The meteoric rise of Cambricon Technologies (688256.SH) has sent shockwaves through the A-share market, showcasing a phenomenal increase exceeding 250% within just over three monthsAt one point, its market capitalization soared past 310 billion yuan, with its stock price nearing 730 yuan per share, making it the second-highest priced stock in A-shares, surpassed only by the legendary Kweichow Moutai (600519.SH).

To truly appreciate the scale of this movement, one must consider the broader timelineFrom February 2024 to the present, Cambricon's stock has skyrocketed by over 700%, raising questions about the underlying forces propelling such an extraordinary valuationWhat is driving a consistently loss-making chip startup to this unprecedented height?

Analysts are quickly pointing to two main factors: institutional investment and passive buying from ETFs (Exchange-Traded Funds). But does this phenomenon classify Cambricon as a "stalking stock" or manipulated asset? Increasingly, observers are labeling it as such, albeit with nuances that challenge the traditional definition

Typically, a "stalking stock" refers to small and mid-cap stocks that are heavily controlled by institutional investors, which can artificially inflate stock prices until they reach a peakEventually, these orchestrators exit the scene, leaving retail investors holding the bag.

Cambricon, however, has graduated to the ranks of large-cap stocks and, in this context, does not fit the conventional mold of a stalking stockNevertheless, disclosures indicate that throughout 2024, the company's trading volumes have increasingly concentrated among a smaller group of investorsAt the end of 2023, there were 33,184 shareholders; by the close of Q3 2024, that number declined to 26,469. This decline suggests a systematic 'washing out' of retail investors.

Simultaneously, institutional investors have flocked to Cambricon, with the number of funds holding the stock increasing from 61 in Q3 2023 to 296 by Q3 2024. Coupled with rapid growth in market capitalization, the company has also been consistently added to key indices, further incentivizing investment

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By the end of 2023, Cambricon was included in the CSI 300 indexMore recently, on December 13, 2024, it also made its way into the Shanghai Stock Exchange 50 index and the CSI A 500 index.

The implications of being part of these indices are significant, as it opens the floodgates for index funds to purchase Cambricon sharesWhen stock prices become excessively high due to market exuberance, the presence of passive funds can create a bufferIf a stock is included in an index, the funds will continue to purchase shares, allowing early institutional backers to exit without losing value, while retail investors may end up 'catching the bag.'

Examining this dynamic, it becomes apparent that Cambricon is not a stalking stock in the traditional senseIn the earlier phases of trading, institutional alliances certainly played a role, but as the stock was added to the Shanghai 50 index, the reliance shifted towards ETF passive buying

That change aligns with recent market trends, particularly since the initiation of what some have termed a "bull market" for A-shares in September 2024, leading to an influx of funds through passive ETF investmentsIf A-shares operated as they used to, with more focus on active fund management, it’s unlikely Cambricon could achieve its current valuation, as fund managers would likely have their own strategies to follow.

Therefore, the frenzy surrounding Cambricon's stock hinges heavily on fortuitous circumstancesYet, it begs the question: Is Cambricon truly worth its current price? The consensus appears to be a resounding 'no.'

And what of the prospect of a market crash? Only time will tellThe fact remains that since Cambricon's initial public offering (IPO) in 2020, touted as "China’s NVIDIA," it has not turned a profitIts cumulative losses from 2017 to Q3 2024 have approached a staggering 5.7 billion yuan

The speculative premise underlying the recent price surge is that Cambricon may one day rival NVIDIA in the AI chip market.

Some analysts assert that NVIDIA's present valuation is a result of serendipity, arguing that its graphics cards, which were initially designed for gaming, found unforeseen utility in artificial intelligenceIn contrast, Cambricon's products are expressly engineered for AI computingThis differentiation leads some investors to firmly believe that, given enough time, Cambricon could outshine NVIDIA on the global stage.

While technology growth stocks often endure losses during their ascent, Cambricon’s situation presents additional complicationsNot only is the company facing persistent deficits, but its R&D investments are also waningIn 2023, Cambricon's R&D expenditure fell over 26% to 1.118 billion yuan—the first annual decline since inception

By Q3 2024, R&D spending decreased by an additional 8.13%. Such cutbacks raise troubling questions: How can a company make significant technological breakthroughs on a reduced budget?

Moreover, a hypothetical trajectory where Cambricon becomes competitive with NVIDIA suggests a monumental leap for China's chip industry, indicating substantial advancements in the entire semiconductor supply chainIf and when Cambricon arrives at that pinnacle, will it dominate the AI chip market singularly? Is it plausible that while Cambricon may excel, other Chinese semiconductor firms would continue to lag behind?

Taking cues from the contemporary landscape of electric vehicles, one might ponder whether the high-margin segments of China’s AI chip market will also end in fierce competition and erosion of profits, akin to the current dynamics faced by EV manufacturers.

Yet for those investors engaging in speculative trades or looking for a quick profit, the larger implications may not be of concern