In a remarkable ascent within the Chinese stock market, Cambricon Technologies has skyrocketed in both value and visibility, pushing the envelope for chip manufacturers in the fiercely competitive AI arenaThe latest surge in stock prices has caught the attention of investors and analysts alike, showcasing an impressive increase that saw the stock peaking at 777.77 CNY, propelling the company’s market capitalization to over 300 billion CNY, making it one of the most significant players in the A-share market.

However, this meteoric rise prompts critical questions about the sustainability of such valuationsIs Cambricon a bubble waiting to burst, or does it represent a genuine opportunity for growth? In 2023, the company reported revenues of merely 710 million CNY, with a substantial loss of 1.04 billion CNY when excluding non-recurring gains and lossesLooking ahead to the first three quarters of 2024, revenues are anticipated to grow by 27%, but even with this growth, the total revenue would only reach about 900 million CNY for the full year, while the losses are expected to persist at approximately 900 million CNY as well

This stark contrast between staggering market cap and low revenue has raised apprehensions about whether the price is justified.

As the stock price demonstrates strength, skeptics are continuously challengedHowever, the decline in the number of shareholders—from 33,200 at the beginning of the year to just 26,500 by the end of Q3—is alarmingThis 20% drop signifies a consolidation of shares, primarily into the hands of institutional investorsData indicates that institutional ownership increased from 537 entities at the beginning of 2024 to 743 by mid-year, subsequently dropping to only 306 by the end of SeptemberDespite this decrease, the number of institutions engaged with Cambricon has seen significant year-over-year growth compared to merely 68 entities in September 2023. Such strong institutional backing hints at a belief in Cambricon's potential, raising questions about whether this is merely speculation or a calculated investment strategy.

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Cambricon, often likened to the Chinese counterpart of NVIDIA, stands as a beacon of hope for domestic AI developmentNVIDIA's phenomenal valuations peak at nearly 4 trillion USD, with a lion’s share of the US investments flowing to tech companiesThe soaring market cap attributed to Cambricon underscores the expectations from investors to see it evolve into a powerhouse amidst the AI boom.

Recently, a new valuation method known as "market R&D ratio" has started to circulate among analystsThis approach departs from traditional valuation metrics such as price-earnings and price-to-sales ratios, emphasizing the correlation between a company’s market cap to its research and development expendituresFor instance, NVIDIA’s R&D investment in the first three quarters of 2024 stood at 9.2 billion USD, representing a 50% year-on-year increaseIf this trajectory continues, NVIDIA's annual R&D expenditure could reach approximately 12.9 billion USD, with a staggering market R&D ratio of 264. In contrast, Cambricon, while currently facing losses, has committed around 660 million CNY to R&D over the first three quarters of 2024. Should this trend continue, the R&D investment would total around 1.02 billion CNY annually, translating to a market R&D ratio of 293 based on its market cap of approximately 300 billion CNY

This suggests that perhaps Cambricon’s valuation is not as inflated as it seems when viewed through this lens.

Despite the arguments derived from this valuation method, it is essential to note that all valuations boil down to actual performance regarding revenue and profitNVIDIA's impressive R&D ratio is backed by robust revenues and net profits, with a rolling price-earnings ratio of merely 54. Projections suggest NVIDIA will generate over 90 billion USD in net profits by 2024, illustrating a foundational strength that is often lacking in newer players like Cambricon.

The volatility of institutional decisions relative to market behavior cannot be overlookedInstitutions often align themselves with trends; however, history has shown that such alignment does not guarantee outcomesInstitutional support for stocks like Moutai and new energy sectors did not shield them from significant declines, with some stocks witnessing over 50% losses

Furthermore, institutional backing does not exempt healthcare investments from similar fates, as many stocks have also regained losses over bearish market conditionsThus, investors must maintain vigilance as they navigate through potential turbulence, especially in the current climate where high valuations can rapidly transform into severe drawdowns.

The whirlwind of transactions surrounding Cambricon has lasted for a couple of years, highlighted by a staggering leap from 46.59 CNY a share in April 2022, to its current peak of 777.77 CNY a share – a tenfold increase yielding an astonishing 15,694% gainThis monumental surge cements Cambricon’s status as a quintessential bull stock, potentially claiming the title of the biggest gainer on the A-share market in 2024. Yet, with such proximity to future revenue projections comes the inherent risk of over-speculation.

Among the greatest beneficiaries of this investment wave is Cambricon's founder and CEO, Chen Tian-shi, a post-85 entrepreneur