Astera Labs reported another impressive quarter in Q3 with revenue maintaining 20% QoQ growth, beating estimates by 11.7%, while GAAP operating and net margins showed solid QoQ expansion. Fiscal 2025 revenue is expected to be around $831 million at midpoint, $55 million above current estimates for $776 million and pointing to approximately 110% YoY growth.
There are two items weighing on Astera’s report this evening. The first is the guide for Q4 of $249M at the midpoint, which implies 76.5% YoY growth yet 8% QoQ growth. This is a slowdown from the 20% QoQ growth this quarter.
However, if we zoom out, we see this is actually a large beat as Q4 was slated to report $216.5M equaling a 15% beat. Also consider Astera has seen significant beats every quarter even after raising guidance, thus the conservatism we’ve seen thus far could continue. When looking at the bottom line, we see % surprise has been exceptional – don't believe I’ve seen this consistency and magnitude of bottom line beat before.
Fundamentals aside, Astera’s stock has recently been haunted by Ethernet for Scale Up Networking (ESUN). ESUN was announced mid-October following the Open Compute Project conference with support from AI chip partners and strong Ethernet players, including Nvidia, AMD, Broadcom, Arista, Cisco, HPE, plus a few hyperscalers such as Meta, Microsoft and AI heavyweight OpenAI. The week of the announcement, Astera dropped as much as 33% from an October high of $225 to $154.
Astera’s product line has greatly benefited from the boom in the PCIe networking protocol, and the readthrough is that PCIe will see competitive pressure from Ethernet.
There is a lot to unpack from the earnings report, yet the PCIe versus ESUN debate takes precedence. As you can expect, the Financials section shows a trend very much in play, but we have to address the boogieman first before we can assess Astera’s ability to continue its remarkable growth trajectory.
UALink versus Ethernet Scale-Up Networking (ESUN)
UALink is an open-source alternative to proprietary interconnect protocols such as Nvidia’s NVLink. Astera offers a portfolio of UA linked connectivity solutions, including AI fabrics for signaling conditioning and other I/O components. The expectation is that PCIe’s low latency would carry UALink as a solid alternative to Nvidia’s NVLink with proliferation expected around 2027.
In the past, Astera has counted ten customers as leveraging PCIe in the short term and a combination of PCIe and UALink in the midterm before “transitioning perhaps to a broader UA Link deployment in 2027 and later.”
The market is concerned because ESUN is now a third viable option and one that comes with a sense of familiarity given its Ethernet based, has large backers and perhaps most importantly – can exceed UALink when it comes to time to market. As you’ve likely picked up on with our energy coverage, time to market is everything right now. The ESUN consortium is banking on Ethernet moving quickly for scale-up networking.
As it stands now, PCIe is optimized for scale-up networks due to low latency and speed measured in nanoseconds whereas Ethernet is best for scale-out networks. However, ESUN is proposing an Ethernet solution for scale-up with the press release stating: “ESUN is a new workstream collaboration designed as an open technical forum to advance Ethernet in the rapidly growing scale-up domain for AI systems.”
There are quite a few details to consider in terms of how this plays out, yet the most likely outcome (from where I stand today) is that both are needed. UALink has specific benefits that will be tough for Ethernet to displace. Here is the technical description: “The [UALink] specification enables load, store, and atomic operations between 100s of GPUs while optimizing the protocol stack to minimize end-to-end latency, reducing valuable die area on GPUs and switches, and reducing interconnect and switching power consumption. UALink will support state-of-the-art up to 200Gbps per lane (equivalent to Ethernet) to provide the high bandwidth required between GPUs while also keeping latency in the 100s of nanoseconds (vs. multiple microseconds for Ethernet)”
It goes back to this last part, which is the 100s of nanoseconds for UALink versus microseconds for Ethernet (as it stands today) that will require a leap in product design and successful deployment in order to displace UALink and the PCIe protocol (where Astera’s solutions fit in). Market participants are doing what many time-strapped investors do – scanning and seeing the large backers for ESUN and assuming it means UALink will not be successful. There is a time to market issue for UALink, yet in the meantime, PCIe remains a strong choice for fast, scale-up systems. PCIe is deployable right now for scale-up pods and CXL is also a strong choice for memory pool connectivity (Astera participates in all of this).
Quick Takeaway: ESUN is attempting to make Ethernet work for scale-up whereas UALink was built from scratch for scale-up. The primary benefit ESUN offers is to move quicker than UALink (as discussed above, ALAB is saying it’ll be 2027 for UALink to be fully deployed). However, in the meantime, Astera’s PCIe solutions are in high demand and deployable now. Even if ESUN moves faster commercially, there is a performance gap that helps to ensure that Astera’s positioning with PCIe/CXL remains intact. That performance gap is best described as the low latency required for what are the most in-demand AI workloads today – those that require memory pooling and GPU-to-GPU communication.
Commentary on the Earnings Call regarding UALink and ESUN
The first question on the call pertained to this concern with an analyst inquiring about any changes in management’s outlook given the recent developments around Ethernet. It’s important to note the analyst acquiesced that it could take 18-24 months for a new protocol to be spec’d out.
Here is what was stated – providing a longer quote given this topic has caused the stock to selloff twice.
“We continue to see our market opportunity grow for our scale-up products, particularly this Scorpio X product like you noted. Scale up, as you can imagine, it's a very large market. We estimate it to be in tens of billions of dollars like you correctly noted, some of these design wins take last over multiple generations, simply because of the investment that goes into developing the software and the hardware required for killer topologies.
For us, if you think about our business today, we are getting ready to ramp into production with our PCIe-based scale-up solutions, it's been extremely popular. There are several customers that are using PCIe like protocols for scale. A new entrant was Qualcomm that publicly announced their new AI 200 inference rack that feature PCIe-based scale-up. For Astera, we have engaged with over 10 AI platform providers. And we expect that these design wins and engagements that we have will continue to ramp.
In fact, we expect this to go 2029 just based on some of the multi-generation nature of these design wins. For us, UALink is also a very meaningfully additive opportunity as customers start adopting it, just based on the higher data rate support the spec has been around, like you noted, for over a year now in terms of the consortium being formed. The spec is stable, the ecosystem is forming, silicon development is in full gear. And many of these customers, we have currently engaged with RFPs and RFQ. So the momentum is really built up very nicely and continues to grow. So we do expect meaningful revenue from UALink to start coming in 2027.”
Notably, there is already a hint that UALink could hurry along to become available in H2 2026: “We continue to expect a portfolio of UALink solutions to be available to customers in the second half of 2026 with early revenues generated in 2027.”
Scorpio P-Series is Ramping Now, and X-Series will Ramp Early 2026
The more immediate catalyst for Astera as we look toward Q4 and into early 2026 are the Scorpio products, which we’ve covered in the past.
Scorpio P-Series represents 10% of revenue now, yet management stated it will quickly double to exit the year at 20% of revenue. From there, management has implied Scorpio X will exceed Scorpio P’s revenue percentage. Net-net, that means Scorpio will reach 50% of revenue sometime in H1 2026 up from effectively 0% of revenue in H1 2025.
Here is a quick refresher on these two solutions:
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 custom silicon 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 ASICs. Per an earnings call earlier this year: “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.
In an effort to identify a catalyst that can sustain Astera’s exceptional growth, it would be this product that does so. The X-series is used to interconnect GPUs for higher GPU utilization, resulting in higher ASPs. Per previous commentary: “So to that standpoint, X-Series does bring in a lot more value, and therefore, you can assume that the ASPs tend to be significantly higher. And that's — again, there are different — the X-Series is not one device, to be very clear, there are multiple part numbers. So there would be situations where maybe one part number is not at the same level as P-Series. But in general, you can just look at it from a per lane standpoint or per port standpoint, and look at the value delivered. And on that basis, the X-Series will always be a much more valuable, much more higher ASP product than a P-Series.”
Notably, Astera maintains their largest opportunity for the X-Series is on the custom silicon side although they foresee hyperscalers wanting to customize their racks in a way that prevents vendor lock-in from both Nvidia and Broadcom.
“So these are fabric switches that are used to interconnect multiple accelerators together. So to that standpoint, a, it's not only a significant dollar opportunity because the ASP of this product tends to be high. But these are also products that are turning out to be anchor sockets for us. If you think of an AI rack being built, you have the accelerators and then you have the fabric that interconnects the accelerators.
So what we are transitioning and what we're excited about is that the Scorpio X device is now translating to be an anchor socket. Think of it as like a mothership around which we are able to now add a lot more products that go along with it, whether it's the silicon level products or module or other form factors that we're considering.”
The longer refresher on Scorpio P-Series and Scorpio X-Series is necessary because the primary catalyst we identified earlier this year has not even ramped yet. Scorpio P-Series only began shipping this quarter and Scorpio X-Series will begin to ship next year. Here’s the most recent update on when these are shipping: “Scorpio P-Series continued its initial volume ramp at our lead customer, and we are excited that our P-Series revenue will further broaden with recent new design wins across a variety of AI platforms at multiple hyperscaler customers. Scorpio X-Series is shipping in preproduction quantities with a volume ramp expected throughout 2026.”
Management confirmed they continue to expect a strong ASP uplift for the upcoming Scorpio X-Series ramp in 2026: “Looking ahead, we are gearing up for Scorpio X-Series to shift to high-volume production over the course of 2026. With this ramp of Scorpio X-Series for scale-up connectivity topologies next year, we expect our overall dollar content opportunity per AI accelerator to significantly increase, representing another step-up from a baseline revenue standpoint.”
To future proof Scorpio solutions, Astera Labs is acquiring xScale Photonics as the market is expected to rely more heavily on photonics (as opposed to copper) a few years from now with management stating: “However, as data rates increase and scale-up domains go beyond 1 rack, clearly, at some point, you will need optical interconnects for scale-up. And there is already a big market for optical interconnects at a data center scale.” The result will be photonic solutions with higher data rates for Astera’s Scorpio solutions.
Financials
Revenue Beats by Nearly 12%
Astera delivered a strong beat on the top line in Q3, with revenue up 103.9% YoY and 20.1% QoQ to $230.6 million, beating the $206.4 million estimate by 11.7%. This maintained Q2’s sequential growth rate of 20%, though YoY decelerated by ~46 points as the company begins to lap tougher comps on a dollar basis. Management said the strong growth was driven by new AI platform ramps featuring multiple products and “robust demand” across its signal conditioning, smart cable module (SCM), and switch fabric portfolios.
For Q4, Astera guided for $245 million to $253 million in revenue, coming in well ahead of estimates for $216.5 million and pointing to YoY growth of 77% and QoQ growth of 8%, driven by continued PCIe 6 momentum and robust growth from Taurus Ethernet SCMs. This would technically mark the company’s first <100% growth quarter since the end of 2024.
While Astera did not provide a full-year guide, extrapolating from the midpoint of Q4’s guide projects FY25 revenue at ~$831 million, ahead of estimates for $776 million and corresponding to nearly 110% YoY growth. This will likely force FY26 revenue revisions to move at least $100 million higher from the current $1.04 billion assuming consensus continues to project 34-35% YoY growth.
GAAP Operating Margin Expands ~32 Points YoY to 24%
While the revenue beat and raise is certainly welcomed, the improvement in GAAP margins down the line was impressive, with GAAP operating margin expanding to 24%.
- GAAP gross margin was 76.2%, ahead of guidance for 75%. This marked a marginal 0.4 point sequential improvement but a 1.5 point YoY contraction. Adjusted gross margin was 76.4%.
- GAAP operating margin was 24.0%, well ahead of guidance for 17.9%, and expanding 3.3 points QoQ and nearly 32 points YoY. This YoY expansion from (7.9%) in Q3 ’24 is quite impressive considering the company was reporting triple-digit revenue growth in each quarter; this also reinforces that the company is comfortably GAAP profitable. Adjusted operating margin was 41.7%, up 2.5 points QoQ and 9.3 points YoY.
- GAAP net margin was 39.5%, up nearly 13 points QoQ and more than 46 points YoY. Adjusted net margin was 38.3%, down 2.4 points QoQ but up 2.7 points YoY.
For Q4, Astera guided for slight sequential moderation in margins down the line, with gross margin guidance at 75%, in line with prior quarter guidance. GAAP operating margin was guided to be 22.2% at midpoint, down 1.8 points QoQ but still up more than 22 points YoY. Adjusted operating margin was guided at 39.9%, down 1.8 points QoQ but up 5.6 points YoY.
GAAP EPS Beats by 92%
With the strong expansion in GAAP net margin, Astera delivered a 92.3% beat on GAAP EPS, reporting $0.50 in Q3 versus the $0.26 estimate. Adjusted EPS was $0.49, up 113% YoY and solidly ahead of the $0.39 estimate.
For Q4, Astera guided for $0.20 in GAAP EPS, below the $0.26 estimate due to a 45% income tax rate. Adjusted EPS was guided at $0.51, up 38% YoY. This guidance would bring FY25 GAAP EPS to $1.17 (versus estimates for $0.96) and adjusted EPS to $1.77 (versus estimates for $1.58).
Cash and Balance Sheet
Cash flow margins moderated quite sharply on both a QoQ and YoY basis, though cash flow generation remained decently strong with an OCF margin of 33.9%.
- Q3 operating cash flow was approximately $78.1 million for a 33.9% margin, down from a 56.2% margin in the year ago quarter and a 70.5% margin in Q2.
- Q3 free cash flow was approximately $65.8 million for a 28.5% margin, down from a 41.4% margin in the year ago quarter and 69.5% in Q2.
- Cash and equivalents totaled $1.13 billion and debt remained zero.
- Accounts receivable were $42.9 million, rebounding from $24.3 million last quarter but remaining lower than the $69.8 million from Q1. Inventories moderated slightly to $51.7 million from $58.6 million in Q2.
Conclusion:
We do a lot of checks and balances at the I/O Fund to figure out if a stock is seeing unexpected headwinds. We look for catalysts (Scorpio solutions), we double check our product understanding (PCIe has unique benefits over Ethernet that will be hard to completely displace especially for memory pooling and GPU-to-GPU communication), we do a thorough checklist of the fundamentals with Astera crushing on the top line and even more so on the bottom line.
To me, ESUN signals that Ethernet vendors are a little afraid of being left out of the scale-up party. The most probable outcome is that both ESUN and UALink coexist to address different layers of an AI cluster and as part of a broader shift away from proprietary networking. Even in a downside scenario where Ethernet moves faster than expected, we probably have an 18-month window before those dynamics materially affect deployments. It won’t be a boring 18 months either, rather it’ll be pretty exciting in terms of the importance of AI networking.
With that said, Astera is a hypergrowth stock with an AI valuation. We are always prudent with these stocks by following risk management plans. We saw this with Palantir this week, reminding us that price action doesn’t always follow fundamentals in the near term. Our antennas are up, not because of concerns specific to Astera, but because prudent positioning is part of being an investor in high-growth AI names.
Equity Analyst Damien Robbins 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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