Nvidia alternative AI chipmaker Cerebras IPO faces challenges as investors question its potential.

• Cerebras aims to become the first major venture-backed tech company to have a public listing in the U.S. since Rubrik's IPO in April.
• The company's technology competes with Nvidia, giving it a significant advantage, but its prospectus contains several warning signs.
• None of the top three tech investment banks, including Goldman Sachs, Morgan Stanley, and JPMorgan Chase, are involved in the deal.

Cerebras aims to become the first major venture-backed tech company to go public in the U.S. since April and to take advantage of the growing demand for AI. Its current valuation is $3.3 trillion.

Cerebras, valued at $4 billion in 2021, is seeking to roughly double that in its IPO, but faces challenges such as a heavy reliance on a single Middle Eastern customer, which may be too difficult to overcome in the company's attempt to ride the Nvidia wave.

"David Golden, a startup investor at Revolution Ventures who led tech investment banking at from 2000 to 2006, stated in an interview this week that there is too much hair on this deal. He added that this would never have passed through their underwriting committee."

In 2016, Cerebras launched and three years later, it unveiled its first processor. The company, based in Sunnyvale, California, claims its current chip is faster and more efficient than Nvidia's GPU for training large language models.

In 2023, Cerebras' sales more than tripled to $78.7 million. In the first half of 2024, revenue climbed to $136.4 million, and growth is expected to ramp up significantly, as Cerebras has signed agreements to sell $1.43 billion worth of systems and services, with prepayment expected before March 2025.

The most significant issue in Cerebras' financial report is the high level of customer concentration, with one company in Abu Dhabi generating 87% of revenue in the first half of the year. This customer, G42, is backed by and is solely responsible for the $1.43 billion purchase commitment.

Cerebras does not mention any other clients in its prospectus, but it names a few on its website, such as , Mayo Clinic, and others. In its filing, the company states that it plans to expand its customer base by aggressively pursuing opportunities in relevant sectors, including healthcare, pharmaceutical, biotechnology, and other areas where its AI acceleration capabilities can address critical computational bottlenecks.

Cerebras is seeking clearance from CFIUS to allow G42, a Middle Eastern firm, to increase its ownership stake in the company. G42 has agreed to purchase a $335 million stake, which would make it the largest owner, and has the option to buy an additional $500 million in shares if it commits to spending $5 billion on Cerebras' computing clusters.

CFIUS has the authority to review foreign investments in U.S. companies for potential national security concerns. Cerebras, in its filing, stated that it does not believe CFIUS has jurisdiction over G42's purchase of its non-voting securities, but added that there is no guarantee that CFIUS will approve it. According to Reuters, Cerebras is likely to delay its IPO and cancel its roadshow, scheduled to start next week, due to a national security review. Reuters cited sources familiar with the matter.

G42's ties to China have caused concern among U.S. lawmakers, with some expressing unease about the company's past investments and customer relationships. In response to this concern, G42 announced in February that it had sold its stakes in Chinese companies. This move was prompted by a letter from Rep. Mike Gallagher, R-Wi, who expressed concern about G42's "extensive business relationships with Chinese military companies, state-owned entities and the PRC intelligence services."

G42 didn't respond to a request for comment.

Shunned by top banks

Despite gaining CFIUS approval, Cerebras faces challenges in selling its deal to investors due to the prolonged suppression of valuations for smaller tech companies and the scarcity of IPOs since the end of 2021.

The absence of involvement from primary tech investment banks poses a potential roadblock for Cerebras.

The tech industry has long dominated IPO underwriting, with several players vying for a share of the market. However, they are all absent from the Cerebras deal, and sources with knowledge of the process said they stayed away due to the risks associated with customer concentration and foreign investment.

The two large global banks leading the deal are not the ones typically at the forefront of top tech IPOs.

None of the representatives from Citigroup, Goldman Sachs, JPMorgan, and Morgan Stanley responded to requests for comment, while Barclays did not respond to a request for comment.

BDO is not one of the Big Four accounting firms, but it is Cerebras' auditor. In contrast, KPMG, PwC, and Deloitte are among the Big Four firms that audited the other three venture-backed IPOs this year.

BDO declined to comment.

Andrew Feldman, CEO of Cerebras, pleaded guilty in 2007 to one count of circumventing accounting controls while he was vice president of marketing at Riverstone Networks.

"What else could have been done to make this even more challenging?" Golden of Revolution's said.

A Cerebras spokesperson declined to comment for this story.

The major Wall Street banks are exploring alternative ways to participate in the growing AI infrastructure market. Goldman Sachs, JPMorgan, and Morgan Stanley were among the banks that issued a $4 billion revolving line of credit to OpenAI last week. Additionally, Nvidia GPU provider CoreWeave announced the closure of a $650 million credit facility that was led by the top three tech banks on Friday.

Despite the lack of investable opportunities in the market, there is still a potential IPO for Cerebras due to the high demand for AI chips.

Nvidia is currently trading near a record high. Mizuho Securities predicts that Nvidia holds 95% of the market for AI training and inference chips used in models like OpenAI's GPT-4. During the All-In Summit last month, venture capitalist Peter Thiel stated that Nvidia is the only profitable company in the industry.

"Thiel stated in an interview at the Los Angeles event that Nvidia is generating over 100% of the profits, while everyone else is collectively incurring losses."

Despite reporting a second-quarter net loss of almost $51 million, Cerebras is close to breakeven on an operating basis when excluding stock-based compensation.

Jim Fitch, a retired home builder in Florida and a retail investor, is excited about the opportunity to invest in Cerebras Systems. Fitch, who previously sold his Nvidia stock, believes the benefits of investing in Cerebras outweigh the risks. Fitch noted that Cerebras' co-founder and CEO, Feldman, sold his previous company, SeaMicro, to Nvidia rival for more than $300 million over a decade ago.

The WSE-3 chip, dubbed "the fastest AI processor on Earth" by Cerebras, has attracted Fitch due to its impressive 4 trillion transistor count.

"It'll do the work of 100 Nvidias," Fitch said.

WATCH: Cerebras CEO on competition with Nvidia