Astera Labs Reset Confirms Growth and Margin Risks

What happened

Astera Labs reported revenue more than doubling year-over-year, but sequential growth slowed to mid-single digits, triggering valuation compression as the market adjusts to a moderated pace. GAAP operating margin declined from mid-20% levels to below 20%, driven by a spike in R&D spending to $93.8 million, which now accounts for nearly 35% of revenue. Despite margin pressure, free cash flow margins remained strong above 30%, supported by $1.19 billion in cash and zero debt, ensuring financial flexibility. This aligns with the DeepValue report's warnings about structural risks, including high customer concentration and warrant-related contra-revenue that could cap margins. The reset reinforces the view that growth sustainability and profitability are under threat without evidence of diversification or margin stabilization.

Implication

The slowing sequential growth indicates potential normalization of AI-driven demand, challenging sustained high valuations and growth assumptions. Margin decline from aggressive R&D investment, while necessary for long-term competitiveness, raises near-term profitability concerns and operational leverage issues. Strong free cash flow and cash reserves provide a liquidity buffer but do not mitigate fundamental risks like customer concentration and warrant headwinds highlighted in the report. Investors must monitor upcoming quarters for Scorpio switch expansion and margin trends, as these are critical to the bull case and thesis validation. Until diversification is proven and margins stabilize, the stock is likely to face continued pressure, supporting the DeepValue report's WAIT rating and patience for a better entry point.

Thesis delta

The article confirms the margin compression and growth slowdown risks anticipated in the DeepValue report, reinforcing the existing thesis without a fundamental shift. It heightens the urgency for monitoring customer diversification and margin stabilization, as these are now evident in recent performance. Investors should adhere to the WAIT rating, with entry consideration only near $110 for improved risk-adjusted returns.