Soaring Astera Labs stock faces a major valuation risk: what next?

Astera Labs stock price has gone parabolic in the past few months, mirroring the performance of the semiconductor industry. ALAB jumped to $346 on Monday, up by 253% from its lowest point this year, with its valuation jumping from $16.6 billion in April to $60 billion today. Still, the company faces some major risks, with analysts predicting a pullback. 

Astera Labs stock has jumped amid the semiconductor industry boom

Astera Labs is a top player in the technology industry, where it builds the connective tissue inside data centers. Instead of making GPUs, the company makes chips and software that enable GPUs, CPUs, memory, and networking gear to communicate with each other well.

The company solves a major problem that has existed in the data center industry for a while. Modern AI platforms use thousands of chips that work together, and moving data between them is a key bottleneck. 

Astera Labs stock price has, therefore, surged this year because of the ongoing data center boom in the United States and other countries. Top companies like Meta Platforms, Microsoft, Google, and Amazon are spending over $750 billion in their data centers this year. 

The most recent numbers showed that Astera Labs’ business was firing on all cylinders. Its revenue jumped by 14% sequentiually and 93% on a YoY basis, making it one of the fastest-growing companies in the industry. It made over $304 million in revenue, beating what analysts were expecting by far. 

This growth happened as the company announced the Scorpio X-Series 320-lane Smart Fabric Switch. It also expanded its Scorpio P-Series PCIe-6 Fabric family that now spans from 32 to 320 lane configurations. 

Astera Labs made a net income of $110 million, representing an operating margin of 36.2%. Analysts believe that this growth momentum will continue as the data center boom gains steam. 

The average estimate is that the company’s revenue jumped by 87% to $360 million. It will then grow by 78% YoY to over $410 million. As a result, the annual revenue growth is expected to grow by 81% this year followed by 42% next year. This means that it will make $1.55 billion this year, followed by $2.19 billion next year.

Still, the main challenge for Astera Labs stock is that it is highly overvalued. Data shows that it trades with a forward price-to-earnings ratio of 153, much higher than the sector median of 32. The forward PEG ratio stands at 2.31, also higher than the sector median of 1.36. 

ALAB stock price technical analysis

Astera Labs stock chart | Source: TradingView

The daily chart shows that the ALAB share price has surged from a low of $98.17 in March to a high of $372 this year. It recently surged above the crucial resistance level at $262, its highest point in September last year. 

The Relative Strength Index has moved from the overbought level of 83 to the current 65. In some instances, it is common for a highly overbought stock to retreat amid profit-taking.

Astera Labs stock has also moved further away from its historical moving averages. For example, its current price of $346 is much higher than the 100-day Exponential Moving Average (EMA) of $203. This means that it may retreat because of a concept known as mean reversion. 

If this happens, the next key level to watch will be at $262, its highest point in September. This target is slightly above the average estimate among analysts, which stands at $233.