In the world of finance, the recent upheaval surrounding Cambricon Technologies has sent shockwaves through investor circles. The company's stock price took a dramatic nosedive, beginning with a modest downward tick of 1% when trading commenced in the early hours. However, just 27 minutes later, the decline steepened alarmingly, eventually reaching a staggering 15.79%. This marked the most significant intraday drop thus far in 2024, with a total decrease of 25% over the past five days—a sharp decline not witnessed for nearly four months. An analysis of the trading activity revealed that, during a single minute at 9:57 AM, an astounding 600 million yuan worth of transactions occurred, triggered by an exceptionally large sell order that profoundly impacted the stock price. By the time the morning session ended, the losses eventually subsided to 11.49%.

The question on everyone's mind is, what caused such a sudden collapse in Cambricon's stock? Notably, just the night before, the company had announced optimistic forecasts for its fourth-quarter earnings in 2024. On January 15, the share price even saw a slight uptick of 0.28%. Everything seemed to be progressing smoothly until the unexpected downturn hit on January 16. What transpired to instigate this swift reversal of fortune?

Experts suggest two primary factors may be at play. The first deals with the company's financial performance, as reported projections indicated a net profit exceeding 200 million yuan for the fourth quarter—Cambricon's first-ever quarterly profitability. However, upon closer inspection, it becomes evident that this profit may not be as substantial as it seems. The reported earnings are predominantly attributed to government subsidies and the reversal of previously accounted bad debts. For instance, if the company had previously set aside 100 million yuan for potential losses, it could subsequently be determined that this amount is recoverable, and thus appear as a profit during the fourth quarter—essentially inflating the profits by 100 million yuan.

The second reason invokes a degree of superstition prevalent in the Chinese stock market. Historically, high-priced stocks in the A-share market have struggled to maintain their valuations for long stretches. Kweichow Moutai stands out as the sole exception. A case in point is the steep decline observed with Stone Technology, whose stock once peaked at nearly 1500 yuan, only to lose two-thirds of its value within eight months, ultimately falling below 500 yuan. When adjusted for prior valuations, the drop from peak to trough was an eye-watering 80%. The silver lining is that Stone Technology’s stock has since rebounded, doubling from its lowest point. However, at present, it remains just 44% of its peak price.

Similar patterns can be identified with Hema Technology, which once boasted a price of 1338.88 yuan per share but has since slumped by 83% over two years, lingering at the bottom floor of the market. Likewise, the stock of Aimeike reached a record high of 1331 yuan, swiftly plummeting 78% thereafter and remaining at depressed levels.

Now, Cambricon is the second-highest-priced stock within the A-share market, trailing only behind Kweichow Moutai. While investing in stocks requires a level of skepticism, there is an undercurrent of truth in this skepticism regarding excessive valuations. Each of the high-priced stocks that have imploded in recent history has exhibited clear signs of a bubble—overestimating future performance only to face the inevitable valuation correction. This leads to a painful reckoning as the market recalibrates itself, often resulting in prolonged periods of value recovery.

Despite claiming the title of the leading AI chip company among A-shares, Cambricon appears to be shouldering a weight of expectations that may prove unsustainable. The allure of becoming China's NVIDIA is captivating, but it's essential to recognize that NVIDIA is already an established leader in the field, with tangible revenue figures and profits to back its claims. In contrast, Cambricon still grapples with questions regarding its technological edge and financial viability.

To date, Cambricon has invested a formidable 6.3 billion yuan in research and development. In an industry where AI chips are touted as the 'pearls' of semiconductor technology, it’s crucial to acknowledge that substantial investment is vital for achieving breakthroughs. Does a few billion yuan of R&D expenditure suffice? While money isn't everything, it is undeniably a significant factor in the tech development ecosystem; inadequate funding could pose a severe threat to long-term success.

There lies another perplexity: given the optimism surrounding Cambricon from institutional investors, why haven’t these entities opted to bolster their funding through equity financing? To date, Cambricon has conducted two rounds of public financing—first, raising nearly 2.6 billion yuan during its initial public offering, followed by an additional 1.67 billion yuan via private placement in 2023.

By the end of the third quarter of 2024, Cambricon's cash reserves had dwindled to less than 1 billion yuan. Unfortunately, the company has yet to generate operational profits, facing substantial losses annually, further compounded by a continued negative operational cash flow. This financial strain poses a substantial threat to the company’s sustainability; without significant technological breakthroughs or notable revenue growth over the next two years, Cambricon may find itself in precarious straits, with cash flow potentially failing to last beyond the two-year mark.