ALAB's explosive results yet massive plunge? Concerns over gross margin behind Amazon's $6.5 billion mega order
Author | Eric
ALAB (Astera Labs) is a global leader in AI connectivity chips, focusing on solving high-speed interconnection bottlenecks in cloud data centers. Its core products include Aries PCIe/CXL Retimer and Scorpio Smart Fabric Switch.
Global connectivity chip giant $Astera Labs (ALAB.US)$ Released Q4 earnings after hours, with post-market share price falling over 9%. Let's explore why the market reacted so pessimistically to this earnings report.
The three key highlights of this earnings report:
1. Expectedgross margin continues to decline; Amazon’s $6.5 billion seven-year warrant accounting treatment has been lowering gross margins by 2 percentage points starting from Q2
ALAB’s revenue has maintained high growth in recent years, with gross margins consistently stable around 75-77%. However, management previously indicated that with the ramp-up of low-margin products like Taurus,the long-term gross margin will drop to around 70%, but the market seemed to have forgotten this point, which is why it was surprised by the guidance of next quarter’s gross margin declining to74%. The ongoing increase in the revenue share of hardware-based solutions will further drag down the gross margin.
Today, ALAB submitted a warrant agreement document with $Amazon (AMZN.US)$ . According to the terms of the agreement, ALAB will issue 3.3 million warrant shares (approximately 1.8% of Q1's fully diluted shares) to Amazon in connection with Amazon’s purchase of the company’s smart fabric switching chips, signal conditioning products, and optical engine solutions.The cumulative maximum value could reach up to $65 billion, a figure large enough to astonish Wall Street.
However, it is worth noting that for accounting purposes, these warrants issued to customers are typically treated as discounts to customers, which would further pressure ALAB’s gross margin.Management expects that starting from Q2, there will be an estimated impact of approximately 2 percentage points on gross margin per quarter.。
2. Management significantly raised the TAM, with the Scorpio series performing beyond expectations, highlighting the potential revenue scale of NVLink Fusion as being comparable to UALink.
As ALAB’s core product line for the future, Scorpio is expected to account for the full-year 2025 revenue atMore than 15%, surpassing the management's expectation of 10%. It remains the only product in the market that has achieved scaled volume shipments as a PCIe 6 switch fabric. The Scorpio P series is expected to continue growing with the key customer Amazon by 2026, while also securing two additional large hyperscaler customers in the US.The highly anticipated Scorpio X series products are expected to see gradual revenue growth in the first half of 2026, transitioning to scaled mass production in the second half, collaborating with over 10 AI platform providers,with full-scale mass production ramp-up completed by 2027。
Company management this quarter raised their previousUSD 12 billion TAMguidance toUSD 25 billion, encompassing Aries and Taurus signal conditioning solutions, Scorpio AI fabric switch chips, Leo CXL memory controllers, and customized solutions for scale-up connectivity. Management noted they are expanding the merchant scale-up switching market opportunity, estimating that by 2030 the industry TAM will reach approximately USD 20 billion, with optical applications in the scale-up segment likely emerging aroundAround 2028The initial deployment of optical technology (especially CPO) may first occur in scale-out, ahead of scale-up deployments.
Management also mentioneda growing demand for the NVLink Fusion solution，The overall revenue scale of NVLink Fusion is expected to be comparable to the company’s previously promoted UALink.。
3. The CFO was suddenly replaced, and the new CFO is Rambus’s CFO.O
This quarter’s earnings report unexpectedly announced the change in CFO; former CFO Mike Tate transitioned to a strategic advisor role, and the new CFO is from $Rambus (RMBS.US)$ Desmond Lynch, who previously served as CFO at an American interface chip company. Such sudden CFO changes often trigger risk aversion among high-valuation growth stocks.
Q4 Key Financial Metrics:
– Revenue2.71billion USD, a year-over-year increase of92%, representing a 17% increase quarter-over-quarter, surpassing the market consensus expectation of $250 million, with the previous guidance upper limit set at $253 million.
- Non-GAAP gross margin75.7%, up 1.6 percentage points year-over-year but down 0.7 percentage points quarter-over-quarter, exceeding the market consensus expectation of 75.1%, with the company’s previous guidance at 75%.
- GAAP net profit44.98 million US dollars, growing by82%, net profit margin16.6%, below the market consensus of 51.24 million US dollars, with the company's previous guidance upper limit at 36.60 million US dollars.
- Non-GAAP net profit105 million US dollars, growing by58%, net profit margin38.7%, above the market consensus of 94.80 million US dollars, with the company's previous guidance upper limit at 93.33 million US dollars.
Q1 Guidance:
Expected FY2026 Q1 revenue286-297 million US dollars, growing by79%-86%, GAAP and Non-GAAP gross margin74%，Down both year-over-year and quarter-over-quarter, GAAP net profitUSD 66.24-69.92 million, growing by108%-120%, Non-GAAP net profitUSD 97.52-99.36 million, growing by64%-67%。
Summary
In summary, $Astera Labs (ALAB.US)$ As a key player in data center interconnect chips and deeply tied to $Amazon (AMZN.US)$ Benefiting from its ultra-high capital expenditure, the market has consistently assigned it a high valuation. However, its core product lines such as Scorpio, NVLink Fusion, and UALink have yet to see large-scale adoption. Coupled with market uncertainty regarding the outlook for UALink, Ethernet, and ESON protocol standards, ALAB's stock price has been experiencing unusually large fluctuations.
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