Chip Off the New Block

Welcome Shareholders,

Every Sunday, we'll highlight one company to do an in-depth breakdown of their business, financial situation, and whether or not it's a worthy investment opportunity - large or small. In today's edition, we'll look at Astera Labs, a semiconductor startup that aims to revolutionize the cloud computing and AI landscape by providing innovative, high-performance memory connectivity solutions.

Valuations for semiconductor startups and public companies have plunged recently due to a slowdown in the PC and cryptocurrency markets, with the once booming sector now facing several headwinds. Slowing demand and shrinking margins has forced investors to reevaluate and reprice the once-hot sector. As a result of this slowdown, Santa Clara-based semiconductor startup Astera Labs saw its IPO hopes dashed in late 2022, compelling the company to stay private and raise capital from VCs.

However, what initially seemed like a challenge turned out to be a blessing in disguise for the company. While many publicly listed semiconductor companies are now struggling to post growth over their impressive 2020-21 results, staying private has provided to be a wise decision, enabling Astera to set its own pace of growth and focus on profitability. The company also defied the trend of declining valuations across the industry by securing $150 million in new venture funding at a $3.2 billion valuation late last year. This latest investment, led by mutual-fund giant Fidelity, more than triples Astera's previous valuation of $950 million.

So what is it about this startup that has investors so intrigued? Let's dive deep into Astera Labs and explore its further growth prospects.

Cracking the Connectivity Code

Astera Labs was conceived when its three co-founders, Jitendra Mohan, Sanjay Gajendra, and Casey Morrison, met at Texas Instruments. They recognized a pressing need for a new chip business that would alleviate bottlenecks in data centers. They observed that connectivity was not keeping pace with the rapid advances in artificial intelligence and machine learning, which were transforming the tech landscape. In 2017, the trio decided to act on this insight. As first-time entrepreneurs, they left their jobs, and established Astera Labs in Santa Clara, California, with the mission of creating connectivity solutions that would ensure smooth data flow in the face of ever-evolving technology.

Astera Labs' rapid growth can be attributed to the company's early investment in cloud technology and emerging connectivity solutions. Operating as a fabless chipmaker, Astera Labs designs its chips in the cloud, which significantly accelerates the development process. Once the design is complete, the chips are fabricated by semiconductor giant TSMC. While other chip startups have concentrated on more high-profile aspects of the industry, such as developing smarter chips through artificial intelligence, Astera Labs' founders opted to focus on the fundamental "plumbing" that enables faster connections between chips. In 2017, many believed that connectivity would be a straightforward challenge to overcome, but Astera Labs recognized its complexity and the importance of addressing it, which turned to bear fruit all these years later.

The Cloud Connection

Astera Labs initially didn't plan on building a cloud-based semiconductor company. In late 2017, when considering infrastructure options, their focus was on maximizing long-term value and selecting a solution that could evolve with their growth. Eventually, they decided on Amazon Web Services (AWS), as it suited their work style and anticipated expansion. Although the team at Astera Labs didn't have cloud expertise, they were determined to develop products and run simulations. They sought assistance from Six Nines IT, a Premier AWS Consulting Partner with deep AWS knowledge and familiarity with EDA workloads.

With Six Nines' help, Astera Labs adopted a cloud-based development approach that enabled them to move and scale rapidly, meeting customer expectations. Astera Labs highlighted the benefits of using the cloud, suggesting that the approach saved significant development time compared to a more restrictive computing approach while also improving its quality assurance process. The cloud allowed Astera Labs to run numerous simulations and checks in parallel, verifying the quality of their chip design in a shorter timeframe. This helped them deliver high-quality products at a faster pace, which would not have been possible in a traditional environment.

Unseen Innovation

Despite being one of the most prominent semiconductor startups to emerge over the last decade, Astera Labs isn’t a household name but has nonetheless made a significant impact in the industry. The fabless firm specializes in system-aware integrated circuits, boards, and services that enable high-speed, reliable PCI Express connectivity. By collaborating with top chip vendors and cloud infrastructure providers, Astera Labs effectively addresses performance bottlenecks in data-intensive cloud computing workloads.Over the past six years, Astera Labs has secured hundreds of design wins for its chips, specializing in memory controller chips handling CXL, PCIe, and Ethernet technologies. Astera Labs' innovative approach to interconnecting various peripherals, accelerators, memory devices, and other electronics to a CPU and a GPU in a cloud server has been likened to the impact of USB on laptops.

Despite facing supply chain challenges that have delayed many chips, Astera Labs has managed to distinguish itself by maintaining a short lead time of three to four months for shipping its products. This level of efficiency has become a valuable asset in the current industry landscape, further solidifying the company's position as a leading player in the semiconductor space. Astera Labs' ability to deliver on its promises bolstered its reputation, allowing it to win over major customers like Amazon Web Services (AWS). By emphasizing the need for their solution to address data center bottlenecks, the founders convinced AWS to come on board, laying the groundwork for future partnerships. As Astera Labs continued to deliver on its commitments, its credibility grew, leading to collaborations with industry giants like Google and Microsoft. The company now has three distinct product lines focused on addressing various bottlenecks and has seen impressive revenue growth, reaching an estimated $35 million in 2021 and around $100 million in 2022.

Finding Its Niche

Astera Labs found its niche in CXL (Compute Express Link) technology, seizing the opportunity to become an early tester alongside Intel Corp. CXL works with the current PCIe Gen 5 as a new open interconnect standard, specifically targeting CPU-intensive workloads. The rapid adoption of CXL as a new standard for advanced computing needs, particularly in cloud applications, has allowed Astera Labs to address bandwidth bottlenecks and increase capacity. The company's foresight in working with CXL, even before it had an official name, has paid off as the scale of the technology has grown beyond its initial expectations. CXL has the potential to revolutionize server architecture and operation by creating a cache-coherent interface between CPUs, memory, GPUs, and other peripherals. This development paves the way for more cost-effective, flexible, and larger DRAM configurations, as well as memory tiering and pooling, among other benefits.

Astera Labs' ability to thrive even as other chip companies faced declining sales in 2022, can be attributed to their focus on the right niche (CXL in this case). Their flagship product, the Leo Memory Connectivity Platform, has been instrumental in enabling servers to establish a unified coherent memory space between CPUs and accelerators. The Leo product line offers multiple solutions tailored for tasks including memory expansion, memory pooling, and memory sharing. Astera’s founders estimate that half of the company's total addressable market of $8 billion is due to CXL. The emergence of a new standard like CXL is a rare event, and as long as the market remains stable, Astera Labs predicts that it should continue to see significant revenue growth.

Future-Proof AI Infrastructure

Despite the challenges with the broader semiconductor industry, The cloud and data center markets are expected to be one of the most resilient with a strong growth trajectory expected in the next few years. This growth is primarily fueled by the rapidly expanding artificial intelligence (AI) market and the increasing complexity of AI models. As AI model complexity doubles every three to four months, traditional data centers will struggle to keep up with the computational demands. This is where the scale of cloud service providers becomes essential, as they possess the resources to support these ever-evolving models. As the AI revolution continues to unfold, it becomes increasingly clear that processing power alone is not enough to support the demands of AI and ML applications.

Although inferencing and training AI models require significant CPU muscle, other components, such as DRAM, will play a critical role in enabling these advanced technologies. DRAM is responsible for hosting vast amounts of data that AI and ML models process and making it readily available to the CPU when needed. This prevents debilitating bottlenecks that can hinder the performance of AI applications. With the exponential growth of AI models, cloud servers require more memory chips to store data for processors and accommodate the increasing need for processing power. However, as CPU cores rise, memory bandwidth has been decreasing, and memory channels become limited. Cloud providers and hyper scalers need to ensure that they have sufficient memory resources available in their data center systems to handle the AI/ML workloads demanded by customers across various industries. Astera Labs' focus on CXL technology and the Leo Memory Connectivity Platform could be key to addressing these constraints, thereby empowering the AI revolution.

Connecting the Dots

Astera Labs Leo Memory Connectivity platform leverages CXL to enable direct attachment of DRAM to a server PCI Express slot using Astera Labs' Leo E-Series Smart Memory Controllers. The CXL interconnect enables the system's CPUs, DRAM, accelerators, and other components to send and receive large amounts of data quickly using a common low-latency and high-bandwidth technology. In addition to enabling memory expansion, the Leo Memory Connectivity Platform also supports memory pooling and sharing. Astera Labs' Leo P-Series chips support CXL memory pooling, allowing multiple host CPUs to access the attached DRAM and deliver increased throughput for each CPU while efficiently using the DRAM across the CPUs.

As the CXL interconnect continues to evolve with version 3.0, it will introduce rack-level disaggregation, enabling even more flexible memory pooling and sharing by host servers. Astera Labs is actively working on implementing these features in its next-generation Leo controllers to stay at the forefront of memory connectivity solutions. By offering an advanced memory connectivity platform that addresses the memory challenges of AI and ML workloads, Astera Labs is empowering the AI revolution and providing essential support for cloud providers and hyper scalers as they adapt to the increasing demands of the industry.

Distinctly Different

Astera Labs has looked to distinguish itself in an increasingly crowded market by focusing on its unique strengths and strong relationships with its channel partners. The company has crucially been able to anticipate market trends, and customer needs early on. The company foresaw the demand for signal integrity solutions as customers transitioned from PCI Express Gen 3 to Gen 4 and identified the need for different solutions to handle larger workloads in the cloud. Astera Labs also focused on reducing latency in their products and adding diagnostics that customers could easily integrate into their software stack, setting them apart from competitors.

Furthermore, Astera Labs' strong relationships with its channel partners contribute to its success. The company works closely with these partners, ensuring that both parties align their interests to deliver what the end customer desires. This collaborative approach is a driving force behind Astera Labs' success, as it creates a mutually beneficial relationship between the company, its channel partners, and its vendors.

Looking Ahead

Looking ahead, Astera Labs has ambitious plans for growth and expansion. The company's latest funding round was raised to support its continued growth and prepare for a potential public offering in the future. To help guide the company's strategic direction, Astera Labs has elected Alexis Black Bjorlin, Vice President of Infrastructure at Meta, and Michael Hurlston, President and CEO of Synaptics, to its board of directors.

Both Black Bjorlin and Hurlston bring valuable expertise in hardware, semiconductors, systems, and scaling operations to Astera Labs. To keep up with its expanding product portfolio and operations, Astera Labs is actively hiring for various positions in North America and Asia for connectivity products, protocols, customer-centric design, and high-volume manufacturing. In addition, Astera Labs is establishing new research and development centers in Toronto and Vancouver, Canada.

Bottom Line

Astera Labs is well-positioned to capitalize on the explosive growth of AI and cloud computing, with its innovative Leo Memory Connectivity Platform and CXL-based solutions that address the critical need for high-performance memory access in data centers. The company's unique strengths and customer-centric approach have enabled it to stand out in a competitive market and build strong relationships with channel partners.

As Astera Labs looks to the future, its plans for expansion, investment in research and development centers, and the addition of experienced board members showcase a clear vision for growth and a commitment to maintaining its competitive edge. By continuing to anticipate and address the evolving needs of the market and delivering cutting-edge solutions, Astera Labs is poised to play a vital role in empowering the AI revolution and shaping the future of cloud-based computing.