Unmasking Nvidia’s Secret Partner: The Next Big AI Investment Opportunity

This advertisement from Shah Gilani has been circulating since early May and remains unchanged. Over the past year, Shah Gilani has been hyping up “the next NVIDIA” AI stocks, both for his previous publisher and now for Manward Press, where he recently took over as the primary pundit from Andrew Snyder. This particular stock pick has generated a lot of interest, and many readers have been asking about it. It’s all part of a promotional push for his entry-level newsletter, the Manward Money Report ($99/year).

Here’s how the ad starts:

So, is this yet another one of the 50-plus AI stocks we’ve examined over the past year, or is it something new? Many companies have been pitched using the “NVIDIA partner” narrative, whether as hidden suppliers or potential competitors that could challenge NVIDIA’s dominance. This chatter will grow louder with NVIDIA’s upcoming earnings report just two weeks away.

It seems this is one of the companies Amazon has chosen to “invest and partner” with. Amazon often strikes long-term purchasing agreements while leveraging its buying power to secure equity stakes in its partners. We’ve seen this strategy in deals involving air cargo (Cargojet) and electric delivery vehicles (Rivian), so it’s unsurprising to see similar arrangements being made with partners on the Amazon Web Services front.

We’re also informed that this company is approximately the same size NVIDIA was back in 2014 (a time after which, as we might recall, NVIDIA’s value eventually skyrocketed by around 10,000%). That would place its market cap at roughly $10 billion—not exactly small for a “startup,” but still significantly smaller than the major AI players making headlines today.

And, just to make the “like NVIDIA” FOMO pitch even clearer, Gilani doesn’t leave room for doubt:

We’re also told that he found this “next blockbuster AI stock” because of one of its venture capital funders…

Gilani mentions that Sutter Hill holds a 12.6% stake in this company, which he describes as “massive”—offering another key clue.

The company appears to play a role in building connectivity solutions within data centers. According to the tease, NVIDIA’s recently introduced Blackwell chips, which made headlines earlier this year, are so advanced that they demand newer, more sophisticated systems to connect them effectively. Here’s how Gilani explains it:

And some specific hints about the company’s performance so far…

And it’s not just NVIDIA that he uses as FOMO fuel, he name drops a few other big winners from past booms as well…

And that “big announcement” that Gilani hints at is really just, in my words, “it will become clear that they’re partnered with NVIDIA, and investors will go nuts.”

Here’s how he puts it:

I can’t say whether this startup will mention NVIDIA in its next earnings call, potentially catching the attention of “mainstream America” and sending the stock soaring—it’s certainly possible. After all, we’ve seen stocks skyrocket for far less substantial reasons over the past year (remember when any company with “AI” in its name seemed to double overnight during the early ChatGPT craze?).

That said, institutional investors likely won’t be caught off guard. Nor will those paying attention, as this stock has already been bid up to an ambitious valuation shortly after going public. Shah Gilani is teasing Astera Labs (ALAB), which made its market debut on March 20.

As luck would have it, ALAB reported its first quarterly earnings recently. They highlighted their close ties with NVIDIA during the conference call, emphasizing their plans to support NVIDIA’s new Blackwell installations with advanced connectivity hardware and software later this year. While this is exciting, much of it was already public knowledge — ALAB showcased their latest products at NVIDIA’s March conference and disclosed collaborations with critical players like NVIDIA, Intel, and AMD in their IPO filings. Still, despite these announcements, the stock moved lower, suggesting the expected “mainstream excitement” hasn’t materialized yet.

Or rather, has yet to re-materialize. ALAB already experienced a dramatic surge when it went public. Priced at $36 during its IPO on March 20, the stock nearly doubled to $64 on the first day and soared to $95 in its debut week. However, it has since returned to the low $70s, with a roughly 5% dip following the earnings release. This places the stock squarely in the middle of its trading range from its first six weeks as a public company.

Earnings were undeniably strong—no surprise for a company going public in a hot sector. Quarterly revenue showed a remarkable 269% growth compared to the previous year, as ALAB touted the latest generation of its connectivity products.

What exactly are these “connectivity products”? I’ll admit, I don’t fully grasp the intricacies of how they function or what the competitive landscape for such technologies looks like. Fortunately, CEO Jitendra Mohan shed some light on the matter in the company’s recent quarterly earnings press release:

I wouldn’t precisely recognize a “Retimer” if it hit me out of nowhere, but the term certainly sounds impressive. Moreover, their revenue growth at least suggests that there’s some substantial demand for their product. There’s potential for significant growth, mainly since they’re focusing on high-end installations with large GPU clusters. They claim to be leading the charge in the next generation of connectivity, which could align with the rollout of NVIDIA’s Blackwell GPUs in late 2024. If you’re trying to mentally justify the company’s current valuation as you review the numbers, keep in mind that growth could improve in the next year or so.

However, after factoring in the top-line growth and impressive revenue performance, it becomes more challenging to assess the business. They aren’t profitable yet, and their first-quarter results were heavily impacted by the costs of their IPO—both from issuing new shares and covering listing expenses. On a positive note, their products make financial sense, with a 70-80% gross margin on sales, which is a good sign. However, the large share issuance means that their GAAP operating loss of $83 million in Q1 far exceeds their revenue of $65 million.

The good news is that the numbers look much better if we adjust for the significant stock-based compensation and IPO costs. On an adjusted basis, they reported 78% gross margins, an operating income of $15.9 million, net income of $14.3 million, and pro forma non-GAAP diluted earnings per share of 10 cents. So, they were profitable and expected growth to continue at a robust pace. However, the increasing share count will likely mean that adjusted earnings growth remains minimal (their guidance suggests non-GAAP diluted earnings of 11 cents per share, mainly due to increased shares from 153 million to about 180 million after the IPO).

They received a nice cash boost from the IPO, as most of the shares sold were from the company (about 15% were sold by existing shareholders). This means ALAB has around $700 million in cash to fuel its next growth phase. However, there may also be pressure to sell once insiders are allowed to sell their shares, which will happen two days after the company reports Q2 earnings—likely opening the door for insiders to start selling in mid-August.

Sutter Hill Ventures is a significant shareholder in Astera Labs. They participated in equity raises in 2021 and 2022, buying preferred stock that was later converted to common stock during the IPO. Over the past couple of years, they’ve also bought shares from executives who wanted liquidity. The other prominent venture backer is Fidelity. Sutter Hill was the largest shareholder before the IPO, holding 13.7% of the company, and their representative, Stefan Dyckerhoff, serves on Astera’s board.

While Sutter Hill isn’t infallible, they have an intriguing history and are more concentrated than many other venture capital firms. Having been around for 60 years, they’re best known today for their involvement in the success of Snowflake (SNOW) and Pure Storage (PSTG). If you’re interested, Jeff Burke wrote a great piece on Substack about what makes Sutter Hill unique. Given their track record, I expect they’ll gradually sell their shares after the lockup period, as is typical with venture-backed IPOs.

So, is Astera Labs a significant investment from here?

I’m still determining. It’s a fast-growing company, but its current valuation is very optimistic.
It’s still early days for the company, founded in 2017. However, it’s backed by experienced and well-connected founders and strong investors like Sutter Hill. In some ways, it reminds me of a younger version of Arista Networks (ANET), aiming to innovate with software-based connectivity solutions that are particularly appealing to hyperscale data center operators. This focus suggests that they will likely maintain a concentrated customer base, which increases quarter-to-quarter risk as those customers decide when to place or pause orders. In 2022, about 89% of their revenue came from their top three customers (with over 50% from one customer), and in 2023, the top three customers accounted for about 70% of their revenue. While these companies aren’t named, assuming they include major players like Amazon, Meta, Microsoft, and Alphabet is reasonable. Notably, Amazon has a partnership with Astera, committing to a base level of spending and acquiring warrants to buy 2.3 million shares at $20.34 each through 2029, based on spending $650 million on Astera’s products over time.

The company is impressive, but the valuation is relatively high by the end of Q2, with 180 million shares outstanding (according to their guidance). This would put their market cap at over $12 billion for a company that is marginally profitable on an adjusted basis and likely to continue issuing a lot of shares in the first few years. True GAAP profitability may still be some time away. If things go well, particularly if the hyperscale customers continue heavy orders, they could transition into a sustainably profitable company faster. But at this valuation, investors will likely expect high growth to continue.

Astera Labs has posted $98 million in sales over the past four quarters and is valued at roughly 120X times those trailing revenues. This is about as high as it gets, so if you’re taking them seriously, you must give credit to their rapid revenue growth. If they continue to grow at 10-12% per quarter sequentially (not year-over-year), as they’re currently projecting for Q2, their revenue could exceed $300 million this year, or possibly even more. It’s speculative to look too far ahead. Still, the end market is growing strongly as investment in data centers remains aggressive, particularly from hyperscalers, and Astera’s products have been well-received. If they hit over $300 million in sales for 2024, their valuation would be around 35-40X forward revenue.

This places them in a very exclusive group, and for this to succeed, they’ll need to continue growing at a similar rate well beyond this year. Few companies trade for more than 30X forward revenue outside of biotech and some uranium miners. Exceptional examples include Microstrategy (MSTR), mainly viewed as a Bitcoin proxy, and Joby Aviation (JOBY), an electric taxi company. Among more established firms, ARM Holdings (ARM) trades at almost 40X trailing sales due to its high margins as a primarily IP and licensing business, and NVIDIA trades at about 37X trailing sales. However, this is a short list of companies that attract extreme investor optimism. Astera Labs will only reach 35X trailing revenue if they surpass the $300 million revenue mark and maintain a share price near $60-70 over the next year.

As I was preparing to post this article, analyst estimates began coming in. Now we have a clearer picture of what the analysts think (they typically wait about a month to initiate coverage of a newly public company). Their outlook is slightly more cautious than mine. Analysts expect Astera Labs (ALAB) to reach $277 million in revenue for 2024, with annual growth of 45-50% after that. At a share price of $69, this equates to roughly 43X the current year’s sales estimates. These analysts also forecast adjusted earnings of 31 cents per share this year, growing by about 70% per year to 90 cents by 2026. On this basis, the forward earnings multiple is over 200X.

Analysts generally have price targets in the $85-100 range (though these targets aren’t significant, in my view), with an overall “buy” rating. Analysts often influence investor sentiment, so despite the relatively modest forecasts, the attention could generate some buying pressure in the coming days.

A high valuation doesn’t necessarily mean the optimism is misplaced, but it’s too early to say. What’s clear is that, at this price, there needs to be more room for disappointment in their growth trajectory. I’m impressed with the story and the rapid progress the founders have made in building the product line and customer base. If you’re interested in learning more, I recommend reading the “Letter from our Founders” in the prospectus, which might encourage you to consider buying shares in these early stages. However, I’ll hold off for now. I occasionally invest in new companies, but I typically find IPOs more appealing after six months, once they’ve reported a few quarters and passed the insider lockup period.

Of course, this is just my perspective—it’s your money, and you should decide.

If you’re curious, the company that keeps coming to mind as a comparison is Arista Networks (ANET). While Arista and Astera have different products, they share a similar strategy: both offer software-driven connectivity solutions for large, complex, and rapidly evolving customer needs, particularly for data centers. Arista, like Astera, relies heavily on a small number of hyperscale customers (though not as much as Astera currently does). This presents both opportunities and risks. Arista has been public for about a decade and has been a strong performer, but it took some time to gain momentum.

At the time of Arista’s 2014 IPO, it had grown sales by 60-70% per year over the two years leading up to it, but it was also already profitable, covering its operating and R&D costs. Arista went public at about 10X sales; for the first few years, it grew revenue at around 40% per year. The company was valued at about 50X earnings and traded at around 10-12X sales. By 2017, when Arista’s market cap reached $12 billion (about the same as Astera’s today), it traded at about 10X sales and 50X earnings and was growing revenue at 45%.

If you had invested in Arista, then buying at 30-40X forward revenue might have worked out, but it required patience. That decision valued Arista at about $70 billion, but the market fully appreciated its worth about six years later. Arista’s market cap is roughly $90 billion, following a significant surge in recent months.

The one hopeful aspect of the ALAB story is the possibility of revenue growth far exceeding analyst expectations. If ALAB can grow its revenues by 150-200% this year and sustain growth at over 100% for the next couple of years, investors might be willing to justify almost any valuation. After all, where there’s growth, there’s hope.

That said, a more fitting comparison might be Snowflake (SNOW). Although Snowflake is a very different type of tech company, it too was launched by Sutter Hill and went public at a staggering 100X sales. Snowflake had a great product and a respected CEO, and many believed its impressive revenue growth could justify the high valuation. However, while things went well initially, growth slowed from 170% at the IPO to around 100% two years later and faltered. Today, Snowflake’s growth rate is down to 36%, and its valuation has significantly dropped. Investors who bought in at over 100X sales, particularly in late 2020 or throughout 2021, have seen their investments lose 35-40% in value.

If Shah Gilani is correct in predicting that “revenues could surge as much as 4,735% over the next few months,” then yes, the stock could rise—but such predictions are often just marketing fluff and should be taken with caution. If Astera were a $3 billion company, I’d be more interested, but I’m hesitant to speculate at a valuation of $10-12 billion. I’ll watch it for now, and I’m encouraged that the stock has started to dip a little today.