Surging AI chip revenue and Microsoft deal boost Cerebras Systems stock by 17%

Artificial intelligence chipmaker Cerebras Systems Inc. delivered third-quarter revenue that comfortably beat expectations in its latest financial report today while announcing a new deal with Microsoft Corp., sending its stock up almost 18% in late trading.

The company reported a loss before certain costs such as stock compensation of 67 cents per share, trailing Wall Street's guidance of a 14-cent-per-share loss, though because of some accounting idiosyncrasies, its numbers are not directly comparable with that guidance. Meanwhile, core adjusted revenue for the period came to $230.9 million, up 70% from a year earlier and surpassing the Street's target of $214.7 million.

The adjustments in Cerebras' revenue are the result of some of the quirks in its accounting procedures. The company includes some pass-through revenue that's subtracted from the total, and it also issues warrants to its major customers, which are then amortized as noncash reductions in revenue based on standard accounting rules, and so these are left out of the adjusted number.

Despite these complexities, investors were clearly impressed with the company's growth over the quarter, and perhaps even more so by its progress toward profitability. Though Cerebras has not been able to show a profit yet, its adjusted operating margin of -14% was still significantly better than its earlier guidance of -24% from three months earlier.

Chief Executive Andrew Feldman (pictured) told analysts on a conference call that the company has an advantage over its competitors, which are struggling to keep up with customer demand and dealing with growing order backlogs. "I think there is opportunity created, particularly on the hardware side, the sale of hardware, where long lead times in GPUs and more expense creates opportunity for us," he said, referring to Nvidia Corp.'s graphics processing units.

Cerebras does have a significant backlog for both hardware and cloud services itself, and that number rose from $25 billion in August to $26 billion at the end of the quarter. However, a significant portion of that backlog is related to the deal it struck with OpenAI Group PBC, Feldman said. This implies that other customers don't have to wait so long for their orders to be processed.

Meanwhile, the chipmaker continues to expand its customer base. After recently signing deals with Amazon Web Services Inc. and Oracle Corp., the company today announced a new customer in Microsoft Corp., although it didn't provide many particulars about that agreement. The small increase in its backlog doesn't do much to settle concerns that all of those deals are on the small side, however.

"We believe revenue begins to show up in quarter one of fiscal 2027," Feldman said after explaining that the agreement with Microsoft was signed and sealed a month earlier.

Feldman also explained that the company is now evaluating its financing options to find ways to meet customer demand and make inroads into its order backlog. It's not clear what that financing will look like, as capital has become much harder to secure in recent months amid growing nervousness about the insane amounts of cash being spent on AI infrastructure buildouts.

Cerebras may perhaps be able to benefit from the uncertainty at its biggest rival Nvidia, which still dominates the AI chip industry, accounting for over 90% of all chip sales, according to some analysts.

Nvidia is in turmoil following the shocking resignation of its co-founder and CEO Jensen Huang. It's believed that Huang was likely forced to hand in his resignation after being outed for having an affair with an executive of a Singapore-based data center infrastructure firm, who is believed to have been acting as a spy for Chinese intelligence and a conduit for illegal shipments of GPUs into that country. Huang also had a second affair with one of Nvidia's executives, according to reports that emerged yesterday, and reportedly a third one too.

It may take a while for Cerebras and other chipmakers to take advantage of the disruption to Nvidia, which is seeking to maintain stability through the appointment of longtime Chief Financial Officer Colette Kress as interim CEO, but in the short term its prospects still look good. The company said it anticipates a core gross margin of 47% to 49% in the fourth quarter, with revenue rising to between $310 million and $330 million. Wall Street analysts are looking for a core gross margin of just 42.1% on sales of $271 million.

Moreover, Feldman told analysts on the call that the company believes its revenue will triple by the end of fiscal 2027. If that holds true, it would mean full-year revenue of around $2.85 billion, slightly below Wall Street's long-term forecast of $2.92 billion in fiscal 2027.