We recently compiled a list of the 10 Most Promising New Technology Stocks According to Hedge Funds. In this article, we are going to take a look at where Astera Labs, Inc. (NASDAQ:ALAB) stands against the other promising new technology stocks.
Tech IPO Outlook 2024
After a prolonged slump, the technology IPO is experiencing a revival in 2024, particularly among companies leveraging artificial intelligence. According to a July 10 report by Morgan Stanley, the firm’s bankers predict to see at least 10 to 15 tech IPOs this year, driven by the growing interest in AI applications across various sectors, especially within technology and healthcare.
According to Colin Stewart, Morgan Stanley’s Global Head of Technology Equity Capital Markets, understanding a company’s role in the evolving AI landscape is crucial for its attractiveness to investors. Companies that demonstrate how AI can transform enterprise operations or customer interactions are more likely to succeed in going public.
The past few years saw a significant decline in IPO activity due to high interest rates and lower company valuations. Many tech firms opted to delay their offerings as capital became more expensive. However, as the market adjusts to these higher rates, companies are realizing they cannot postpone their IPOs indefinitely. The need for liquidity and public financing is prompting many large private firms to consider going public again.
AI has been a revolutionary addition to the healthcare segment as well. Companies are increasingly focused on harnessing vast amounts of data to drive improvements in patient care and medical research. By developing systems that can analyze complex datasets such as electronic health records, imaging data, and genomic information. These firms are positioning themselves as essential players in the healthcare ecosystem. The ability to generate proprietary datasets that power AI applications is becoming a key factor in attracting investor interest.
Read More: 10 Best Small-Cap Stocks Ready To Explode and 10 Cheap NASDAQ Stocks To Invest In Now.
Moreover, George Chan, the EY Global IPO Leader in a report regarding global IPO trends Q3 2024, highlighted several critical insights. His observations reflect a complex interplay of economic factors influencing IPO activity amid a backdrop of global challenges. Chan noted that the global IPO market in Q3 2024 has shown signs of cautious optimism, despite facing a global economic slowdown, market volatility, and geopolitical shifts. There was a year-over-year decline in both the number of IPOs and proceeds, down 14% to 310 IPOs and 35% to $24.9 billion. However, Q3 did see a modest increase in IPO launches compared to the first two quarters of the year.
The report emphasizes that the onset of a global interest rate easing cycle is crucial for shaping future IPO activity. As inflationary pressures diminish and central banks pivot towards stimulating economic growth, lower interest rates are expected to reduce the cost of capital for companies looking to go public. Chan pointed out that this shift could alleviate some financial burdens and encourage investment in new ventures, which is vital for revitalizing the IPO landscape. Despite overall declines in IPO volumes, he highlighted the resilience demonstrated by markets in the Americas and EMEIA.
The EMEIA region saw a remarkable 45% increase in IPO proceeds compared to the previous year, helping to mitigate the global downturn. Chan stressed that investor sentiment is shifting as they prepare for increased volatility in the second half of 2024. With inflation and interest rates receding, other factors are beginning to play more significant roles in influencing IPO decisions. He emphasized that well-timed market entries and compelling equity narratives will be crucial for businesses aiming to capitalize on available opportunities.
Lastly, the report also noted an uptick in cross-border listings, with an increase from 64 companies listing abroad in the same period last year to 77 this year. This trend reflects a growing preference among international companies for US markets due to their liquidity and favorable valuations. Chan indicated that as geopolitical tensions influence capital flows, investors are increasingly diverting funds from slower or unstable economies to more promising markets.
Our Methodology
To compile the list of the 10 most promising new technology stocks according to hedge funds, we used the Finviz stock screener and Q3 2024 hedge fund data by Insider Monkey. We used the screener to filter technology stocks with IPO dates within the past 3 years and then sorted them by market capitalization. Next, we sourced the number of hedge funds holding each stock and ranked the stocks in ascending order of the number of hedge fund holders.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A robotic arm holding a semiconductor chip, emphasizing the precision and quality of the company’s production equipment.
Astera Labs, Inc. (NASDAQ:ALAB)
Number of Hedge Funds: 39
Astera Labs, Inc. (NASDAQ:ALAB) specializes in creating connectivity solutions that use semiconductor technology to enhance cloud computing and artificial intelligence (AI) systems.
Astera Labs, Inc. (NASDAQ:ALAB) on November 4, reported impressive financial results for the third quarter of 2024, achieving record revenue of $113 million. This represents a 47% increase from the previous quarter and a remarkable 206% growth compared to the same period last year. Management attributed this success to a new phase of growth driven by multiple product families, particularly in the AI sector, where their solutions are increasingly in demand.
Moreover, the company is expanding its product portfolio with the introduction of the Scorpio Smart Fabric Switches, aimed at addressing complex connectivity needs within AI infrastructure. This new product line is expected to enhance AI server performance and productivity by improving data transfer speeds and efficiency. In addition, the company has also joined the Ultra Accelerator Link Consortium, along with industry-leading hyperscalers and AI platform providers, aiming to develop high-speed, low-latency interconnects for AI workloads.
Looking ahead to Q4, Astera Labs, Inc. (NASDAQ:ALAB) anticipates continued revenue growth, estimating between $126 million and $130 million. The company is well-positioned to capitalize on the increasing importance of connectivity in AI applications, especially as AI models become more complex and require faster data processing capabilities. It is one of the most promising new technology stocks according to hedge funds.
Baron Discovery Fund stated the following regarding Astera Labs, Inc. (NASDAQ:ALAB) in its Q2 2024 investor letter:
“AI models are rapidly moving from objects of curiosity to levels of functionality that just a couple of years ago were believed to exist only in the realm of science fiction. We obviously do not invest in large-cap companies that produce AI hardware, which is where significant market attention is focused right now. Yet we continue to look for exciting small-cap ideas in AI hardware. For example, we owned a small-cap AI-oriented semiconductor company in the second quarter called Astera Labs, Inc. (NASDAQ:ALAB). Astera Labs manufactures analog semiconductors that facilitate improved communications within a motherboard (for example between graphics processing units like what NVIDIA makes and central processing units which are made by companies like Intel), and between servers. We bought shares when the company went public, but due to the incredible hype surrounding hardware-based AI companies, the stock quickly doubled and exceeded what we believed was a reasonable long-term valuation (particularly given new competitive offerings on the horizon). Therefore, we sold our investment but continue to monitor its valuation closely for a potential re-entry point.”
Overall ALAB ranks 2nd on our list of the most promising new technology stocks according to hedge funds. While we acknowledge the potential of ALAB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.