IPO Cerebras has ‘too much hair’ as the chipmaker tries to take on Nvidia

AI chip maker Cerebras is trying to become the first venture-backed technology company to go public in the US from April and is chasing investors’ unmet demand. Nvidiait is now worth $3.3 trillion.

While its position in artificial intelligence infrastructure represents a huge tailwind, Cerebras has challenges — especially its heavy reliance on Middle Eastern customers — that may weigh too much to overcome in the company’s efforts to ride the Nvidia wave. Valued at $4 billion in 2021, Cerebras is reportedly looking to roughly double that in an IPO.

“There’s a lot of hair in this deal,” said David Golden, an early stage investor at Revolution Ventures who heads up technology investment banking JPMorgan Chase from 2000 to 2006, said in an interview this week. “This will never get past our underwriting committee.”

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

By 2023, Cerebras sales more than tripled to $78.7 million. In the first half of 2024, revenue rose to $136.4 million, and growth looks poised to increase significantly, as Cerebras said in its prospectus that it has signed an agreement to sell systems and services for $1.43 billion, with prepayment expected before March 2025.

But the most glaring red flag in Cerebras’ filing has to do with customer concentration. One company based in Abu Dhabi, United Arab Emirates, recorded 87% of its revenue in the first half of the year. The customer, G42, is supported by Microsoftand is responsible for $1.43 billion in purchase commitments.

Cerebras does not list its other clients in its prospectus, but names several on its website, including AstraZeneca, GlaxoSmithKline and the Mayo Clinic. Cerebras said that, in order to expand its customer base, the company plans to “aggressively pursue opportunities in relevant sectors such as healthcare, pharmaceuticals, biotechnology” and other areas “where our AI acceleration capabilities can overcome critical computing bottlenecks.”

In addition to relying on the G42 for business, Cerebras considers the company an investor, and has sought permission from the U.S. Treasury Department’s Committee on Foreign Investment, or CFIUS, to give a greater position to Middle Eastern companies. G42 has agreed to buy $ 335 million of shares in April which, at the current rate, will be the largest owner. G42 can pick up another $500 million in Cerebras Shares if it commits to spending $5 billion on the company’s computerized cluster.

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

US lawmakers expressed unease about the G42’s historical ties to China, through past investments and customer relationships. G42 said in February that it had sold shares in Chinese companies after Rep. Mike Gallagher, R-Wis., Chairman of the Chinese Communist Party Select Committee, wrote a letter of concern to Commerce Secretary Gina Raimondo about the so-called G42. “Extensive business relationships with Chinese military companies, state-owned entities and PRC intelligence services.”

G42 did not respond to a request for comment.

Despite getting CFIUS approval, Cerebras has a lot to overcome when trying to sell this deal to investors after suppressed valuations for small tech companies and a lack of IPOs since the end of 2021.

Adding to Cerebras’ list of roadblocks is the fact that no major technology investment bank is involved.

Goldman Sachs and Morgan Stanley has long dominated IPO underwriting in tech, with JPMorgan Chase also struggling to get in the mix. They are all absent from the Cerebras deal, and a source with knowledge of the process, who asked not to be named because of private talks, said they stay away in part because of the risk of having customer concentration and foreign investment.

The deal was led by Citigroup and Barclayswhich are two big global banks but not the ones that have achieved leadership positions in the top tech IPOs.

Representatives from Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley declined to comment. Barclays did not respond to a request for comment.

Cerebras’ auditor is BDO, which is not one of the Big Four accounting firms. For the other three venture-backed IPOs this year, the accountants were KPMG (Reddit and Rubricand PwC (Astera Labs), are two of the Big Four, along with Deloitte and Ernst & Young.

BDO declined to comment.

There is also Cerebras CEO Andrew Feldman, who pleaded guilty in 2007 to a count of circumventing accounting controls when he was vice president of marketing at a public company called Riverstone Networks a few years earlier.

“What else can be added to make it so difficult?” Golden’s revolution said.

A spokesman for Cerebras declined to comment for this story.

Major Wall Street banks, for their part, are looking for other ways to play in the emerging AI infrastructure market. Last week, Goldman Sachs, JPMorgan and Morgan Stanley were among the list of banks involved in issuing a $4 billion revolving credit line to OpenAI. And on Friday, GPU provider Nvidia CoreWeave announced the closing of a $650 million credit facility led by three top tech banks.

For Cerebras, there is still a road to IPO, due to the great excitement about AI chips and the lack of investment opportunities in the market.

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 making money.

“Nvidia makes more than 100% profit,” Thiel said in an interview on stage at the event in Los Angeles. “Everybody else is losing money.”

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

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

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

“It will do the work of 100 Nvidia,” Fitch said.

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