Astera Labs is down over 16% 📉📉, despite reporting a stellar Q4, where they beat and raised guidance that confirms the demand environment. At TPO, we had cut our position in Astera Labs by half last week, and currently sit at 2.8% allocation.

🤔 So, why the knee-jerk reaction?

Simply put, investors are looking past the quarter and anchoring on two things that feel uncomfortable in the near term. 

1️⃣ The first is the step-up in operating expenses, that is expected to squeeze margins in the short-term.

2️⃣ Second, Astera also announced that it entered into a warrant agreement with Amazon, allowing the tech giant to purchase up to 3.26M shares at $142.82 through February 2033, that will vest in tranches of payments made by Amazon for the purchase of up to $6.5B of Astera’s products.

💡 But, let’s just get a little bit deeper into the next point, as this may feel confusing from an accounting and investment standpoint, even though the vote of confidence from one of Astera’s major customers should be welcome news.

You see, from an accounting standpoint, when a company provides equity to a customer in exchange for their business, that equity is considered a "payment to a customer.”

In other words, if Astera Labs sells $100M of product to Amazon but "pays" $2M in warrant value for that quarter’s milestone, the reported Top Line (Revenue) will only be $98M.

As a mathematical consequence of revenue reduction, the “noncash hit” flows against gross margins as the CFO noted.

In all of this, it is worth pointing out that Astera’s structural long-term story still remains intact. In fact, Scorpio X is the bigger unlock because it is the anchor socket for scale-up with management projecting at least 50%  revenue by 2026, with a higher ASP than the P-Series.