While technology world is waiting with baited breath for Reddit’s public debut, another company you may never have heard of is about to go public: Astera Labs. And it may be a more important test of returning investor appetite for tech IPOs.
Asteras this week announced the a public filing that its public debut would be bigger than it originally planned in every way: It will sell more shares — 19.8 million versus the previous plan of 17.8 million — and at a higher price, expecting to sell at 32 to 34 dollars per share, versus the previous range of $27 to $30. Astera expects to raise $517.6 million in the middle of its increased range, it said, from $392.4 million. IPO watchers expect it to debut this week.
While Reddit’s IPO could do well for investors looking to buy a well-known social media company that has an interesting, growing AI data business, Astera Labs is an AI hardware story. And no, it’s not taking on Nvidia, the American chip giant that created the world’s most sought-after AI chip.
Astera Labs makes connectivity hardware for cloud computing data centers. Because AI requires massive amounts of data moving in, out and around data centers, Astera has seen recent revenue boom. After generating $79.9 million in 2022, revenue rose 45% in 2023 to $115.8 million.
With 271 mentions of “AI” in its most recent SEC filing, the company is working hard to convince investors that it’s part of the larger AI boom.
How much AI juice Astera really has for long-term success is up for debate. Nick Einhorn, vice president of research at Renaissance Capital, a firm that tracks the IPO market and offers ETFs focused on public offerings, is very skeptical. Astera “is not an AI company,” Einhorn told TechCrunch. The company, however, is “benefiting from the trend,” in his view, particularly data center spending driven by AI. So much so that in 2022, Amazon signed a warrant agreement that allows it to buy just 1.5 million shares, which isn’t proof that Amazon Web Services is a customer, but hints at it.
Again, while the company has an AI story to tell, its rapid recent growth and proven early profitability could be key drivers of investor interest in its public market.
Companies can grow and make money at the same time
In the home country, growth and losses often go hand in hand. Startups raise capital from private market investors, investing the funds in their operations to expand the number of employees so they can build and sell faster. Often, by the time a startup reaches the scale required to go public, it’s still unprofitable and unlikely to start generating adjusted earnings, let alone profit under stricter accounting standards, in the near future.
By the fourth quarter of 2023, Astera Labs appeared to be just that kind of company. Its business grew rapidly last year, with significant losses.
On 2022 revenue of $79.9 million, it posted a net loss of $58.3 million. on its revenue of $115.8 million in 2023, the net loss was $26.3 million. So on a year-over-year basis, this is far from the kind of profitable company that IPO experts say this tough market calls for. Even when the company took out the non-cash costs of partially paying its employees in stock, the company’s adjusted earnings were still negative in 2023.
But when we dig deeper, his financial success becomes more nuanced. In the third quarter of 2023, Astera Labs’ revenue began to rise dramatically: from $10.7 million in the second quarter of 2023 to $36.9 million in the third quarter and $50.5 million in the fourth quarter.
And while this growth spurt is impressive in itself, the company’s profitability picture has also improved radically as 2023 comes to a close. After posting a net loss of $20.0 million in Q2 2023, the net loss evaporated to just $3.1 million in Q3 2023.
And for the fourth quarter, Astera Labs posted a profit: net income worth $14.3 million.
Einhorn cautioned that the company’s Q4 2023 results may not herald the company’s new normal. “One of the challenges for companies like this,” he explained, “is that you tend to have a high concentration of customers, and the buying patterns of customers can be very uncomfortable.” Good recent quarters do not always indicate similar future quarters. Another weakness: in 2023, its three largest customers accounted for about 70% of its revenue, Astera revealed.
Putting it all together: Astera Labs has been riding a wave thanks to AI data center spending. The resulting financial recovery is impressive and explains why its IPO is set to take place at a valuation about $5.2 billiona healthy increase from the final private market price amounting to 3.15 billion dollars.
If the company is able to attract a strong following after its first day of trading, it could open the IPO door for other businesses that see new growth as a byproduct of artificial intelligence. And maybe that will be enough for more tech deals to sneak out this year.
