Astera Labs reported solid earnings that beat the top-line and bottom-line estimates driven by AI strength. Q4 revenue grew by 179.4% YoY and 24.8% QoQ to $141.3 million, beating estimates by 10.3%. Adjusted EPS grew by 208.3% YoY to $0.37 and 150% YoY to $0.30 after excluding one-time tax benefit, beating estimates by 15.8%.

Management Q1 revenue guide is $151 million to $155 million, representing YoY growth of 134.4% at the midpoint, beating estimates by 14.2%. Adjusted EPS guide is $0.28 to $0.29, beating estimates by 14%.

The only downside in the report was the gross margin, which was below the management guide due to the higher mix of hardware revenue. Management reiterated that margins will trend closer to the long-term gross margin target of 70% from the current 74%.

Looking ahead, the IOF is likely to build a bigger Astera position in 2025 due to nearly-unrivaled pricing power from PCIe 5.0 retimers and higher average sales prices from the soon-ramping Scorpio PCIe 6.0 switches. In our original analysis, it was stated: “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.” This was reiterated on the earnings call: “we will continue to benefit from increased dollar content per accelerator in these next-generation AI infrastructure systems.”

The see-saw market reaction is similar to what we are seeing across many AI-related hardware companies, which is due to mixed messaging around the delivery of Blackwell systems. Management indicated their Q1 is primarily being driven by custom silicon programs, which is a positive to be diversified, yet requires additional due diligence for Nvidia investors such as ourselves.

Overall, management teams are offering a more muted Q1 in their commentary with increased anticipation for H2 2025. Where Astera Labs is unique is they serve both custom silicon and GPU systems, of which, there are many systems combining both.

Regarding tariffs and China, Astera Labs has 15% exposure and this is less of a concern for this stock, then say, something like Blackwell being delayed. It’s speculative as to the extent that Blackwell is delayed, yet we have now another management team aligned with this possibility.

I look at this and more below.

Q4 Revenue Grows 179% from Aries and Taurus Products

The company’s Q4 revenue grew by 179.4% YoY and 24.8% QoQ to $141.3 million, beating estimates by 10.3%, driven by strong AI demand.

The company experienced significant revenue growth in Q4 primarily due to strong sales of its Aries PCIe Retimer and Taurus Ethernet Smart Cable Module products. Leo and Scorpio's product momentum continued, with both products shipping in pre-production volumes during the fourth quarter.

Here is what management stated about the beat – most intriguing is the note that 2025 will be a “breakout year” and that the Scorpio products are slated to become the company’s largest product line (and yet did not drive the current outsized revenue growth and beat):

“Our revenue growth in 2024 was largely driven by Aries products, along with a strong ramp of Taurus in the fourth quarter. We expect 2025 to be a breakout year as we enter a new phase of growth driven by production revenue from all four of our product families to support a diverse set of customers and platforms. We expect 2025 to be a breakout year as we enter a new phase of growth driven by production revenue from all four of our product families to support a diverse set of customers and platforms. 

In 2025, our Aries and Taurus retirements are on track to continue their strong growth trajectory. Also, Astera Labs is poised to be a key enabler of CXL proliferation over the next several years with the volume ramp of our Leo family expected to start in second half of ‘25. 

Finally, our Scorpio smart fabric switches will begin ramping this year with new and broadening engagements for a scale up with our X series and scale out with our PCD switches. In time, we expect Scorpio Fabrics switches to become our largest product line, given the size and growth of the market opportunity for AI Fabrics.”to become our largest product line, given the size and growth of the market opportunity for AI Fabrics.”

• Management Q1 revenue guide is $151 million to $155 million, representing a YoY growth of 134.4% and 8.4% QoQ at the midpoint, beating estimates by 14.2%.
• Analysts expect revenue to grow 108.6% YoY and 5% QoQ to $160.58 million in Q2 and 59% YoY and 12% QoQ to $179.85 million in Q3.

• 2024 revenue grew by 242.3% YoY to $396.3 million, accelerating from 45% growth in 2023.
• Looking further out, analysts expect revenue to grow 75% in 2025 and 25.8% in 2026.

Regarding 2025 being a breakout year, management stated it was partly due to increased dollar content per accelerator. We offer more in the Q&A section below, yet this was stated in the opening remarks: “As we look into 2025, we see strong secular trends across the industry, supported by higher CapEx spent by our customers, broadening deployment of AI infrastructure driven by more efficient AI models, and company-specific catalysts that should drive above market growth rates for Astera Labs.

Specifically, for 2025, we expect three key business drivers. One is the continued deployment of internally developed AI accelerator platforms that incorporate multiple Astera Labs product families, including Aries, Taurus and Scorpio. As a result, we will continue to benefit from increased dollar content per accelerator in these next-generation AI infrastructure systems.”

The total addressable market of $12 billion was further reiterated by saying, “We estimate our portfolio of hardware and software solutions across retimers, controller and fabric switches will address a $12 billion market by 2028.”

Gross Margin Contracts 330 Basis Points YoY

The company’s bottom line is growing at a remarkable pace. However, the margins will trend lower in the coming quarters due to the expected higher mix of hardware revenue. Notably, stock-based compensation is high yet the company has strong GAAP profitability potential as SBC becomes a lower percentage in the coming quarters/years.

The CFO answered an analyst question on margins for 2025. “Now, if you go into 2025, we still see good contribution from Taurus and Aries SCM modules. But as we make it through the year, the Aries board and chips as well as Leo and Scorpio are a positive for us as well. So, we think Q1 and Q2, we should have a consistent margin profile of around 74%. And as we highlighted, margins will be trending down closer to the longer term model of 70%, but it all depends on the mix of our hardware versus silicon.”

• Gross profit grew by 167.6% YoY to $104.5 million or 74% of revenue compared to 77.3% in the same period last year.
• Adjusted gross margin was 74.1% compared to 77.3% in the same period last year. The gross margin was below the management guide of 75% due to the higher mix of hardware revenue. Management guide for the next quarter is 74%.
• Operating margin was 0.1% compared to 17.9% in the same period last year.
• Adjusted operating margin was 34.3% compared to 24.4% in the same period last year; it was better than the guide of 32.4%, helped by operating leverage. However, operating expenses were higher than the management expectation as it continued to invest in R&D to support the strong growth and they closed a small acquisition in the quarter that also contributed to higher spending in the quarter.
• Management Q1 adjusted operating margin guide is 30.5%. The CFO said in the earnings call, “Operating expenses will grow in Q1 is largely driven by three factors, one, continued momentum in expanding our R&D resource pool across headcount and intellectual property. Two, seasonal labor, expense step ups associated with annual performance merit increases and payroll tax resets, and three, a full quarter contribution of the strategic acquisition we executed in the latter part of Q4.”
• Net income grew by 72.7% YoY to $24.7 million or 17.5% of revenue compared to 28.4% in the same period last year. Adjusted net income grew by 277.8% YoY to $66.5 million or 47.1% compared to 34.9% in the same period last year. The company benefited from a one-time tax benefit of $7.6 million in Q4.
• The vast difference between GAAP and non-GAAP net income was due to the stock-based compensation of $48.2 million or 34.2% of revenue in Q4. Once SBC naturally levels out, this company has strong enough margins to become GAAP profitable.

Strong EPS growth

Adjusted EPS grew by 208.3% YoY to $0.37 and 150% YoY to $0.30 after excluding one-time tax benefits, beating estimates by 15.8%, driven by strong operating leverage.

• Q1 adjusted EPS guide is $0.28 to $0.29, beating estimates by 14%.
• Analysts expect adjusted EPS to grow 38.5% YoY to $1.16 in 2025 and 52.6% YoY to $1.77 in 2026.

Cash Flows and Balance Sheet

The company’s cash flows are growing, helped by higher revenues.

• Q4 operating cash flow grew by 175.7% YoY to $39.7 million or 28.1% of revenue compared to 28.5% in the same period last year.
• Q4 free cash flow grew by 15.4% YoY to $15.45 million or 17.2% of revenue compared to 26.5% in the same period last year.
• Cash and marketable securities were $914.3 million compared to $886.8 million at the end of Q3 with no debt.
• Inventories increased to $43.2 million from $24.4 million at the end of Q3. Management clarified in the earnings call Q&A that they will be maintaining the current levels to support growth and the strong growth in Q3 led to the company draw down significant inventories in Q3, which led to the sequential increase in Q4.

Harlan Sur (Analyst):

Appreciate that. And on the balance sheet, inventories are up almost 80% sequentially in the December quarter. That's an all-time high for the team. I think it’s up 60% versus the average inventory level over the past four quarters. Is the significant step-up reflective of a strong multi-quarter shipment profile across the overall portfolio? Or maybe reflective of a step up in more of your board level solutions? Or is it a kind of a combination of both?

A: Jitendra Mohan (CEO and Co-Founder)

Well, if you remember, in Q3, our revenues were very strong. We were up 47% sequentially. A lot of that strength developed during the quarter. So we drew down our inventories pretty significantly in Q3. Now in Q4, we had time to build back to our more normalized level. So this this level of inventory is actually where we feel much comfortable.

We always want to be in a position to support upsize from our customers and – because most of our programs are sole sourced. But this level reflects the growth in our business now.”

Earnings Call:

Aries PCIe6 Forecasts Potential Delay on Nvidia’s GB200s

Astera stated they are shipping pre-production quantities for its Scorpio P Series and Aries PCIe Gen 6 solutions to maximize GPU throughput. The company stated: “These programs are driving higher dollar content opportunities for Astera Labs on a full rack and full accelerator basis and we expect volume deployments to begin in the second half of this year.”

What this comment implies is both the Scorpio P Series and PCIe Gen 6 will deploy in H2, yet originally, PCIe 6.0 was expected to ramp with support initially offered in the GB200s. Back in March, Astera demo’ed PCIe 6.0 for a wide range of Blackwell products.

There was also indication back in the August call that Gen 6 was confirmed to be used in Blackwell’s GB200, and there were initial shipments: “We have started shipping initial quantities of preproduction orders of our PCIe Gen 6 solution, Aries 6. We ship and support our hyperscaler customers initial program developments that are based on Nvidia's Blackwell platform, including GB200.”

There was further confirmation in the November call that preproduction volumes were shipping: “At the recent 2024 OCP Global Summit, we demonstrated the industry's first PCIe Gen 6 fabric switch, which is currently shipping in preproduction volumes for AI platforms.”

As Nvidia investors, we keep a close eye on these suppliers as they often can flag any issues with unparalleled accuracy. Given we are nose-down on many earnings reports over the past year regarding Nvidia’s AI systems specifically, there’s a notable change in tone for Astera to go from preproduction volumes to now shipping in volume in H2. We’ve noticed this change in other earnings reports, and will detail this more fully for you later today.

To stay on the topic of Astera, the following was discussed in the Q&A section:

“Now, if you look into 2025, we see both contributing growth. The first half of the year will be more predominantly the AI – internal AI accelerator programs. But if you get into the back half of the year, the transition on the merchant GPUs will also be very strong for us. This is where you'll see the custom rack configurations start to deploy and that’s where we see a big dollar increase in our contemporary GPU with Scorpio starting to ramp.”

On one hand this is a positive, but on the other hand, it raises questions as to why merchant GPUs (Nvidia) will be stronger in the back half of the year as this does not match the anticipated timing originally described by Nvidia’s management team with the CEO stating, “Blackwell production is in full steam. I think we're in great shape with respect to the Blackwell ramp at this point.”

There could be an argument made it’s unique to Astera Labs, yet we have seen something similar echoed across a few management teams in the last 4 business days, thus, it’s important to inform investors of this change in tone.

Thomas O'Malley   Barclays Bank

Super helpful. And then my follow-up was just — I think it was Mike's commentary on one of the first questions here on the call. You talked about kind of the year 2025 on the Aries side, talking about how in the first half of the year, you would see more internal AI efforts followed by the second half of the year being more merchant GPU. That comment was a bit surprising to me given we're going through a big product transition now at the large customer of yours. So is there any change in the way that you see the ramp of 2025 versus where you did before? I would have anticipated maybe the merchant GPU being a bit stronger earlier in the year. Just any reason behind those comments that caught me a little off guard.

Michael Tate   CFO

Sure. Yes, so the — first of all, the merchant GPU drives both Scorpio and Aries. So the big incremental piece of the merchant GPUs is the score field content which is all new for us. The designs that we have are complex in nature, they're all new. So the — to get them — to productize and ramp we're looking at that to start off in the back half of the year. Right now, in the first half of the year's preproduction. These are all for custom configuration. So the customization adds a little bit of lead time to the volume rates.

Aries, Taurus Driving the Beat; Scorpio is Ramping Quickly

We covered Astera Lab’s product offerings in our deep dive here. 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. On PCIe6, Astera will compete against Broadcom but this is less of a concern for merchant GPUs from Nvidia, and meanwhile, Astera has indicated it’s custom silicon programs are healthy.

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.

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.

Aries products drove the company’s strong growth in 2024, along with the ramp of Taurus products in Q4. Management expects Scorpio product revenue to grow sequentially in Q1 and comprise at least 10% of total revenue for 2025.

Mike Tate, CFO, said in the earnings call, “During the quarter, we enjoyed strong revenue growth of both our Aries and Taurus Smart Cable Module products supporting both scale up and scale out PCIe and Ethernet connectivity for AI rack level configurations. For Leo CXL, and Scorpio Smart Fabric Switches, we shipped pre-production volumes as our customers work to qualify their products for production deployments later in 2025.”

Scorpio is especially promising with one analyst stating it was apparent Scorpio will drive more than 10% of revenue with ASPs being “significantly higher” than other products:

Here is what management explained: “So I think to add some color to that, again, the ASP profile of a retimer class device and a switch device tends to be very different, meaning on the switch side, we do get a significantly higher ASP. And if you look at least for the customized AI racks that are being deployed, we are essentially adding a Scorpio socket to go along with the retimer socket. And given that attach rate configuration, what we also see is that the dollar content per GPU will go up. But in general, the switch is a much bigger TAM out there. And then we get to play both in the front end with the P-Series and the back end. Back end tends to be obviously a lot more fertile in many ways because we have many GPUs talking to each other. And we benefit from having a high ASP device like the X-Series switches and them being deployed in a scale that's much more significant compared to any other products that we have released so far.”

China and Tariffs

We have covered in our editorial that semiconductor stocks face geopolitical risks from tariff threats and a possible US-China trade war in 2025, but they will also face a tougher selling climate in China as the country pushes for more domestic production towards its goal for 70% semiconductor self-sufficiency by the end of 2025. Astera Labs has 15% exposure in China, which is less of a concern for this stock.

Conclusion:

Astera is likely to see volatile price action if a Blackwell delay were to be confirmed. Its important investors have a plan and a strategy since there is an unprecedented amount of capital pointed straight at these particular AI systems (GB200s). Our plan, as it stands today, is to embrace the volatility as part of investing, hedge at times, and keep dry powder on hand with plans to buy lower. Should Blackwell ship on time (although I cannot find a component supplier who has reported yet confirming this), then we will, of course, still participate.

For the H2 vision on Astera, here is the thesis in a nutshell from our last write-up:

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.

Note: Astera’s fiscal year revenue will be $676M for closer to a 10X increase, should the assumptions stated above play out.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

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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