After Hot Opening Day, Cerebras Stock Is Down Big. Is This a Buying Opportunity?

Cerebras Systems (NASDAQ: CBRS) came out of the gate scorching hot, with its stock opening at $350 on its first day of trading (May 14) after pricing its initial public offering (IPO) at $185 per share. However, it's been largely downhill since, with the stock already down more than 25% from that initial price.

The question for investors is whether this sell-off is a buying opportunity.

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A big bet on inference

Cerebras is currently a niche player in the booming artificial intelligence (AI) infrastructure market. Its end-to-end server-rack system -- the CS-3 -- is designed specifically to handle inference, and it's approaching this market in a completely different way than most competitors.

Compared to AI model training, inference tends to be more memory-bound than compute-bound, which is why graphics processing units (GPUs) and other memory chips need to be packaged with high-bandwidth memory. Cerebras tackles this problem by incorporating SRAM (static random-access memory) directly onto its chips. This makes its chips faster, but significantly larger, more complex, and expensive to manufacture. While most chips are the size of postage stamps, its Wafer-Scale Engine (WSE) chips are about the size of a regular iPad.

The specs for Cerebras' chips are impressive, and the company boasts that they can deliver inference 15 times faster than GPUs at a fraction of the energy cost. However, the size of chips comes with power management and temperature challenges, making the infrastructure for deploying the systems more complex and costly. This is why the company's systems have not become mainstream. Manufacturing wafer-sized chips also comes with its own issues, as the company needs to add extra cores to try to work around potential costly defects.

Right now, Cerebras' CS-3 system is a premium and much more expensive solution, which could keep it a niche player. However, it has reportedly received $10 billion to $20 billion in commitments from OpenAI over the next three years in exchange for warrants, which could be a step change for a company that produced $510 million in revenue from both selling hardware and renting out its servers.

Even after the sell-off, Cerebras has a market cap of over $55 billion. If the company were to capture $6.6 billion in annual revenue from OpenAI and grow its total revenue to $7.5 billion, it would be trading at 7.5 times sales for a hardware company. If the company's solution can revolutionize the inference market, it's a bargain, but if it's just a niche player, it's vastly overvalued. As such, it deserves consideration only as a small, speculative position.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.