ALAB acting like AHAB

Investment Analysis Clubs Saul’s Investing Discussions
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My initial reaction was “Wow, great quarter.” I mean 20% sequential growth? It nearly hit $200 before reversing hard.

I asked Claude AI to summarize the results for us and speculate on the decline to give us a starting point to discuss.It seems as mystified as I am getting most of its news from one service, and not having access to the conference call.

It’s basically making valuation the story, which is a poor reason, but looking at what happened to Palantir after their numbers (I wouldn’t touch that stock with AHAB’s leg, BTW) maybe no numbers are going to satisfy this market as it corrects.

Based on today’s earnings announcement, here’s what happened:

The Numbers That Look Great

Astera Labs reported record Q3 revenue of $230.6 million, crushing the consensus estimate of $206.4 million by 24/7 Wall St.Stock Titan 11.7%—a 104% year-over-year increase and 20% sequential growth from Q2. Adjusted EPS came in at $0.49, beating the $0.39 estimate by $0.10, with the company now beating EPS expectations in four consecutive quarters, averaging a 33% surprise rate. 24/7 Wall St.

The profitability inflection was striking: operating income swung to $55.4 million from an $8.9 million loss in the year-ago quarter, with gross margin expanding to 76.2%—up 100 basis points year-over-year. 24/7 Wall St. For Q4, management guided revenue to $245–$253 million (implying 6–10% sequential growth) with non-GAAP EPS expected to reach $0.51. 24/7 Wall St.

Why The Stock Fell Anyway

Despite these stellar results, the stock initially rallied in after-hours trading before reversing sharply, closing down 6.4%. 24/7 Wall St. Several factors likely drove this counterintuitive reaction:

  1. Extreme Valuation: The stock trades at 240x trailing earnings, and after a 280% run from the 52-week low, profit-taking appears inevitable. 24/7 Wall St. The stock is also down 31.8% from its September high of $262.90, suggesting investors were waiting for a dip to exit positions. 24/7 Wall St.

  2. Profit-Taking, Not Fundamentals: The intraday reversal—opening down, rallying to plus 6.7%, then closing down 6.4%—on a beat suggests profit-taking after a massive rally rather than fundamental concerns. 24/7 Wall St.

  3. Concentration Risk Questions: Investors will want clarity on whether new customer wins are broadening or concentrating around a few hyperscalers, which will determine if this is a sustainable multi-year cycle or a narrower spike. 24/7 Wall St.

  4. Tax Rate Surprise: The Q4 GAAP tax rate is projected at ~45% Stock Titan, which is significantly higher than the normalized ~15% rate and may have concerned some investors.

The Bottom Line

This is a classic “sell the news” event. The company delivered genuinely excellent results—doubling revenue while expanding margins—and demonstrated strong momentum in AI infrastructure connectivity. The decline reflects the stock’s stratospheric valuation and recent performance, not operational deterioration. The real test will be Q4 execution and management commentary on whether the AI infrastructure refresh cycle remains as robust as management suggests.

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Alab was up until the earning call where Chief Financial Officer Mike Tate mentioned that gross margins will contract from their current level of 75%. That is when the stock started to tank After Hours. Agree the valuation is frothy.

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I am quite possibility talking out of my arse here , but if other earnings start to come out looking this good and still get dumped it starts to give 2022 vibes. It was almost exactly 3 years ago when we started to see these growth stocks tank. The results coming out were good, so we mostly held onto things and just watched them dwindle. Of course there is literally know way to know if that’s what is happening again … but these lofty valuations and returns won’t last indefinitely. If we start to see that even great looking earnings beats aren’t enough to get things moving it does raise some concern. Gross margins contracting causing a dump with otherwise great numbers could indicate that only perfection will be accepted.

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I thought this was a pretty strong quarter with the guide of revenue being for 203 - 210M and actually landing at 231M which was +20% qoq and 104% yoy. The profitability metrics landed well ahead of their estimates as well.

On the margins they mentioned Taurus ships in volume next quarter. It’s also been their story for awhile the long term target for gross margins is 70%, and then landed extremely high at 76.2% GAAP gross margin this quarter.

I think its a stretch to say the market tanked on the gross margin discussion. Yes it happened coincidentally at that time in the Q&A but this is the normal trading patterns that the market is exhibiting lately. What I mean is most of the after hours action is from momentum traders who are not concerned with any aspect of the business. If it breaks towards the downside at the start of after hours, as is common on a negative news day, then its likely to fall at lot further. Just as easily the stock could have been up 20%+ on this over performance had they reported on a different day. I don’t think we should try to be drawing conclusions based on the stock price swings for what has supposedly gone wrong with the business.

Something new they pointed out in the commentary is how early they are getting invited to the conversation on designs. They called it “Multi-generational conversions”, and later they said “These engagements will live for multiple generations” and see revenues going into 2029. You just do not see hardly any other companies getting revenue visibility three years down the road. Of course we are going to have a pay a premium to own this type of stock as its not going to be a bargain with the type of performance they are delivering.

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@wpr101 I totally agree, I think it was just a really unlucky day to report. I gave them an A on my earnings tracker.

@mess7777 I think the concern is valid and yet the debacle of 2022 had a huge catalyst in terms of the inflation crisis. In today’s day and age, there’s a potential catalyst around every corner, so I wouldn’t want to discount your fear. My hope would be that the market would be selective in who they decide to crush…after all, PLTR (who has been the poster child of AI overvaluation) has a P/E of 204 vs. 88 for ALAB, despite growing topline revenue at 63% vs. 104%. But the market can be much more blunt than that.

As for my decisions, for a little over a year I’ve been primarily making yes/no investing decisions by looking at a ratio of growth vs. EV/Sales. It’s led me to miss out on some big gainers, but I’m also happy with my results. Recently I’ve updated it to look at growth vs. the average of EV/Sales and EV/EBITDA. I’m hoping this method can shield me from what seems to be a wave of valuation scrutiny.

In addition, after earnings I’m going to look closely at my distribution across sectors. WPR has pointed out how his portfolio is balanced which de-risks some of these very concerns.

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I would be interested in seeing how you might apply this decison tree, both the rationale, the mechanics of the calculations and some examples, including ALAB and PLTR.

Here are some of those metrics, PLTR according to Koyfin and ALAB according to its press release (Koyfin hasn’t updated ALAB for Q3 yet)

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Edit changes: Above is an updated table based on prust04’s answer below. The original table had some errors, so in the interest of clarity I removed and replaced with above.

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@twillo Sure. I also use Koyfin so I’ll just pull from my dashboard which only has lagging info for ALABs 1Y FQ Revenue growth. I call the metric “Growth Affordability”, for lack of a better term.

ALAB’s growth is 104%. EV/Sales at 27.5 and EV/EBITDA at 65.3, the average of which is 46.4. So their “Growth Affordability” coefficient is 2.24.

PLTR’s is 63/((77.4+150.2)/2) = 0.55

So if I was making a decision to enter one of these, I’d vastly prefer ALAB, where growth is “1/4 the cost”. But it’s worth mentioning that I only use this to decide to enter, not to exit - this is a new development since I exited AXON wayyy to early based on this metric. ALAB is no longer the best performer on this metric, compared to others in my portfolio, but their consistently strong results keep them at a high allocation (13%). Once earnings are largely done across my companies, I will re-balance my portfolio and evaluate where I feel comfortable with them.

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By my favorite metric ALAB seems reasonably valued.

NTM EV/EBITDA is 64.32x vs Fwd 2-Yr EBITDA CAGR 96.3% ratio is .67. As a rough rule of thumb, a stock is fairly valued if the ratio is around 1 and I prefer to buy when the ratio is .5 or less.

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I don’t seem to be able to find this metric in Koyfin. Is that where you get it from?

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Tikr.com is what I use. Jonah lupton turned me on to it.

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