Astera Labs is a stock that simply cannot be ignored despite having a fraction of the market cap compared to much larger AI hardware players.
The company offers a few key products that are enabling larger and faster AI clusters. For data center AI accelerators, the company was first to offer PCIe 5 switches and retimers. Growth will likely continue due to next-generation PCIe 6 products with higher average sales prices that will be released in 2025 and ramp in 2026.
There are additional growth opportunities, including a software architecture that allows hyperscalers to monitor their data center infrastructure and increase utilization rates; the software helps to incentivize hyperscalers to use Astera Labs hardware products. The company also offers ethernet smart cable modules and is introducing a new CXL product for CXL-enabled CPUs next year.
We are interested in Astera Labs for the increased average sales prices that are expected to persist at least through 2025-2026 due to the Aries products and upcoming Scorpio products. Astera Labs is a highly technical company, yet this quote clearly communicates why the growth trajectory can sustain:
“One is generally speaking with each new generation of a protocol like PCIe going from Gen 5 to Gen 6. There is an ASP uplift. That's number one. Number two, of course, we were hinting at the Scorpio product line, which because of the value it delivers to customers is at a higher ASP, as you can imagine. So overall, if you look at the design wins we have today, the dollar content per GPU goes up, that's one way to look at it based on what we've shared before […] So overall, if you look at sort of the increasing speed, additional product line as well as the fact that the internally developed platforms, AI accelerated database platforms, they are starting to gain more and more traction. So when you look at all of them, on an average, our content is on the up.”
Investment Thesis:
- Current Growth Driver: Increased average sales prices are being driven by CPUs, GPUs and ASICs all moving to the new PCIe 5.0 standards. Arista Labs’ Aries Retimers and PCIe 5.0 components is driving the current growth, and the company is unchallenged in this new generation of PCIe, which came to market for AI accelerators only recently with Nvidia’s H200s.
- Catalyst: Scorpio is a new product that is expected to expand the TAM to more than $12B by 2028: Astera Labs is releasing a PCIe Gen 6 fabric switch custom designed for AI data flows with high performance per watt compared to incumbents. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals. With Scorpio, Astera Labs is defending its dominance in PCIe5 by doubling the bandwidth at lower power requirements than the 5th generation of PCIe.
- The market demand for Astera Labs is healthy, as a major supplier to Nvidia’s PCIe-enabled GPUs (note: most of Nvidia’s GPUs use their in-house NVLink). Yet, Arista also supplies other AI accelerator platforms for Big Tech, and Arista is the only provider for PCIe5. In addition to hardware, ALAB offers Big Tech data centers software-defined architecture called COSMOS that allows for performance monitoring. There is some favorable vendor lock-in dynamics with COSMOS as the many different product lines can be optimized and monitored with the software.
- Financials on Astera Labs are impressive as the company is hypergrowth at 206% growth last quarter and 153% guided next quarter. The free cash flow margin is at 41%. The company is not GAAP profitable due to being a recent IPO with outsized stock-based compensation. However, there is a path to GAAP profitability, which is detailed in the financials section below.
Overview of Astera’s Products:
Broadly speaking, Astera’s products are seeing increased relevance as AI clusters grow to support hundred-billion and trillion parameter models. The company’s hardware and software increase AI server performance and productivity for the current generations and future generations of AI accelerators.
Transition to PCIe5 and PCIe5 Retimers are Driving Astera’s Growth:
The Aries products offer PCIe5 interfaces that GPUs and AI accelerators (like custom silicon) use to connect components including ethernet networking. Compared to the previous generation, PCIe5 is twice as fast with data transfer rates that reach up to 128 GBs/s on multi-directional bandwidth in each lane. By increasing the data transfer for each lane, it allows more lanes to become available to help leverage the power of the GPU or AI accelerator.
PCIe5 Retimers are chips that boost signals across high-speed components and are seeing increased demand, starting with Nvidia’s H200s, and also for application-specific chips. Specifically, Aries Retimers and smart cable modules allow hyperscalers to connect multiple racks together with up to 7 meters of copper cables. Aries can also go up to 50 meters with optical fiber. According to a presentation at Nvidia’s GTC event, this is 3X the standard reach defined in PCIe specs.
Despite PCIe5 being out since 2019, it was Nvidia’s H200s released in 2024 that were the first data center GPUs to use PCIe5. What’s interesting is that Astera is said to have captured 95% of the XPU market, which refers to application-specific chips that are specific on a product level. Per an analyst on the earnings call: “Majority of the XPU shipments are still going to be I think Gen 5 based where your market share is still somewhere in the range of, I think, like 95%.”
Management also stated: “The upside to the guidance was driven largely from Aries' revenue, both for the third-party GPUs, but also as well with the strong ramps on new platforms on the internally developed AI accelerators. And we're seeing that across multiple hyperscaler customers, so it's not just one. So the upside was largely driven by that Aries revenue.”
Notably, Aries devices are used to interconnect AI accelerators with CPUs and networking, yet are also used for backend networking between GPUs for larger clusters. Astera supplies the HGX H100 systems with PCIe-based GPUs with up to 25 retimer chips per HGX system.
Scorpio PCIe6 Custom-Built for AI is a Catalyst:
Scorpio is where the excitement is building for continued growth next year with management stating it will “exceed 10% of revenues in 2025” with “good momentum going into 2026.” This is due to the PCI Express switches being custom built for AI purposes, whereas in the past, PCIe was built for storage and then retrofitted for AI purposes.
PCIe 6 doubles the bandwidth from the 5th generation, with up to 256 GB/s of bandwidth per lane, which will require faster supporting components, such as the retimers that Astera Labs offers. The demo from GTC showed the Scorpio fabric switches (name released in October) delivering twice the bandwidth with less power at 11W instead of the 13W from the PCIe 5 interfaces.
There are two Scorpio fabric switches. The Scorpio P-Series is a small chip that connects the CPU, GPU, NIC and NVMe storage. Rather than building a large switch, the company built a smaller device that is more efficient for high-speed signals to help feed GPUs with data. The fewer ports and smaller switch decrease complexity in a bid to compete against Broadcom with twice the lane count.
The X-Series is for back-end networking in GPU-to-GPU configurations, and will offer a higher port count. Astera is essentially building something similar to Nvidia’s NVSwitch with the X-Series, but for PCIe-enabled GPUs: “And this one, like Mike noted, it's a greenfield use case, meaning if you keep Nvidia and NV Switch aside, everyone else is starting to build configurations that are obviously going to need some kind of a switching functionality, which is what we are addressing with our X Series device.” The X-Series improves efficiency for ever-increasing AI cluster sizes. The majority of AI clusters are in the tens of thousands GPUs, but are expected to go to the hundreds of thousands (already has with X and some other Big Tech companies), and will see AI clusters with millions of GPUs over the next couple of years.
Here is another quote from the management team as to why the X-Series Scorpio switch fabric is a big opportunity for their company:
“X series will have a bigger TAM. The TAM today is nearly zero. It's not very commonly used outside of the Nvidia ecosystem. We do expect many hyperscalers to start deploying this, starting with the X family and the designs for which that we have. And we are able to do that because of the architecture that we have. Because of our software-defined architecture, we can customize many parts of the X-Series to cater to the specific requirements of the hyperscalers both on the side of performance, the exact configuration that they require in count and so on and also the diagnostics framework that they require to monitor their infrastructure. So over time, we do expect X-Series to become larger [than the P-Series].”
COSMOS Software:
In order of importance, COSMOS Software ranks higher than some of Astera’s hardware as it offers performance monitoring for data center infrastructure. This is especially important for Big Tech companies concerned with utilization rates for expensive GPU systems.
The adoption of the software stack to monitor for performance is expected to increase with the Scorpio X-Series:
“Where the Scorpio family sits, we have access to a lot more diagnostic information. And we can couple that with the information that we are collecting from our other families deployed such as Aries and even Taurus to provide a holistic view of the AI infrastructure to the data center operators. So both from the hardware side, the kind of the purpose-built nature of these devices as well as the software stack that comes with it is a big differentiator for us.”
Taurus Ethernet Smart Cable Modules:
Astera Lab offers Ethernet smart cable modules which help to alleviate bandwidth issues with 100-gig per lane connectivity over copper cables including AEC. The company recently released 400-gig Ethernet SCMs, which help to stabilize the network. When thinking of ALAB’s investment thesis, Ethernet is not top-of-mind given the sheer size and lead we see from Broadcom, Nvidia’s Spectrum, and Arista Networks.
Right now, the maximum bandwidth supported by PCIe 5.0 is 400Gbps per port. By using 106Gbps PAM4 SerDes, ASICs can be tuned to support 100, 200 and 400 Gbps port speeds. To work around this, and to achieve 800Gbps, larger chip makers are building NICs directly into the accelerator. According to The Register, the 800Gbps ports built into accelerators may reduce bottlenecks before PCIe 6.0 arrives on the market. The larger Ethernet players are moving quickly on this, and we will need to keep an eye on Astera Labs to determine if the company’s Taurus product can remain competitive.
Leo Compute Express Link (CXL):
Leo is slated to impact revenue in 2025 when data center platforms plan to utilize CXL technology for memory bandwidth and capacity bottlenecks. Next year, CXL-capable CPUs will become broadly available. We’ve covered in the past how CXL is a new server architecture that “dynamically assigns memory resources between servers.” The result is boosted memory bandwidth and also at a lower cost than adding more CPUs. Partially-disaggregated racks are expected to deploy in 2024-2025 with separate compute, memory and I/O racks with the interconnect being CXL.
Per Astera’s management team: “In the past, this was done by adding additional CPUs into the server box to provide for more memory channels. But what we have demonstrated is that by using Leo you're not only able to get the higher performance by the added memory. But from an overall TCO standpoint, it's significantly less than adding additional CPUs. “
Financials: Strong Revenue Growth, Expanding Margins
Astera Labs reported solid top-line and bottom-line beats in the recent Q3 results. The company reported record revenue of $113.1 million, up 47% QoQ and 206% YoY, beating estimates by 16.1%. The adjusted operating margin expanded to 32.4% from 2% in the same period last year, which was helped by strong operating leverage. The adjusted EPS of $0.23 beat estimates by 35%.
Revenue:
The company is one of the fastest-growing tech companies and is emerging as a rising star in the AI data center networking space. The company’s Q3 revenue grew by 206.2% YoY and 47% QoQ to $113.1 million.
Jitendra Mohan, CEO and co-founder of the company, said in the Q3 2024 earnings call, “Our business has entered a new growth phase with multiple product families ramping across AI platforms, featuring both third-party GPUs and internally developed AI accelerators, which drove the Q3 sales upside verus our guidance.”
- Management also provided a strong Q4 revenue guide of $126 million to $130 million, representing YoY growth of 153.4% at the mid-point. This also represents QoQ growth of 13% at the midpoint.
According to management, the QoQ growth is being driven by “our Aries product family across a diverse set of AI platforms, some of which are just starting to ramp and also from our Taurus SCM for 400-gig applications, and additional preproduction shipments of our Scorpio P-Series switches.”
- Analysts estimate revenue to grow 103.5% to $132.78 million in Q1 2025 and 85.2% YoY to $142.34 million in Q2 2025. While the growth rates are strong, growth is expected to slow down due to tougher comps.
Jitendra Mohan said, “Looking into Q4, we expect our revenue momentum to continue, largely driven by the Aries PCIe and Taurus Ethernet product lines. The Scorpio Fabric Switches are continuing to ship in preproduction volumes.”
The newly introduced Scorpio Fabric Switches are expected to increase the total market opportunity to more than $12 billion by 2028 for the company. Scorpio Switches are also expected to constitute more than 10% of revenue in 2025.
Source: Company website
Analysts expect 2024 revenue growth of 230.9% YoY to $383.14 million, followed by 55.5% and 40.4% in the subsequent years. Meanwhile, management comments seem to imply the growth recently reported will sustain, implying the growth phase has only begun: “Our business has entered a new growth phase with multiple product families ramping across AI platforms, featuring both third-party GPUs and internally developed AI accelerators, which drove the Q3 sales upside versus our guidance.”
Management also later stated: “Yes, right now, our visibility is very strong, both as always with our backlog position, but also the breadth of designs we have — right now, we're really kind of entering a new phase of growth here where our revenue streams are clearly diversifying […].”
Margins:
The company’s margins are improving, helped by strong operating leverage. However, the product mix might weigh on the margins going forward. Management mentioned in the recent earnings call that they have a long-term gross margin target of 70%.
- Q3 gross profits grew by 212.7% YoY to $87.88 million or 77.7% of revenue compared to 76.1% in the same period last year.
- This compares to 73.5% for FY2022 and 68.9% for FY2023.
- Adjusted gross margin was 77.8% compared to 76.1% in the same period last year.
- Management gross margin and adjusted gross margin guide for the next quarter are 75%. This is down sequentially due to higher product mix towards hardware solutions during the quarter.
- Operating margin was (-7.9%) compared to (-5.3%) in the same period last year. The adjusted operating margin expanded to 32.4% from 2% in the same period last year, helped by strong operating leverage.
- Management operating margin guide for the next quarter is (-4.3%) and adjusted operating margin guide is 32.4%.
- It’s important to consider that stock-based compensation is quite high due to the recent IPO at 40.3% this quarter, and was at 56% last quarter. Once SBC naturally levels out, this company has strong enough margins to become GAAP profitable.
- Net loss was (-$7.6 million) or (-6.7%) of revenue compared to (-8.5%) in the same period last year.
- Adjusted net income improved significantly to $40.28 million or 35.6% of revenue compared to (-$0.41 million) or (-1.1%) of revenue in the same period last year.
The difference between the GAAP and non-GAAP net income is due to high stock-based compensation. Stock-based compensation was $45.5 million or 40.3% of revenue in the recent quarter. Stock-based compensation has been lumpy as the company’s IPO was in March 2024.
EPS:
The company beat EPS estimates helped by solid operating leverage. Q3 GAAP loss per share was ($0.05) compared to ($0.08) in the same period last year, beating estimates by 28.1%. Adjusted EPS was $0.23 and beat estimates by 35%.
- Management has guided the Q4 GAAP EPS in the range of $0.04 to $0.06.
- Notably, the company will not be GAAP operating income positive next quarter as the guide suggests an operating loss of (-$5.5 million) and interest income of about $10 million in the next quarter will make it GAAP profitable. However, it’s very close to being GAAP profitable across all margins, and we think it’s only a matter of time before this happens.
- Adjusted EPS guide is $0.25 to $0.26.
- Analysts expect adjusted EPS to be $0.25 in Q1 2025 and $0.27 in Q2 2025.
- Analysts expect strong EPS growth. They expect 2025 adjusted EPS to grow 58.9% YoY to $1.14 and 48.6% YoY to $1.70 in 2026.
Cash Flow and Balance Sheet:
The company’s cash flows margins are high and are also improving due to increased profits.
- Q3 operating cash flow was $63.5 million or 56.2% of revenue compared to (-0.9%) in the same period last year. It is also a significant improvement from (-17%) for the full year 2022 and (-6.5%) for 2023.
- Free cash flow was $46.81 million or 41.4% of revenue compared to (-$1.07 million) or (-2.9%) in the same period last year.
- Inventory was $24.4 million compared to $28.6 million in Q2.
- The company had cash and marketable securities of $886.8 million with no debt.
- Net proceeds from the IPO were $672.2 million. The shares began trading on the NASDAQ on March 20, 2024.
Valuation and IPO Risk:
On a sales valuation, Astera Labs is trading higher than Nvidia at 36X Fwd P/S compared to Nvidia’s at 29 Fwd P/S. On the bottom line, whether it’s PE Ratio, EV/EBITDA or Price to FCF, Astera is trading nearly double Nvidia’s valuation.
The company went public on March 20th, 2024 with shares opening for public trading around $62. The company raised $672.2 million with a lockup that expired September 11th, 2024. Insiders saw shares priced at $36 per share at time of IPO and the highest the stock has traded is $95 following the last earnings report.
The valuation is testing the upper limits of AI semi-related stocks. Therefore, we foresee participating now as a momentum play and participating longer-term with a new entry sometime late 2024-early 2025.
This stock requires an active stance, to where if we enter, we will exit for a quick trade, and try again at a lower valuation for a longer-term position. We offer real-time trade alerts on our Advanced tier.
Conclusion:
Management commentary is at odds with analysts’ estimates, as the commentary suggests there is a new growth phase occurring while estimates suggest a drop off in growth over the next 1-2 years. The products are enabling faster data speeds with PCIe5 and also increased back-end networking with PCIe6 for large AI clusters, and thus management’s commentary that this is a new growth phase holds weight. We certainly know the future for AI clusters is going to exponentially increase from 10s of thousands for AI clusters to eventually millions of AI accelerators per cluster. This is not only a GPU opportunity but also a custom silicon opportunity, as Astera Labs exclusively offered PCIe5 switches and retimers, and will now compete against Broadcom on PCIe6.
Astera Labs is technically in the lead and Broadcom is the follower in this case; but where it gets even more interesting is with the new product Scorpio. It is expected to increase the TAM by $5.0 billion with a total TAM of over $12B over the next 3 years. If we assume Astera captures 50% of the total TAM, then what we have is a stock that will remain in hypergrowth territory. If you do the math, that’s a potential 12X increase in revenue by 2028 from the $500M run rate Astera has today.
Certainly, technical analysis is critical given we are dealing with a very stretched valuation, a recent IPO, and ultimately, a stock that will be volatile in the years to come – yet perhaps, with the right timing, the stock will be as equally rewarding. We typically do not participate in IPOs, and Astera Labs illustrates why given its trading 2X higher than the AI juggernaut with impeccable financials (Nvidia). We do not plan to participate long-term in Astera Labs for this reason, yet may participate briefly, and then keep the stock on our watchlist from there.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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