Key Points
Cerebras Systems (NASDAQ: CBRS) launched one of the year’s most exciting technology initial public offerings just a month ago. The company, an artificial intelligence (AI) chip player that aims to rival market giant Nvidia, raised $5.5 billion for the biggest IPO of the year at that point. (Space Exploration Technologies, or SpaceX, went on to surpass that a few weeks later when it completed the largest IPO ever.)
On its first day of trading, Cerebras saw its shares soar 68%, but since that day, they’ve lost more than 25%. The company hasn’t reported unfavorable news that could have prompted this movement, but it’s important to keep in mind that investors have grown increasingly cautious regarding AI stocks. The industry has led gains in the S&P 500 over the past few years, and now, investors are watchful for any signs of a slowdown.
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So far, AI companies of all sorts — from chip designers to cloud service providers — have spoken of soaring demand and revenue. And that’s very positive. But another earnings metric is also important to watch. In fact, Cerebras’ first earnings report since its IPO just highlighted it — and this metric is a crucial point that all AI investors shouldn’t ignore.
Image source: Getty Images.
Cerebras’ big chip
First, a quick summary of the Cerebras story so far. The company has designed a chip that it says may even beat the speed of Nvidia’s top graphics processing units (GPUs). Cerebras’ technology involves packing processors onto one giant chip rather than linking together smaller GPUs. The company’s Wafer-Scale Engine (WSE) is 58 times larger than Nvidia’s B200 chip and has more than 2,000 times the memory bandwidth of two of those Nvidia chips linked together as a package. Cerebras says this size results in incredible speed.
The company has seen revenue soar, and this was confirmed in its earnings report, with revenue surging 92% in the first quarter to a record of more than $191 million. The company also signed a multi-year deal with OpenAI that’s worth more than $20 billion and has inked a partnership with Amazon‘s Amazon Web Services (AWS) to offer customers access to its chips. Right now, Cerebras is very dependent on a limited number of customers, but the AWS partnership could help the company broaden its reach.
A key forecast
Now, let’s consider the metric all AI investors — whether you invest in Cerebras or not — should look to. And that’s where Cerebras may have disappointed investors this quarter. This is the company’s forecast for gross margin. In the first quarter, Cerebras reported core gross margin of 47%. (The core figure is non-GAAP and excludes certain items.) For the current quarter, Cerebras expects core gross margin in the range of 36% to 38%, which clearly shows a narrowing from the first three months of the year.
It’s important for an AI company to generate sales gains, but today, investors should focus on profitability on sales — and that’s seen in gross margin figures. Here, we can see Cerebras shifting toward lower profitability on sales in the second quarter of the year. It’s too early to draw major conclusions, as this may be a temporary shift and margins may progressively improve. But it is something important to watch, and ideally, investors should aim to invest in AI players that are seeing steady high margins — such as Nvidia, with a gross margin of more than 70% — or that are progressively expanding their margins.
Of course, it’s also important to put the gross margin figure into perspective. If a company is ramping up a new product, it might see profitability dip temporarily while it establishes certain production processes, for example. So, while you should aim to invest in a company with increasing or steadily high margins, there may be very logical reasons for a dip here and there.
It’s clear that AI is driving revenue growth at many companies, from Cerebras to market giants like Nvidia or Amazon. But in order to choose lasting AI winners, investors shouldn’t ignore gross margin, a metric that could determine how profitable the company might become over the long run.
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Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Nvidia. The Motley Fool has a disclosure policy.
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