Cerebras Post-IPO: Buy, Hold, or Sell?

This year is turning out to be big for initial public offerings, particularly in the technology industry. And one of the first to complete its operation was Cerebras Systems (NASDAQ: CBRS) just last month. The company is present in a very exciting space, that of artificial intelligence (AI) chips, and aims to compete with a market giant -- Nvidia.

Investors clearly have been optimistic about Cerebras' prospects as the stock soared 68% in its first day of trading -- though it has declined from its peak. Now the question is: At today's level, is Cerebras a buy, a hold, or a sell post-IPO? Let's find out.

Image source: Getty Images.

Nvidia vs Cerebras

So, first, let's talk a bit about Cerebras. AI workloads require tremendous power, and various companies develop chips that offer this. Nvidia has stood out from the bunch as it designs the world's top-performing graphics processing units (GPUs). And now, Cerebras says it has a chip that's even faster than those of the market leader.

Cerebras' processor is called the Wafer-Scale Engine (WSE), and its strength is in its size. The WSE is 58 times bigger than Nvidia's leading chip and has more than 2,000 times the memory bandwidth of a "package" that includes two Nvidia chips. Cerebras says that by packing an enormous amount of compute and memory onto one chip, it's able to deliver greater speed for AI customers.

The company says that for some workloads, the WSE is 15 times faster than today's top GPUs -- and in certain specific cases, it's achieved a 1,000 times faster performance.

Of course, Cerebras, reaching the market later than Nvidia, is far behind when it comes to revenue and customer count. But it's made noteworthy progress in recent times. For example, it signed an AI compute deal with OpenAI, spanning several years and with a value of more than $20 billion.

And Cerebras' WSE now is available through Amazon's Amazon Web Services. Considering that this is the world's biggest cloud services provider, presence here could turn out to be a key growth move for Cerebras.

Cerebras' double-digit growth

Speaking of growth, the company has delivered here -- with a 75% increase in revenue last year to $509 million. But it's important to keep in mind that Cerebras isn't yet profitable on an operational basis. The company reported an operating loss of $145 million last year, wider than its $101 million loss the previous year. This isn't shocking, however, for a company at this stage of its growth story. (It's important to remember that Cerebras was founded in 2015, so it's a rather young company compared to Nvidia, which has been in business for more than 30 years.)

So, Cerebras has developed a compelling product, is delivering growth, and may be on the path to gaining additional deals and customers. But the company still faces risk, particularly the following: Cerebras generates most of its revenue from a small number of customers -- if one of those customers suddenly sees less of a need for Cerebras' chips, this could significantly hurt the company's growth. For example, last year, work with Mohamed bin Zayed University of Artificial Intelligence represented 62% of the company's revenue.

It's likely that Cerebras is on track to broaden its portfolio of customers, but this will be a point to watch in the quarters to come.

Now, let's return to our question: Considering all of this, is Cerebras a buy, a hold, or a sell? I wouldn't consider the stock a sell right now -- the company's technology is interesting and deals with OpenAI and Amazon, both AI giants, are encouraging. If you've already purchased the stock, it's a great idea to hold on as this exciting story develops. But if you haven't yet gotten in on the story, I wouldn't rush to do so.

Instead, I would wait for an earnings report or two -- if the company broadens its customer base and continues to see strong demand, it could be a stock to eventually buy on the dip.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.