When Will the Cambrian Collapse?

In every bull market, there is always a valuation bubble. As this bull market progresses, a company named Cambrian (688256.SH) has emerged as an enigma to many investors.On October 18, Cambrian's stock surged by the upper limit, reaching an all-time high. The following trading day, on the 21st, it pulled back but still closed up 3.33%, again setting a new record. Currently, Cambrian's market capitalization has surpassed 180 billion yuan, effectively doubling its valuation in just 11 trading days. Why is it that many proclaim they cannot comprehend this phenomenon?Founded in 2020, Cambrian has dubbed itself the "first AI chip stock" in the market, yet the company has reported annual losses and has never turned a profit.In the first half of 2024, Cambrian reported a revenue of only 64.77 million yuan, a staggering decline of over 43% year-on-year, with losses exceeding 500 million yuan. From 2017 through the first half of 2024, the cumulative loss reached approximately 5.5 billion yuan.Despite these dismal financial results, the hype around Cambrian suggests there must be some underlying reason. Some of Cambrian's investors firmly believe that it will become the NVIDIA of China. One user on a prominent financial forum remarked that although NVIDIA currently enjoys a high market capitalization, its foray into AI was almost by chance; NVIDIA's GPUs were originally designed for gaming, not specifically for artificial intelligence. "What we need are chips uniquely purposed for AI computation. In China, that role belongs to Cambrian."Moreover, another user calculated:"Both AMD and TSMC predict that by 2027 the GPU market will reach 400 billion dollars. If China captures even 10% of that market, that’s 40 billion dollars. Should Cambrian, as a pioneer of AI chips in China, achieve just 5% market share, that would equate to 2 billion dollars."In fact, if Cambrian does ascend to the heights of being China's "NVIDIA", then according to NVIDIA's current Price-to-Sales (PS) ratio, Cambrian is not overpriced, but rather undervalued!Assuming they achieve that projected revenue of 2 billion dollars, converted to RMB, that is roughly 14.2 billion. If NVIDIA commands a PS ratio of 35 times, then Cambrian should theoretically bloom to a market cap of 497 billion, which is over double its current valuation. Such projections seem wildly extravagant.However, Cambrian faces three significant dilemmas:First, can it keep pace with NVIDIA in terms of technology and products?Second, will it have enough capital to endure until it potentially becomes "China's NVIDIA"?Finally, by the time Cambrian becomes "China's NVIDIA", will AI chips still be as scarce as they are now?Let's start with the first issue: technology and product development.In recent years, Cambrian has made commendable strides in catching up with NVIDIA, though substantial challenges remain.Currently, NVIDIA's high-end product, the A100, faces export restrictions to China from the United States. In 2021, Cambrian launched its "Siyuan" chip, which boasts inference capabilities equivalent to 40% of the A100 and training performance roughly 20% that of the A100. This product has already been supplied in bulk to leading server providers like Aliyun, Inspur, and Sugon, as well as AI firms such as iFLYTEK.By 2023, Cambrian introduced the next-generation Siyuan 590 chip that competes directly with the A100. According to internal tests from Baidu, the Siyuan 590 supports almost all mainstream models. Its performance varies between models, with some showing training capabilities very close to the A100, while others only achieving around 50% of its performance. Overall, it can be said to reach approximately 80% of the A100's capabilities.Yet, in addition to the technological gap, Cambrian also faces risks associated with its supply chain.Cambrian's wafer foundry, chip IP, EDA tools, and packaging and testing processes are heavily concentrated in the US and Taiwan. After being placed on the US Entity List in 2022, the pressure on their supply chain has been quite apparent.Addressing the second issue: how much longer can Cambrian sustain its finances?This uncertainty proves even more daunting.Not only is Cambrian lacking in funds, but it is also cutting down on research and development investments.In 2020, when Cambrian went public, it raised just 2.582 billion yuan, barely a fraction of what its contemporaries like SMIC garnered. In 2022, Cambrian proposed a plan for a 2.65 billion yuan capital increase, which faced regulatory scrutiny, ending with a mere 1.67 billion raised.By mid-2024, Cambrian's cash reserves stood at only 1.383 billion, a stark decline of over 65% from the end of 2023.What’s even more concerning is that with increasing financial pressure, their R&D expenditure has been consistently decreasing. In 2023, Cambrian's R&D budget fell to 1.118 billion, over 26% less than the previous year; it marked the first annual decline since the company's establishment. The first half of 2024 saw another reduction of 7.27% in R&D spending.Nevertheless, Cambrian's investors may comfort themselves with the thought that the higher the stock price climbs, the greater the chances they have of hanging on. After all, a rising stock price could potentially increase their future fundraising capacity.Finally, the third issue:By the time Cambrian successfully establishes itself as a competitor to NVIDIA, will AI chips still be as scarce?When Cambrian progresses to a point where it can match NVIDIA, it signals that China has made significant strides in its industrial chain. When that day arrives, can Cambrian truly monopolize the domestic AI chip市场?Might the high-end semiconductor industry mirror today's scenario in the new energy vehicle market, where fierce competition drives down prices to rock-bottom levels?Ultimately, the speculative trading in China's stock market often relies more on emotion than logic; when a bubble bursts, who can predict when that might happen?As long as there are dreams, the A-share market is capable of creating miracles!These are my personal opinions and are for reference only.