A Once-in-a-Decade Opportunity: 17 Billion Reasons to Pay Attention to This Monster Artificial Intelligence (AI) Infrastructure Company (Hint: Not Nvidia)

Key Points

• Astera Labs provides semiconductor-based connectivity solutions for cloud and AI infrastructure.

• Its focus on open standards and interconnectivity is proving to be a key competitive advantage.

• The company boasts solid financials, and strategic collaborations can strengthen its competitive moat.

• 10 stocks we like better than Astera Labs ›

Artificial intelligence (AI) has taken the world by storm, and Nvidia has positioned itself as the backbone of this revolution. The company's AI-optimized GPUs are in high demand, and this trend shows no signs of slowing as enterprises and hyperscalers continue to scale their AI infrastructure.

While much investor attention is focused on compute capacity, networking and high-speed connectivity are also equally crucial in global AI buildout. That's where Astera Labs (NASDAQ: ALAB) comes in.

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Astera Labs estimated the target addressable market for its cloud and AI connectivity solutions at $17.2 billion in 2024 and expects it to grow to $27.4 billion by 2027. Those 17 billion reasons alone make this networking player hard to ignore, while its focus on open standards and interoperability-including collaborations with Nvidia, Advanced Micro Devices, and Alchip positions it as the next monster company in the AI infrastructure landscape.

Business drivers

The global AI infrastructure buildout is increasingly vulnerable to networking and latency bottlenecks, in addition to compute power constraints. PCI Express (PCIe) is the open networking standard used inside servers and AI racks to link CPUs, GPUs, memory, and storage. Each new generation delivers faster and more efficient internal chip-to-chip and server-to-server connectivity, allowing AI workloads to move massive amounts of data with reduced delay.

Astera is targeting this connectivity and latency market with its purpose-built solutions that includes Aries PCIe retimers (a small chip that cleans and boosts data signals), Scorpio PCIe fabric switches (connecting PCIe devices inside a server or data center rack), Taurus electrical cables, and Leo CXL controllers (manages Compute Express Link connections, a new standard built on PCIe). These products ensure stable and high-speed connections across accelerators, storage, and memory in the AI server racks.

The California-based company also operates an Intelligent Connectivity Platform that combines hardware (retimers, switches, active cables, CXL controllers) with COSMOS software, which is used to monitor and optimize connections across entire AI racks. The hardware-software integration is becoming increasingly critical as hyperscalers expand their AI clusters. The company has also demonstrated PCIe Gen 6 interoperability with Nvidia's GPUs (including Blackwell architecture chips ), which has dramatically strengthened its position in the AI connectivity space.

Financial performance

Demand for these advanced networking products is evident from Astera's financial performance. In the second quarter of its fiscal 2025 (ended June 30), revenue soared 150% year-over-year to $191.9 million, driven by solid demand for its Aries and Taurus product lines to connect more chips within an AI server rack or to connect multiple AI server racks.

Astera Labs is also showing strong profitability and cash generation. In the second quarter, non-GAAP operating margin expanded 550 basis points year over year to 39.2%. The company also generated free cash flow of $135.4 million and had $1.07 billion in cash and marketable securities at the end of the second quarter. These funds have provided the company with the flexibility to fund growth initiatives.

Demand visibility

Astera is seeing strong demand as hyperscalers accelerate AI data center buildouts. The company's Scorpio P-Series switches, which support PCI Express Gen 6 (the latest version of the PCIe standard) for connecting multiple servers and racks in AI clusters, have entered volume production and already account for more than 10% of revenue -- the fastest product ramp in its history.

The company is also engaging with over 10 unique AI platform and cloud infrastructure companies for its Scorpio X-Series, designed for connectivity between next-generation AI racks. The company expects high-volume production of Scorpio X switches in 2026. These switches can lead to better monetization for the company in the coming years.

Server manufacturers are also testing Leo CXL controllers and may soon choose to deploy them. Taurus Ethernet cables are also expected to see wider use in 2026.

Interoperability

Astera is positioned to benefit dramatically from the AI Infrastructure 2.0 transition -- the shift from proprietary and difficult-to-scale rack designs to open, multi-vendor, and scalable ones. The company is a promoter of UALink, an open interconnect standard for AI accelerators backed by AMD and major hyperscalers. Astera is also working with Nvidia to support NVLink Fusion networking technology and with custom chip developers such as Alchip. These partnerships highlight its commitment to ensuring vendor interoperability in AI clusters.

Data centers are increasingly preferring interoperability, as it prevents vendor lock-in. Hence, this could help drive adoption of Astera's solutions in future years.

Valuation

Shares have surged over 440% from Astera's initial public offering price of $36 in March 2024. The stock trades at nearly 103 times forward earnings, which is steep. However, with trailing 12-month revenue of $605.5 million and a profit margin of 16.5%, the valuation appears more reasonable -- especially since topline and bottom-line performance is better than that of many AI peers. Analysts are also guiding for revenue to grow year over year by nearly 96% in fiscal 2025 and 31.5% in fiscal 2026. On the other hand, earnings per share are estimated to grow by 88.4% and 29.3%, respectively, in fiscal 2025 and fiscal 2026.

Investors often accept high valuation multiples for companies with rapid revenue growth and improving profitability -- much like Palantir Technologies, which continues to trade at premium valuations due to robust demand trends. Hence, while execution risks remain, Astera seems to be a solid high-risk, high-reward choice for long-term investors.

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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.