MW Why Amazon's $6.5 billion chip deal with Astera Labs is a 'double-edged sword'

By Christine Ji

While the agreement promises robust future revenues for Astera Labs, analysts are concerned about customer concentration and a hit to margins

Shares of Astera Labs tumbled on Wednesday despite a fourth-quarter earnings beat, as investors questioned the merits of the large deal with Amazon.

For Astera Labs, landing a multibillion-dollar commitment from Amazon.com is a vote of confidence for its technology - but such a deal isn't without its risks.

Shares of Astera Labs (ALAB) tumbled 20.2% in recent trading on Wednesday morning, despite the company reporting higher-than-expected fourth-quarter revenue and earnings, as investors weighed concerns over margin compression, or lower profitability, and customer concentration.

Late Tuesday, the company posted that revenue rose 17% from a year ago, to $271 million; and adjusted earnings of 58 cents per share - beating FactSet consensus estimates of $250 million for revenue and 51 cents for adjusted EPS.

The semiconductor-connectivity specialist, which went public last year, revealed a $6.5 billion warrant agreement with Amazon (AMZN) to help it build out data centers for Amazon Web Services. Under the deal, Amazon has the right to purchase up to 3.26 million shares of Astera Labs common stock at an exercise price of $142.82 per share, contingent on product purchases up to $6.5 billion.

But Wall Street had mixed feelings about Amazon's big investment.

"Supplying the hyperscale datacenter is a double-edged sword," TD Cowen analyst Sean O'Loughlin wrote following the earnings results. Connectivity solutions have become a critical bottleneck in bringing capacity online, making Astera Labs a critical player in the artificial-intelligence build-out.

O'Loughlin pointed out that the deal would be "a source of significant revenue opportunity and revenue concentration." That the $6.5 billion performance condition is around seven times the size of Astera Labs' current revenue base, he said.

O'Loughlin pointed to "significant growth potential" from the new Amazon deal, especially as Amazon uses Astera Labs' Scorpio X-Series switches to build clusters of Trainium chips, but highlighted that investors may be overlooking the level of competition in the switching space from other providers such as Broadcom $(AVGO)$ and Marvell $(MRVL)$.

But the deal also comes with margin pressures. Management expects the accounting treatment of these warrants to act as a "contra-revenue" headwind, reducing gross margins by around 200 basis points - 2 percentage points - starting in the second quarter of 2026.

Read: 10 stocks that let you invest like Nvidia in the next hot AI trade

O'Loughlin added that while Astera Labs posted strong earnings results, investor expectations were heightened after Big Tech companies raised their capital expenditure estimates for 2026 in previous weeks, with Amazon alone expected to spend $200 billion.

Astera Labs is also increasing its own spending to keep up with the AI boom, which will lead to further margin pressures. The company announced a new research and development center in Israel this week, and acquired optical connectivity startup aiXscale Photonics in October 2025. Management shared that the payoff period on these investments is expected to start in 18 to 24 months.

"We view these investments as key to maintaining the company's growth trajectory in an increasingly competitive datacenter connectivity landscape - but they remain impactful to the bottom line in the near-term," TD Cowen's O'Loughlin wrote. He maintained his hold rating and price target of $170.

This isn't the first deal between Astera Labs and Amazon, but it's by far the largest. In October 2022, Amazon first secured warrants to purchase approximately 1.5 million shares at an exercise price of $20.34 per share. In October 2023, the original agreement was amended to allow Amazon to purchase an additional 830,000 shares.

See more: These under-the-radar chip stocks could deliver rapid sales growth for the next 2 years.

Even with Wednesday's selloff, Astera Labs' stock has still soared 58.9% over the past 12 months, compared with the S&P 500 index's SPX gain of 14.2% over the same time.

-Christine Ji

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February 11, 2026 11:22 ET (16:22 GMT)

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