Astera Labs ALAB, despite an impressive performance following its initial public offering (IPO) exactly a year ago, is currently experiencing a rough patch. This Santa Clara-based semiconductor firm posted a stellar fourth-quarter 2024 report, with adjusted earnings up 61% and revenues surging 179% year over year. Yet, despite exceeding Wall Street's estimates and providing a bullish first-quarter guidance, Astera Labs failed to gain investors’ confidence. Slightly lower-than-expected gross margins and concerns over slowing revenue growth were the reasons behind the stock’s decline.

Since the company’s fourth-quarter results were announced on Feb. 10, the stock has tanked 46.6%, underperforming the broader Zacks Computer & Technology sector’s decline of 36.5% and the Zacks Electronics—Semiconductors industry’s decrease of 23%.

Share Performance Since Q4 Release

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Astera Lab’s lower-than-expected gross margin of 74.1% in the fourth quarter of 2024, impacted by a shift in product mix toward hardware-based solutions like the Aries and Taurus Smart Cable Modules, impacted investors’ sentiment.

Astera Labs isn’t the only company to witness a downturn. Competitors like Broadcom AVGO and Marvell Technology MRVL also saw substantial declines of 34.2% and 54.8%, respectively, in the same time frame as ALAB. The entire semiconductor space, in fact, has been under pressure amid concerns over elevated inventories and cyclical demand slowdown.

Broadcom, a key player in AI through its custom chip business, has been caught in the broader tech selloff. Investors are concerned that cloud giants may slow their AI spending and shift to building more chips in-house. Concerns about saturation in hyperscaler spending and a longer-term shift toward in-house chip development by major cloud players have begun to weigh on investors' sentiments for Broadcom.

Marvell Technology, too, is facing a challenging 2025 due to macroeconomic headwinds and internal issues. The company issued a lackluster first-quarter fiscal 2026 guidance, forecasting $1.875 billion in revenues, below the buy-side expectation of $2 billion. The outlook sparked investor concerns over Marvell’s gloomy near-term prospects as customers are rescheduling orders to manage excess chip inventories.

Tariffs Trigger Further Concerns for Astera Labs

Semiconductor stocks collectively saw a sharp pullback following President Trump’s announcement of sweeping new reciprocal tariffs, which reignited investor fears about supply chain disruption and rising input costs. Under the new set of tariffs, set to take effect on April 10, China (54%), Vietnam (46%) and Taiwan (32%), all of which are critical to the semiconductor value chain, will be hit the hardest.

These tariffs, particularly those targeting imports from Taiwan and China, directly impact Astera Labs' supply chain and cost structure. For example, the company relies heavily on manufacturing partnerships with firms like Taiwan Semiconductor Manufacturing Company for the production of its high-performance chips. The newly imposed 32% reciprocal tariff on Taiwanese imports threatens a substantial increase in production costs for Astera Labs.

Expensive Valuation for ALAB

Astera Lab shares are currently overvalued, as suggested by its Value Score of F.

In terms of the forward 12-month price/sales, ALAB is trading at 12.24X, higher than the industry’s 5.52X.

ALAB is also expensive compared to Broadcom and Marvell, which currently trade at forward 12-month price/sales of 10.87X and 5.15X, respectively.

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Astera Labs Positioned for Sustained Long-Term Growth

At the heart of the company’s growth strategy are three core business drivers. Together, these drivers are expected to fuel above-market growth for Astera Labs throughout the year and beyond.

Rising Adoption of Internally Developed AI Accelerators: A key growth driver for Astera Labs is the rising use of AI platforms built on internal accelerators that use its Aries Retimers, Taurus Smart Cables and Scorpio Switches. This trend picked up in the third quarter of 2024, boosting revenues and setting the stage for continued growth in 2025, especially for Aries PCIe Gen 5 as AI clusters scale. Demand for Taurus 400G cables is also strong, with an eye on the shift to 800G in 2026. Meanwhile, the new Scorpio X Switch, powered by Astera Lab’s COSMOS software, is gaining early traction with its first pre-production orders.

Custom AI Racks Built With Third-Party GPUs: Despite the near-term gloom, Astera Labs expects to grow in 2025 with the ramp-up of custom AI racks using third-party graphics processing units (GPUs). The company is providing Scorpio P Series switches and Aries PCIe Gen 6 Retimers to boost GPU performance while supporting customers’ networking setups. Pre-production shipments are already underway, with full deployments expected in the second half of the year.

Growing Share in General Compute Infrastructure: Beyond AI, Astera Labs is gaining traction in general compute platforms, including new CPUs, SSDs and network cards. Products like Aries Retimers, Taurus Ethernet FTM and Leo CXL are expanding its reach in this space. While smaller than the AI segment, general compute adds stability and diversity, helping drive consistent growth across a wider range of data center applications.

A $12 Billion Market Opportunity by 2028

Astera Labs is investing heavily in R&D to drive innovation across hardware, software and system-level solutions. It expects its market opportunity in retimers, controllers and switches to reach $12 billion by 2028, with major growth in AI fabric solutions for scale-up applications. By tackling complex interconnect challenges and removing data, memory and network bottlenecks, Astera Labs is boosting its value and increasing its share of spend per rack.

Earnings Estimates for ALAB Show Upward Trend Too

The Zacks Consensus Estimate for 2025 revenues is currently pegged at $671.2 million, indicating an increase of 69.4% from the 2024 reported figure.

The consensus mark for earnings is currently pegged at $1.26 per share, indicating a 50% improvement from the year-ago period. Over the past 60 days, the Zacks Consensus Estimate has moved north by 14 cents as analysts increased their estimates, depicting optimism over the stock’s growth potential.

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Astera Labs: A Hold Now

While Astera Labs is clearly positioned for strong long-term growth driven by increasing adoption of its connectivity solutions in AI infrastructure, rising traction in general computing and a promising strategic roadmap, the stock faces notable near-term challenges. Despite solid fundamentals and exposure to a projected $12 billion market by 2028, recent concerns around the imposition of reciprocal tariffs, particularly those targeting imports from Taiwan, may raise production costs and complicate supply chain logistics, further putting pressure on profitability. Stretched valuation also remains a concern.  Accordingly, this might not be the ideal time to invest in this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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