With This IPO on the Horizon, Has Nvidia Met its Match?

Nvidia (NASDAQ: NVDA) isn't the only game in town when it comes to artificial intelligence (AI) chips. Customers can seek high-performance chips -- and at a lower price -- from rivals like Advanced Micro Devices or Intel, for example. But Nvidia has stood out, and claimed the lion's share of the AI chip market, thanks to its superior performance.

Customers are willing to pay more to get ahead in the highly competitive AI race, and that's led to demand for Nvidia's chips surpassing supply. And all of this has translated into triple-digit increases in earnings for the company quarter after quarter and outsized share price gains. Nvidia reported a record $30 billion in revenue in the recent quarter, and the stock has soared 172% so far this year.

Soon, though, another rival may launch an initial public offering (IPO), a way to raise capital and possibly set it along the path to major growth in the AI chip market. Cerebras Systems late last month filed a registration statement with the Securities and Exchange Commission (SEC) in preparation for a potential IPO. The company sells an AI processor that could rival Nvidia's current top seller, the H100, and even Nvidia's new Blackwell chip. With this IPO on the horizon, has the AI giant met its match? Let's find out.

Image source: Getty Images.

Nvidia vs Cerebras

First, let's consider Nvidia's Blackwell chip, set for release this year. The Blackwell graphics processing unit (GPU) is loaded with 208 billion transistors -- the idea is the more transistors a chip has, the more impressive the speed, memory, and general performance. Customers using the latest NVLink can ensure high levels of communication among as many as 576 GPUs.

Cerebras takes a completely different approach that sets it apart from other chip designers. The company bypasses the idea of linking together many GPUs to do a particular job and instead builds giant chips -- the size of an entire silicon wafer. The Cerebras Wafer-Scale Engine, or WSE-3, is the biggest chip ever commercialized. It's 57 times bigger than Nvidia's GPUs and has 52 times more compute cores, 880 times more on-chip memory, and 7,000 times more memory bandwidth.

This impressive size allows Cerebras to keep the job on the chip, so customers don't have to link together many GPUs. As a result, they can solve problems faster and use less energy, the company says.

"We believe Cerebras has built the world's fastest commercially available AI training and inference solution," the company said in its SEC filing.

An analyst at Futurum Group took a deep dive into Nvidia's upcoming Blackwell chip versus WSE-3 technology and reported that Cerebras could indeed be viewed as the fastest -- thanks to top performances in memory and training, and power efficiency over time.

Cerebras' quadruple-digit revenue growth

Cerebras is seeing mind-boggling growth, with revenue skyrocketing 1,474% to more than $136 million in the first six months of this year compared with the year-earlier period. The company's gross margin slipped to 41% from 50%, but this was due to a change in the mix of hardware and services revenue -- in the prior year, the company sold more of the higher-margin services offerings.

All this shows us that Cerebras' product could be a formidable rival for Nvidia and other chip designers. But does this mean Nvidia has met its match? Not necessarily.

First, it's important to note that Cerebras' IPO may not happen overnight. The company hasn't yet set the number of shares to be offered or the price range and says the offer is "subject to market conditions." So we're in the early stages of the process.

On top of this, Reuters reported Cerebras may postpone the IPO after facing delays in a U.S. security review of the UAE-based tech group G42's investment in the company -- the wire service cites people familiar with the matter. This is amid concern that third parties could leak U.S. technology to China -- a country not authorized to access the technology directly.

Reliance on one customer

It's also worth noting that G42 is Cerebras' biggest customer, and this reliance on one player represents some risk. Last year, G42 spent more than $65 million as a Cerebras customer, representing 83% of the company's total revenue.

Finally, it's key to remember that Nvidia has built a solid position in the market, with customers investing in its complete system; this isn't something a customer drops overnight to switch to a competitor. Nvidia's focus on innovation means it's likely to launch fresh, high-performance products often enough to keep customers satisfied. In fact, it's already promised an annual update to its GPUs.

Cerebras' technology sounds exciting and could progressively gain market share, especially after a potential IPO. It is definitely an AI company to watch. But I wouldn't worry about Nvidia losing its top spot anytime soon, meaning now is still a great time to buy and hold shares of this AI giant.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool recommends Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.