Will Cerebras Soar After Its IPO This Week? History Offers a Compelling Answer.

Artificial intelligence (AI) players have been among the hottest stocks on the planet over the past few years. Names like chip giant Nvidia (NASDAQ: NVDA) and software company Palantir Technologies have seen their shares climb more than 600% and 1,200%, respectively, over the past three years. And many others, such as cloud service providers Amazon and Alphabet, have delivered triple-digit returns.

In fact, these players have driven the performance of the S&P 500, pushing it into its third year of a bull market in October -- and helping it to reach new record highs in recent times. Investors are excited about AI companies as the technology has the potential to improve the way business is done -- and that could supercharge earnings growth.

So, it's clear that investors will closely watch the performance of any new-to-the-market AI stock. And with that in mind, we may consider Cerebras, an AI chip company on track for an initial public offering this week. The stock is expected to begin trading on Thursday. Will the stock soar after that time? History offers us a compelling answer.

Image source: Getty Images.

The recipe for an investing win

As mentioned, AI stocks have, in many cases, been a recipe for investing success in recent years. Investors rushed into these players with the idea that their earnings could soar down the road, and often this trend was already gaining significant momentum -- particularly for companies offering products and services essential to the AI build-out.

A key example is Nvidia, the world's No. 1 AI chip designer. The company's graphics processing units (GPUs) have proven to be the most powerful on the market, and that's sparked significant demand. At certain points, demand has even surpassed supply. Though Nvidia faces competition from other chip designers, such as Advanced Micro Devices, as well as the in-house chips of some of its own customers, like Amazon, Nvidia has maintained its lead.

And now, there's a new kid on the block: Cerebras. The company may be worth more than $48 billion right out of the gate after increasing its IPO price range to $150 to $160 per share -- that's compared to the earlier range of $115 to $125.

Cerebras differentiates itself by offering a chip that's considerably bigger than Nvidia's top GPUs, and says this size allows it to deliver incredible speed. The company says its processor is 58 times larger than Nvidia's B200. In inference, or the powering of the "thinking" of AI models, Cerebras has been as much as 15 times faster than leading GPUs.

This has resulted in a $20 billion deal for compute with research lab OpenAI and an agreement with Amazon Web Services, the world's No. 1 cloud services provider, to offer Cerebras compute to its cloud customers.

A name to watch

All of this suggests that Cerebras could be a name to watch -- and even invest in as it enters the market. So, will the stock soar after its IPO? A look at history offers us some insight.

The Statista chart below shows that in recent years -- in 2021 through 2024 -- the average returns for IPO companies were negative in the first year after the operation.

Data source: Statista.

A look at a few recent tech IPOs shows that they each soared in the days or months following their market launches -- but offered investors plenty of buying opportunities later as their prices dipped.

PLTR data by YCharts

So, history offers us a message that's compellingly clear. It suggests that Cerebras may soar immediately or soon after its IPO, but the stock could lose some ground in the year to come. Of course, it's important to keep in mind that history isn't always right -- and stocks may surprise us with moves that stray from historical patterns. Still, it's useful to consider these patterns as they offer us an idea of what frequently happens.

Considering this, should you buy Cerebras stock in the days following its IPO? If you believe in the company's long-term story and valuation looks reasonable, you might consider it. But history shows us we don't have to rush into IPO stocks as, in general, these hot stocks often offer us better buying opportunities -- on the dip -- down the road.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Cloudflare, Nvidia, Palantir Technologies, and Snowflake. The Motley Fool has a disclosure policy.