There's no question that Nvidia(NASDAQ: NVDA) has been the principal beneficiary of recent advances in artificial intelligence (AI). The company's graphics processing units (GPUs) quickly became the gold standard for generative AI, capturing a stunning 92% of the data center GPU market, according to market researcher IoT Analytics. Nvidia has parlayed that dominance into five consecutive quarters of triple-digit year-over-year sales and profit growth.
Many competitors have tried to keep up with the company's relentless pace of innovation, but none have succeeded. Just this year, Nvidia revised its product release cadence from two years to every year, making it even tougher for rivals to compete.
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However, a recent entrant into the AI marketplace is making waves and could mark the first real competition Nvidia has faced.
Image source: Getty Images.
The challenger
Cerebras Systems is an AI company founded in 2016, and there have recently been rumblings of an IPO on the horizon. The company believes that "AI is the most transformative technology of our generation."
Cerebras developed the Wafer-Scale Engine (WSE) -- a giant semiconductor that is taking a different approach to accelerating AI. The WSE boasts 4 trillion transistors and integrates 900,000 compute cores and 44 gigabytes of Static Random Access Memory (SRAM) into the chip itself.
Cerebras claims that its unique construction reduces latency -- or the lag resulting from data transmission -- making the third-generation WSE "the world's fastest commercially available AI training and inference solution." In August, Cerebras launched what it called "the world's fastest AI inference," which it claims is 20 times faster than Nvidia's GPU-based solutions at a fraction of the cost.
In a press release that dropped last week, Cerebras updated its claims, saying it tripled its "industry-leading inference performance, setting [a] new all-time record." The company said its tests with Llama 3.2 -- the recently upgraded generative AI model from Meta Platforms -- were "16x faster than any known GPU solution, and 68x faster than hyperscale clouds."
Does this spell trouble for Nvidia?
While AI-centric efforts by Nvidia and Cerebras have some overlap, it's important to take a step back and put the rivalry in context.
Nvidia's chips have a track record dating back 25 years and have stood the test of time. These GPUs dominate a variety of tasks and markets, including video game graphics cards, data centers, earlier branches of AI, and -- most recently -- generative AI.
Beyond its processors themselves, Nvidia has taken a more holistic approach, creating software, switches, links -- and even entire plug-and-play systems -- that work together to accelerate the performance of its processors. Additionally, Nvidia is deeply entrenched in the enterprise world, while Cerebras is a relative Johnny-come-lately. It's effortless for businesses to adopt Nvidia's AI solutions, which are relatively easy to deploy.
This represents a challenge for Cerebras, as potential customers will have to reengineer their systems to incorporate its technology. The switching costs involved may be substantial, which could act as a competitive moat for Nvidia. Furthermore, businesses are less eager to spend heavily on technology that is unproven and has yet to stand the test of time.
Finally, there's the matter of customer breadth. Nvidia counts many of the most well-known companies in the world as its customers, though it gets an estimated 46% of its revenue from just four customers. While Nvidia is mum about who those are, they are widely believed to be Alphabet, Amazon, Meta Platforms, and Microsoft.
Cerebras, on the other hand, derived 83% of its 2023 revenue from just one customer -- G42 in the United Arab Emirates -- which represented 87% of its sales during the first six months of this year. Any change in direction or falling out between the two companies could put Cerebras in dire straits, potentially leaving its other customers -- few though they may be -- in a difficult position.
Perhaps more concerning is the fact that lawmakers in the U.S. have expressed concerns about G42, citing the company's "extensive business relationships with Chinese military companies, state-owned entities, and the PRC [People's Republic of China] intelligence services." This history and concerns of U.S. regulators could limit Cerebras' business dealings with G42 and dent its future prospects.
The forest for the trees
To be clear, Cerebras offers a unique solution that represents a new level of competition for Nvidia that its other rivals have yet to achieve -- so it certainly bears watching. However, the company will need to clear a great many hurdles before it represents a significant challenge to Nvidia.
Cerebras has made a number of claims that still need to be put to the test. It will ultimately be customer demand that will decide whether Cerebras has what it takes to take on Nvidia.
Until then, however, Nvidia remains the king of the AI revolution. While it currently sells for roughly 34 times next year's sales, Nvidia's long track record of success, industry dominance, and entrenched position make it the name to beat.
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