Look up in the sky! It’s a bird! It’s a plane! It’s… an IPO. The Cerebras S-1 filing is interesting in many ways, but certainly one is that, well, it is an (upcoming) IPO in the first place. In a context where tech IPOs have been at an all time low, with a very modest uptick in 2024 (Reddit, Rubrik, etc), the fact that a VC-backed tech startup has filed is rare enough to be exciting and newsworthy on its own.
The other unmistakable part of the filing is that Cerebras is a “pure play AI” company, in a context where there’s been a dearth of such companies in public markets, outside of Palantir and arguably a couple of others, like C3 AI or recent entrants like Tempus AI and Astera Labs. For the most part, public market investors have had very limited options to play the Generative AI wave: essentially NVIDIA, and indirect bets on AI through the hyperscalers. (This scarcity of AI stocks and to some extent, data infra stocks, is a reality we captured in 2021 through our MAD Public Company Index, that will soon be worth updating as hopefully more IPOs happen).
Cerebras, rightfully so, isn’t shy about claiming the AI mantle, and by our count, there are 137 mentions of “AI” in the prospectus summary alone.
With the return of the IPOs comes the return of our “quick teardown” blog posts – meant to be quick off-the-cuff breakdowns and summaries as we read through S-1 filings in our areas of interest (data, ML and AI, mostly), as opposed to any particularly in-depth analysis. For prior teardowns, see Klaviyo, Confluent, C3, Palantir, Snowflake. This one is written in collaboration with my close colleague Aman Kabeer.
For anyone interested in a little bit of historical context, Michael James, co-founder, had presented at my monthly Data Driven NYC event in February 2020: Designing an AI Supercomputer.
HIGH LEVEL THOUGHTS
The chip wars. There’s a fun David vs Goliath dimension to the Cerebras IPO story as they “come at the king”, NVIDIA (mixing metaphors from both the Bible and The Wire is one the things we’re proudest of, in our S-1 teardown series). While NVIDIA owns 90% of the market, there’s a plethora of other competitors both big (AMD, Intel, Microsoft, etc) and emerging (Groq, SambaNova, etc). Reading through the S-1s, Cerebras makes exciting performance claims that should position it well from a product perspective: 10 times faster training time-to-solution, and over 10 times faster output generation speeds than other top GPU-based solutions for inference (which enables real-time interactivity for AI applications and agents).
Timing is everything? Of course AI is hot, hot, hot, and Cerebras plays in a very strategic part of the AI market (the well-documented AI infrastructure build, happening right now), at a very sensitive time (the even more well-documented GPU shortage, which may or may not last). Therefore, this indeed feels like there’s a very interesting window of opportunity for Cerebras to go out, despite overall market uncertainty (elections, etc), and a business that is less fully baked than some would-be IPO candidates (Stripe, Databricks).
Return of the small IPO? In the grand scheme of things, while it’s growing very fast, the company is reasonably early in revenue – $136 million in revenue in the first six months of 2024, and $78.7M for the fully year 2023. In many conversations with both sell side and buy side people, we’ve heard many times that anything below $400M in ARR is going to be considered “subscale”, with some market participants (like Philippe Laffont of Coatue) saying that $1B in ARR is the minimum number. Now, many investors are unhappy with this state of things, and argue that the market should allow smaller companies to go public – including, interestingly Brad Gerstner of Altimeter (investor in Cerebras) and Bill Gurley of Benchmark (Eric Vishria of Benchmark led the first round in Cerebras and has been on the board ever since), putting their money where their mouth is.
Regardless, given the scale of competitors Cerebras is going after, it makes sense for Cerebras to access the deep pockets of public markets as soon as possible.
Very much in line with the arguments of those advocating for smaller companies to go public, Cerebras may turn out to be a good example of a company where all the growth and value creation was not captured by private markets.
Growth or profitability? The market has flip flopped from a priority standpoint over the past few years, from ‘growth at all costs’ being rewarded in the 2020 & 2021 software heyday to ‘efficiency efficiency efficiency’ in 2022 & 2023. Cerebras will be a great case study, particularly amidst a perceived return to favoring growth as the predominant factor. The company is scaling incredibly rapidly (220% Y/Y from 2022-2023), but still inefficiently (-136.3% Non-GAAP Operating Margin in 2023), with a $66.6 million net loss for the first six months of 2024, compared with a wider $77.8 million net loss in the first half of 2023.
Hardware vs software: Cerebras is clearly going after NVIDIA, with impressive product performance. However, a big part of NVIDIA’s competitive advantage lies not just in the hardware, but also in the software – CUDA, both a computing platform and programming model enabling developers to program NVIDIA GPUs directly. CUDA has led to strong lock in within the developer community and it’s considered to a key component of NVIDIA’s overall value. While Cerebras certainly has a software business (see below), it will be interesting to see to which extent markets value it as a hardware company vs hardware/software a la NVIDIA.
Revenue concentration: in our teardown of C3 IPO, we were noting how revenue for C3 was highly concentrated, with the top two customers accounting for 26% of revenue. Well, Cerebras is taking this to a whole new level, with 87% of Revenue in the first half of this year is from just one customer, G42 in the UAE (see details below). Now, the nature of the chip business in the cloud era arguably lends itself to revenue concentration (smaller number of customers with deep pockets that will place very large orders, vs every company buying its own GPU), but it will be interesting to see how markets react.
ADDITIONAL NOTES
Company / Background
- Cerebras was founded in 2016 by Andrew Feldman (CEO) and co-founders Jean-Philippe Fricker, Michael James, Gary Lauterbach and Sean Lie. It started shipping products in 2019.
- Cerebras provides chips for high-performance computing, specifically for use in training & inferencing LLMs and other models
- Specific differentiation from NVIDIA and other chip providers comes from Cerebras’ manufacturing of ‘wafer-scale chips’ – i.e. instead of breaking down a large silicon wafer into several individual chips (like NVIDIA’s GPUs), Cerebras keeps the full wafer intact
- As a result, each individual Cerebras chip is much larger than an NVIDIA chip (in fact, the largest chip ever sold), with advantages (on a per chip basis) in number of cores, chip memory and memory bandwidth among other things
- The Cerebras AI Supercomputer is a massive cluster of these (already large) chips, comprised of 2,048 CS-3 systems for large scale model training & inference
- The company also provides a software layer (CSoft) closely integrated with their chips
- Cerebras advertises the world’s fastest inference service, as benchmarked by running Llama3.1-70B vs. GPU-based hyperscale clouds and emerging competitors
- Cerebras’ AI Model Studio as an end-to-end platform for training, finetuning & inference
- Relationship with G42, the Abu Dhabi based Emirati AI holding company:
- G42 initially acquired a ~1% stake in Cerebras back in 2021
- The S-1 reveals an agreement for G42 to invest an incremental $335M (Series F-2) by April 15, 2025
- G42 already contributes the majority of Cerebras’ Revenue, representing ~83% of total FY23 Revenue and ~87% of 1H FY24 Revenue
- This is as part of an overarching commitment from G42 to purchase $1.43B of hardware & services from Cerebras, to be pre-paid before February 2025
- G42 has an option (the ‘G42 Option’ listed in the S-1) to purchase more shares in conjunction with large purchases of hardware & services from Cerebras:
- If G42 purchases >$500M and <$5B in a single purchase order, they have the right to purchase more preferred shares
- Total amount of shares G42 can purchase is calculated as: 10% of the purchase order (>$500M) divided by either 1) if company is still private, 17.5% discount to the last private price OR 2) if company is public, 17.5% discount to the average public closing price over the prior 30-day period
Financials
- Revenue
- Annual
- FY2023: $78.7M (+220% Y/Y)
- FY2022: $24.6M
- L6M (ended June 30)
- 1H FY2024: $136.4M
- 1H FY2023: $8.7M
- Highly unusually ~87% of Revenue in the first half of this year is from just one customer – G42 (was ~83% of FY23 Revenue)
- Annual
- Gross Margin
- Annual
- FY2023: 33.5%
- FY2022: 11.7%
- L6M (ended June 30) – Gross Margin compression in 1H FY2024 is attributed to a discount provided to G24 given volume of purchase
- 1H FY2024: 41.1%
- 1H FY2023: 50.5%
- Annual
- R&D as by far the highest contributor to Opex
- Annual
- FY2023: 178% of Revenue
- FY2022: 631% of Revenue
- L6M (ended June 30)
- FY2024: 57% of Revenue
- FY2023: 881% of Revenue
- Annual
- S&M as a much lower fraction of spend, possibly given concentration / focus on one core customer
- Annual
- FY2023: 12% of Revenue
- FY2022: 38% of Revenue
- L6M (ended June 30)
- FY2024: 5% of Revenue
- FY2023: 48% of Revenue
- Annual
- G&A
- Annual
- FY2023: 13% of Revenue
- FY2022: 69% of Revenue
- L6M (ended June 30)
- FY2024: 9% of Revenue
- FY2023: 57% of Revenue
- Annual
- Non-GAAP Operating Margin
- Annual
- FY2023: -136.3%
- FY2022: -632.8%
- L6M (ended June 30)
- 1H FY2024: -6.9%
- 1H FY2023: -828.2%
- Annual
- Balance Sheet
- Perhaps the most notable item here is the very large $300M ‘Customer Deposits’ liability, drawn from G42’s April 2024 agreement to purchase a minimum of $300M worth of AI supercomputer products and services
- G24 has also agreed to purchase an aggregate of $1.43B worth of computing systems, installation & support services – not recognized on the balance sheet today (no customer deposit) but one to look out for on the B/S going forward
- Perhaps the most notable item here is the very large $300M ‘Customer Deposits’ liability, drawn from G42’s April 2024 agreement to purchase a minimum of $300M worth of AI supercomputer products and services
Board & Capitalization
- Cerebras has raised $715M in venture capital (according to Crunchbase), most recently at a $4.1B valuation.
- A number of well-known VC investors on the cap table, with Alpha Wave, Altimeter, Benchmark, Coatue, Eclipse Ventures and Foundation Capital all holding >5% of outstanding shares
- Sam Altman is reportedly an investor
- Board Members:
- Employee Directors:
- Andrew Feldman – CEO & President
- Robert Komin – CFO & Treasurer
- Dhiraj Mallick – COO
- Non-Employee Directors:
- Paul Auvil – prev. CFO of Proofpoint
- Glenda Dorchak – prev. EVP & GM of Global Business for Spansion, fmr senior Intel exec
- Thomas Lantzsch – prev. SVP & GM, IoT at Intel
- Lior Susan – Eclipse Ventures
- Steve Vassallo – Foundation Capital
- Eric Vishria – Benchmark
- Employee Directors: