The recent surge in the semiconductor sector of the A-shares in China has garnered remarkable attention, especially with a staggering rise of over 60% since the 924 Market RallyThis sector has been viewed as an absolute standout among the markets in Shanghai, Shenzhen, and Beijing, captivating the interest of both analysts and investorsAmong these semiconductor companies, Cambricon has seen its stock skyrocket, increasing by more than 150% within just two months, leading to a market capitalization that has surpassed 220 billion yuanThis meteoric rise has sparked both fascination and skepticism regarding the sustainability of such impressive valuations.

After achieving these new highs, the price-to-book (PB) ratio of Cambricon has reached an astonishing 43 times, which is far beyond the average of merely 4.65 times for the semiconductor index as calculated by ShenwanCurrently, it stands as the highest among the 159 semiconductor firms listed in the A-share market

However, this valuation raises pressing questions: what are the underlying fundamentals that support such a lofty market cap?

Despite soaring stock prices, the performance figures of Cambricon for the third quarter of 2024 reveal a very different storyThe company reported revenues of only 185 million yuan, while it faced a massive net loss attributable to shareholders of 724 million yuanThis raises crucial inquiries into what drives the current valuation of around 220 billion yuan, despite such financial struggles.

Several critical perspectives can be gathered from the current scenario:

Firstly, the fundamental economic indicators for Cambricon suggest considerable weaknessesThe company's revenue growth appears stagnant, and since 2017, the cumulative net loss attributable to shareholders has reached a staggering 5.69 billion yuanThis lack of profitability poses significant concerns regarding the sustainability of its stock price.

Secondly, there are extraordinarily high expectations from capital markets regarding Cambricon's cloud product line (AI chips). However, it faces significant uncertainties about whether it can genuinely break through in the market

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On one hand, challenges stemming from the "Entity List," which disrupts the supply chain and revenue streams, could preclude the company from capitalizing on the explosive growth period for artificial intelligence technologyOn the other hand, the company’s AI chips are closely tied to servers, for which Cambricon has yet to establish a downstream ecosystem, complicating logistics and distribution efforts.

Lastly, the exorbitant valuation seems primarily linked to speculative fervor surrounding AI rather than tangible performance metricsThis disconnect between stock prices and fundamental performance indicators creates risks of significant price volatility in the future.

As we analyze the performance from 2021 to 2023, Cambricon's revenues have been relatively stagnant, recording figures of 721 million yuan in 2021, 729 million yuan in 2022, and falling to 709 million yuan in 2023. The growing concerns about its ability to generate profits intensified when the company's net profit attributable to shareholders showed cumulative losses of 5.69 billion yuan since revealing its financial data in 2017. Notably, no quarterly reports have shown positive net profit figures.

In terms of profitability, as of the third quarter, Cambricon's gross sales margin stood at 55.23%, which represents a drastic decline of 13.93 percentage points compared to the end of 2023; the net profit margin continues to be negative

This ongoing decline in both profits and return on investment can be directly tied to the significant R&D expenditures the company has madeBetween 2020 and 2022, Cambricon invested heavily in chip research and development, with the expenses ballooning to 768 million yuan, 1.136 billion yuan, and 1.523 billion yuan, respectively.

This intense focus on research and development took a considerable toll on the company’s financesSignificant shifts occurred when Cambricon was placed on the “Entity List” in December 2022, preventing it from procuring essential equipment, software, and technologies from U.Sfirms, which disrupted its supply chain and incomeFollowing this, the company began to restructure, with R&D spending showing a steep declineBy 2023, R&D costs were reported at 1.118 billion yuan, reflecting a 26.6% reduction year-on-yearMeanwhile, the company’s workforce dedicated to research dwindled to 752 employees, a stark decrease of 38% from the previous year

During this transitional phase, its subsidiary targeting intelligent driving chips, Xinge Technology, faced multiple rounds of layoffs, indicating severe pressures within the organization.

While a reduction in R&D expenditure might seem beneficial during tough economic times, in this case, it raises alarmsFor Cambricon, the need for innovation in AI chips is paramount to foster the development of competitive new products that could potentially lead to hefty profits in the futurePersistent investment in research is a forward-looking indicator, and the ongoing decrease in R&D spending reflects a troubling tension between operational pressures and cash flow urges.

Since 2017, Cambricon has experienced a continuous outflow of operational cash flow, with the most recent figures showing an outflow exceeding 1.8 billion yuan in the first three quarters of this year, marking a record high in cash drain and increasingly pressuring its financial standing.

Overall, despite the adverse fundamental performance of Cambricon, the market remains undeterred, fostering high expectations for the company's future growth

Yet, the rising valuations have sparked skepticism among seasoned investors.

Turning our attention to the AI chip market, it is essential to assess whether the flashy growth prospects can translate into tangible returnsOver the past few years, significant shifts in revenue structures have occurred, particularly as the company faces challenges linked to product adoptionFrom 2017-2018, the majority of revenues were generated from terminal intelligent processor IPs, primarily driven by the integration of Cambricon’s 1A and IH processors with the Kirin 970 and 980 chips of leading tech companiesHowever, the tide turned in 2019 when Huawei moved away from Cambricon chips, resulting in a collapse of this once-thriving business segment.

Moreover, while its edge product line showed initial promise via the Siyuan 220 chip-based intelligent acceleration cards launched in 2021, recent years have seen dwindling revenues, collapsing from 175 million yuan in its peak year to a mere 11 million yuan in 2023. Currently, Cambricon’s primary business revolves around intelligent computing cluster systems, utilizing a cloud-based product line in conjunction with its self-developed foundational software platform to create solutions for the data center and cloud computing landscapes

Yet, the revenue from this core business has not shown explosive growth, rising from 296 million yuan in 2019 to merely 600 million yuan in 2023.

The anticipated growth in demand for cloud-based AI solutions is attractive to capital markets, particularly when considering newly minted AI chips designed for cloud training and inferenceDespite this, Cambricon's cloud product line has flagged significantly, suffering a nearly 60% drop in revenue to just 90 million yuan amid a sky-high demand backdrop since 2023. This setback can largely be attributed to the influence of U.Ssanctions that have hampered the company’s ability to serve a broader customer base.

As we gaze into the future, the viability of Cambricon’s cloud offerings remains cloaked in uncertaintyThe company could risk missing the golden growth opportunities during the current AI boomThe competitive landscape for major AI model providers, including Baidu Smart Cloud and SenseTime, is becoming increasingly defined, resulting in numerous smaller firms opting out of the AI model training space altogether.

Furthermore, Cambricon has yet to build a robust ecosystem for downstream servers; even with future advantageous product launches, fulfilling sales orders may still pose obstacles