 2019 and has recently seen a large increase in demand, leading to this recent IPO.
Cerebras’ giant chip
Cerebras’ big differentiator is that its AI chips, which it calls wafer-scale engines (WSEs), are huge. And then we are talking about a chip that takes up an entire semiconductor wafer. A foundry typically produces many chips per wafer, some of which are defective and are discarded. But Cerebras opts for one gigantic chip per wafer.
The result is a massive processor that is 57 times larger than an Nvidia GPU, with 52 times more computing cores, 880 times more on-chip memory, and 7,000 times more memory bandwidth. One Cerebras WSE has a remarkable 4 trillion transistors – that’s 50 times the 80 billion transistor count of Nvidia’s H200! Like Nvidia, Cerebras chips are produced by Taiwanese semiconductor manufacturing.
The theory behind creating a giant chip is that by putting more processing on the chip, the WSE eliminates the need for Infiniband or Ethernet-based network connections that string together hundreds or thousands of GPUs. According to Cerebras, this architecture enables WSEs to achieve more than 10 times faster training and inference than an Nvidia system with 8 GPUs.
In a recent interview, Feldman said that recent tests have shown that Cerebras chips are 20 times faster at making inferences than Nvidia’s. Sounds impressive? When Feldman was asked at a summer conference how much market share Cerebras wanted to take from Nvidia, he replied: “All of it.”
The financial figures show a major acceleration
Not only is Cerebras talking a big game, but it has also shown impressive revenue acceleration and improved profitability this year, as you can see:
|
Brain (Nasdaq: CBRS) |
H1 2023 |
H1 2024 |
|---|---|---|
|
Hardware revenue |
$1,559 |
$104,269 |
|
Turnover from services |
$7,105 |
$32,133 |
|
Total turnover |
$8,664 |
$136,402 |
|
Gross profit |
$4,378 |
$56,019 |
|
Operating result (loss) |
($81,015) |
($41,811) |
Data source: Cerebras S-1. H1 = first half of the corresponding year.
As you can see, Cerebras’ revenue increased by a whopping 1,474% between the first half of 2023 and the first half of 2024. Although the gross margin technically fell, from 50.5% to 41.1%, this was mainly because almost all of last year’s turnover came from higher-margin services. Cerebras’ hardware gross margins have actually increased during that time. In fact, operating losses are down by $40 million, a good indication that the company will be profitable as it scales.
This exponential increase in scale should continue next year. Cerebras’ largest customer, Abu Dhabi’s G42, agreed to purchase $1.43 billion worth of equipment through the end of 2025, according to the filing. That is a sixfold growth compared to the current run rate in 2024.
Risks to the Cerebras story
However, there are some risks associated with the Cerebras story. One of them is that producing one huge chip can lead to many defects. While Nvidia or any other chipmaker can throw all the bad chips on a wafer, Cerebras has to take the whole thing and open up its WSEs to imperfections.
To get around this, Cerebras says it has created “redundant” cores and interconnects on its chips, because Cerebras assumes many chips will have defects. “Defects are designed to be recognized, closed and redirected,” the filing said.
However, building redundancy also means that Cerebras cannot utilize all the potential that its chip’s surface area could otherwise gain. Management clearly believes that the big chip architecture more than compensates for these inefficiencies.
A second risk, and probably the largest, is Cerebras’ customer concentration. Currently, United Arab Emirates AI company G42 accounts for 87% of Cerebras’ revenue in the first six months of 2024. G42 and affiliated entities are also behind next year’s order worth $1.43 billion, which means that the concentration will only increase.
Concentration is somewhat expected in the early stages of a company’s growth. But if something goes wrong with the relationship or with the G42 itself, it could seriously derail Cerebras’ plans. The G42’s close ties to a foreign government — the UAE’s national security adviser is the company’s founder and largest shareholder — certainly poses a risk should a geopolitical flare-up occur.
Cerebras is one to watch
When it goes public, Cerebras will be a new AI player and will likely be sold at a high valuation. So investors need to be careful about how much they pay for the stock when it comes to the market.
Nevertheless, the company has an architecture that stands out from the rest of the pack. That’s why it’s definitely worth watching when it goes public, especially if you’re a major Nvidia or AMD shareholder.
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Billy Duberstein and/or his clients have positions in Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Is this company an “Nvidia killer?” What to Know About Cerebras’ IPO was originally published by The Motley Fool
