TheChek News Flow

Startups with an AI angle would do well to pay attention

While the technology world breathlessly awaits Reddit’s public debut, another company you might never have heard of is about to go public: Astera Labs. And it may be a more important test of investors’ returning appetite for tech IPOs.

Astera this week announced in a public filing that it’s public debut would be bigger than it initially planned in every way: It will sell more shares — 19.8 million vs. the previous plan of 17.8 million — and at a higher price, expecting to sell at $32 to $34 per share, vs. the previous $27 to $30 range. Astera expects to raise $517.6 million at the middle of its raised range, it said, up from $392.4 million. IPO watchers expect it to debut this week.

While Reddit’s IPO could do well from investors looking to buy a well-known social media company that has an interesting, burgeoning AI data business, Astera Labs is an AI hardware story. And no, it’s not taking on Nvidia, the American chip giant that created the world’s most in-demand AI chip.

Astera Labs makes connectivity hardware for cloud computing data centers. Because AI requires massive amounts of data moving into, out of and around data centers, Astera has seen recent its revenues bloom. After generating $79.9 million in 2022, revenue swelled 45% in 2023 to $115.8 million.

With 271 mentions of “AI” in its most recent SEC filing, the company is working hard to convince investors that it’s part of the larger artificial intelligence boom.

Just how much AI-juice Astera really has for long-term success is up for debate. Nick Einhorn, vice president of research at Renaissance Capital, a company that tracks the IPO market and offers public-offering focused ETFs, is a touch skeptical. Astera is “not an AI company” Einghorn told TechCrunch. The company, is, however, “benefiting from the trend,” in his view, particularly data center spending driven by AI. So much so, that in 2022, Amazon signed a warrant agreement that allows it to buy just shy of 1.5 million shares, which isn’t proof that Amazon Web Services is a customer, but does hint at it.

Then again, while the company does have an AI story to tell, its rapid recent growth and demonstrated early profitability could be the key drivers to its public-market investor interest.

In startup-land, growth and losses often walk hand-in-hand. Startups raise capital from private-market investors, investing the funds into their operations to expand headcount so that they can build, and sell more quickly. Often by the time that a startup reaches the required scale to file for a public offering, it is still unprofitable and not likely to start generating adjusted profits, let alone profit according to more stringent accounting standards, in the near future

Up until the fourth quarter of 2023, Astera Labs appeared to be just that sort of company. It’s business grew rapidly last year, with sticky losses to match.

On its 2022 $79.9 million in revenue, it posted a net loss of $58.3 million; on its 2023 $115.8 million in revenue, net loss tallied $26.3 million. So, on an annual basis, this is far from the kind of profitable company IPO experts say this harsh market requires. Even when the company removed the non-cash costs of paying its workers partially in shares, the company’s adjusted profits were still negative in 2023.

But when we dig in, its financial success becomes more nuanced. In the third quarter of 2023, Astera Labs’ revenue began growing dramatically: from $10.7 million in Q2 2023 to $36.9 million in Q3, and $50.5 million in Q4.

And while that spike in growth is impressive on its own, the company’s profitability picture has also radically improved as 2023 came to a close. After posting a net loss of $20.0 million in Q2 2023, net loss evaporated to a mere $3.1 million in Q3 2023.

And for Q4, Astera Labs swung to a profit: $14.3 million worth of net income.

Einhorn warned that the company’s Q4 2023 results may not augur the company’s new normal. “One of the challenges for companies like this,” he explained, “is that you tend to have a lot of customer concentration and customer buying patterns can be very lumpy.” Good recent quarters do not always imply similar future quarters. Another weakness: in 2023, its biggest three customers represented about 70% of its revenue, Astera disclosed.

Putting it all together: Astera Labs has caught a wave thanks to AI data center spending. Its resulting financial glow-up is impressive, and helps explain why its IPO is is set to occur at a valuation of around $5.2 billion, a healthy lift from of its final private-market price of $3.15 billion.

If the company is able to attract a strong following after its first day of trading, it could wedge the IPO door open for other businesses seeing newfound growth as a by-product of AI. And perhaps that will be enough for more technology offerings to sneak out this year.

Plant being built in South Carolina by parent Volkswagen among options available to German brand

Audi is looking into manufacturing electric cars in the US, including using space in a $2bn plant being built by parent company Volkswagen in South Carolina.

Chief executive Gernot Döllner said the company had discussed “different scenarios on how to produce in the US” as it looks to increase its market share. “There’s more potential for growth in the US,” he said. 

He added that “bigger SUVs” would be part of Audi’s US strategy. While EV sales have taken off in coastal regions, many drivers in inland states still prefer combustion engine models, he added.

Unlike rivals BMW and Mercedes-Benz, Audi makes no cars in the US. Its factory in Mexico makes the Q5 SUV, but many cars it sells in America are exported from Europe. The Q7 and Q8, its largest SUVs, are imported from Slovakia.

The US has had an influx of EV investment in response to the Inflation Reduction Act, which provides generous tax incentives for EVs that are manufactured using batteries produced in the country.

Carmakers such as Hyundai have poured billions into new facilities because of the act, while VW slowed plans for an eastern European battery plant to focus on North American investments. It is building an EV battery factory in Canada, which is in line to receive more than $10bn in subsidies and will operate by 2027.

VW, which has a factory in Chattanooga, Tennessee, has struggled in the US, one reason why it is trying to revive the Scout off-road brand, which has been defunct since 1980. 

Audi has had more success. Its US deliveries rose by 21 per cent last year to 235,000, a faster growth rate than it achieved in China or Europe. Sales of its EVs rose 55 per cent between 2022 and 2023 in the US, it said on Tuesday. 

Döllner also said he would not rule out producing vehicles for the North American market exclusively in the region, a “local for local” strategy employed by other brands such as VW with its “In China, for China” policy.

However, he denied that rowing back on the IRA by a new administration next year would threaten any shift in manufacturing, saying it would not be “that important”.

“[Cancellation of the IRA] would not make it less attractive to us, especially as a premium manufacturer. We are not that reliant on subsidies and the battery incentives [for VW] are already locked in, in Canada”, Döllner said.

“We are planning much more long term than one legislative term.”

Carmakers have warned that cutting subsidies would hurt demand for EVs, which remain more expensive than combustion engine models, and the wider US car industry.

Audi said on Tuesday that 2023 operating profits were €6.3bn, down from €7.6bn a year earlier, mainly because of commodities hedging. Sales increased 13 per cent to €69.9bn.

In June 2023, Inflection announced it had raised $1.3 billion to build what it called “more personal AI.” The lead investor was Microsoft.

Today, less than a year later, Microsoft announced that it was essentially eating Inflection alive (though I think they phrased it differently).

Co-founders Mustafa Suleyman and Karén Simonyan will go to Microsoft, where the former will head up the newly formed Microsoft AI division, along with “several members” of their team as Microsoft put it — or “most of the staff,” as Bloomberg reports it. Reid Hoffman will stay behind with new CEO Sean White to try to salvage what’s left of the company, which, I feel I have to repeat, raised $1.3 billion dollars 9 months ago and $225 million in mid-2022.

Inflection’s thesis was a conversational AI that you could talk to normally via multiple platforms, and which remembered you and previous conversations, making it more personal and useful. A lovely idea, but Pi, their AI, never really got close. It was fine, but even with all that money they couldn’t keep up with the rapid advances in capabilities and services being offered by OpenAI (which Microsoft, hedging its bets, also backs), Google’s Gemini (which has the home field advantage in search), and Anthropic (which made its play for safe, boring applications at which AI can excel).

Perhaps the pitch was destined for failure: it’s not really clear people want a personalized AI, when the things already sit so comfortably in the uncanny valley of humanity. They may not want their business writing expert AI, their architectural sketching AI, and their therapeutic chat AI to know one another at all. To unify them is certainly an approach, but whether the market rejected it, or Inflection’s tech simply fell short of its aims, Pi always seemed to us a respectable also-ran.

Of course, taking this shot was immensely costly, probably to the tune of hundreds of millions of dollars, with, I imagine, negligible revenue, relatively speaking.

How long do you continue throwing money in the hole? When does it stop being a long play and inverts into a waste of capital? (I don’t say a waste of effort, as the company produced a lot of valuable work in the field and its researchers no doubt have pride.) And who makes that call?

Whoever it was, here is “The new Inflection” now: minus its two most technically substantive co-founders (sorry Reid), minus the product that it invested a fortune in (there will be “no immediate changes” to Pi, which is basically a death warrant), minus some or most of the team that built it, and one imagines minus a lot of the money that was contingent on performance. Hoffman and White have their work cut out for them.

The new focus, on an “AI studio business, where custom generative AI models are crafted, tested and fine tuned for commercial customers,” probably would have been fine to focus on a year or two ago, but I suspect that at this point they will be fighting over crumbs.

And then there’s Microsoft.

What’s that I hear? An echo from the ’90s? Embrace… extend… extinguish…

Are they the good guy here, rescuing a valuable team from the wreckage of a business that was in danger of taking them down with it? Or are they opportunists who backed multiple horses in the same race, with the express intention of gleefully devouring any of them that tripped before the finish line?

I mean, it was only in November that we saw them take a flying bite at OpenAI — literally the exact same thing!

For a few hours, OpenAI was the fallen horse, and Sam Altman and Greg Brockman and their loyalists were the meat! Ultimately Microsoft got a bit of extra leverage on the company instead of eating it alive.

Now they’ve got their second choice, and probably a lot cheaper. Inflection doesn’t have the momentum of OpenAI, which was perhaps at its zenith of ambition thus far when the coup was attempted. We’ll see if Suleyman and Simonyan can lead the new AI division effectively — I don’t know about you, but I would be pretty skeptical of their instincts after seeing a billion-dollar enterprise evaporate so quickly. Would you hire them after all this?

Whatever the circumstances behind this sudden fall, it emphasizes the primacy of legacy tech companies in this space. Whether it was OpenAI or Inflection, Microsoft was feeding their cash and compute addictions, whispering in their ear about partnerships, and then as soon as they tripped, out came the hidden fork and knife. You think Google isn’t ready to do the same thing to Anthropic? You don’t think Apple would do the same if it could?

As always in tech: Those who can, build; those who can’t, buy… by any means necessary.

The Biden Administration aims to have crude in the Strategic Petroleum Reserve (SPR) back up to the levels before the massive sales of 180 million barrels in the past two years, U.S. Energy Secretary Jennifer Granholm said at the CERAWeek energy conference in Houston.

The U.S. saw the stockpiles of crude oil in the SPR fall from 638 million barrels at President Joe Biden’s inauguration to just 347 million barrels by the summer of 2023 as the Administration tried to bring down gasoline prices for consumers. The large sell-off in the country’s safety supply of crude oil was met with criticism. Also met with criticism has been the Administration’s slow response to falling oil prices—a perfect opportunity for any Administration earnestly looking to replenish SPR oil inventories.

The U.S. Department of Energy expects only 40 million barrels to be refilled by the end of this year, but the other 140 million barrels of crude will stay in the SPR after a cancellation of congressionally mandated sales from 2022, according to Reuters.

Currently, the SPR has around 362 million barrels of crude, compared to 565 million barrels in March 2022, when the Administration first announced the massive 180-million-barrel sale to curb the soaring gasoline prices after the Russian invasion of Ukraine.

The U.S. Administration is looking to buy 3 million barrels of oil for delivery to the SPR, the U.S. Department of Energy said last week, announcing a solicitation for the purchases.

The Administration will be looking to buy 1.5 million barrels of sour crude oil for delivery to Bayou Choctaw, Louisiana, in August 2024. Bayou Choctaw is wrapping up maintenance.

The Administration continues to target purchases of crude for the strategic reserve at a price of $79 per barrel or below.

Early on Tuesday, the price of the U.S. benchmark, WTI Crude, was over $82 per barrel, at $82.70.

Kering’s first-quarter revenues will likely decline by 10 percent on a comparable basis, the Paris-based luxury group flagged on Tuesday.

Kering’s first-quarter revenues will likely decline by 10 percent on a comparable basis, the Paris-based luxury group flagged in an unscheduled trading update Tuesday.

The company cited slow sales at Gucci, which accounts for more than half of Kering’s revenues, as the principal driver of the drop. Gucci’s comparable revenues are likely to fall by 20 percent year-on-year, Kering said, noting particularly poor performance in the key Asia-Pacific region.

Gucci faced pressure to shake up its fashion image and commercial strategy after a historic boom piloted by designer Alessandro Michele and CEO Marco Bizzarri came back to earth and was followed by years of anaemic growth.

But sales have continued to slide under a revamped team including creative director Sabato De Sarno and CEO Jean-François Palus (Kering chairman François-Henri Pinault’s longtime deputy CEO at the group level).

The first collections by De Sarno did not arrive in stores mid-February, Kering flagged. The new collection, whose availability will gradually be ramped up over the coming months, is “meeting with highly favourable reception,” the company said.

Reported revenues for the group will fall by 1 to 2 percent as the company consolidates the sales of perfume brand Creed for the first time, helping to offset Gucci’s decline. Other brands in the portfolio should be roughly flat, analysts inferred.

Kering has taken a harder hit than most listed rivals as soaring demand for luxury in the wake of the pandemic slowed sharply in recent months. At Gucci, consumer interest in the quirky, maximalist vision put in place by De Sarno’s predecessor had been wearing thin for years, while an over-dependence on aspirational customers made it harder for the group’s second-biggest brand, Saint Laurent, to keep posting record growth.

Meanwhile, Bottega Veneta has sought to reduce its wholesale exposure, depressing sales, and the continued after-shocks of a public relations meltdown at Balenciaga have made it harder for the brand to sustain interest in its chunky sneakers and logo hoodies.

Still, news that the group’s decline has worsened will likely shake markets: the forecast 10 percent drop in Q1 follows a 4 percent decline in the holiday quarter.

Kering may not be the only company to report worse-than-expected results this quarter: US credit card purchases on luxury items fell 15 percent year-on-year in February, following a 19 percent drop in January, according to Citi. Sales in the key Chinese market have also continued to bounce back more slowly than hoped.

“The bad news on Kering are company specific, but are also a good reminder that consumer confidence and discretionary spend in China is soft,” Bernstein analyst Luca Solca said.

A handful of top-end competitors like Hermès, Loewe, Loro Piana, Brunello Cucinelli and Zegna have continued to see customer interest surge in recent quarters. But efforts by more-accessible luxury brands to reposition themselves to capture demand from the wealthiest consumers could backfire: higher prices risk further putting off entry-level customers, while top spenders are hard to recruit.

“Most luxury companies have highlighted demand weakness in entry-level categories usually targeting aspirational consumers, with sharp multi-year price increases posing a risk to future volume growth,” Citi analyst Thomas Chauvet said in a note Tuesday.

The 20 percent decline in sales at Gucci, Kering’s biggest and most profitable brand, is a worrying sign for markets. Analysts were expecting a 4 percent drop in the first quarter, according to Visible Alpha’s consensus.

De Sarno’s less extravagant, more relatable Gucci has won only limited accolades from fashion insiders. That it has yet to reinvigorate sales will only make it harder to shore up support for the new direction. But operational hold-ups are also to blame.

New product represents only about 5 percent of total Gucci goods in stores today, and should scale to 30 percent by June, RBC Capital Market analyst Richard Chamberlain estimates.

“We believe more is needed to assess customer reaction,” Chamberlain wrote in a note to clients. “By mid-year, Gucci will have 30 percent (or all of its seasonal product) in the new Sabato De Sarno design aesthetic, at which point we would hope to see better visibility (advertising, marketing, celebrity and influencer uptake, etc.) and early signs of uptake with the broader customer base.”

The private equity firm has launched Elevate Beauty, which is dedicated to investing in early-stage beauty businesses.

L Catterton is fine-tuning its beauty strategy.

The private equity firm that in the past has invested in the likes of Tula, Oddity, The Honest Company and Nutrafol, has launched Elevate Beauty, a fund developed within L Catterton’s Growth Fund dedicated to investing in early-stage beauty businesses.

“Having invested across the beauty category for decades, we are acutely aware of the power that disruptive, consumer-driven brands can have for consumers in a competitive market and the impact of the right financial partner in driving that success long-term,” said Jon Owsley and Michael Farello, managing partners in L Catterton’s Growth fund, in a joint statement. “We are thrilled to have the opportunity to reach the growing number of attractive, emerging brands through our Elevate Beauty platform.”

Elevate Beauty will be led by Cori Aleardi, who most recently served as president of clinical skin care brand StriVectin (which L Catterton backed for many years). Prior to StriVectin, she held investment and operating roles at L Catterton.

Three recent L Catterton investments — cosmetics brand Dibs Beauty; plastic surgeon founded skin care line Eighth Day, and Irene Forte Skincare, a natural skin care label — will sit within Elevate Beauty.

Elevate Beauty can write checks from around $2 million to $15 million, though $5 million to $10 million is its sweet spot, Aleardi told WWD. In comparison, L Catterton’s growth fund is investing anywhere from $15 million to roughly $125 million per deal.

“It’s really around being able to not only provide capital, but to provide hands-on and very thoughtful partnership to these companies when they’re in what we would consider some of their most important decision making stages,” Aleardi said. “So that ability to get from a couple million dollars in revenue to $10 million or from $10 million to $20 million. Those management teams and founders are making extremely important decisions and don’t necessarily have the experience to know what’s around the corner. We are folks who have sat in the seat and can really help these management teams and founders look around the corner and say what are the right steps to take in order to build a successful long-term iconic brand.”

In skin care, Aleardi sees the most opportunities with in medical-backed and clean brands. On Eighth Day, she pointed to its scientific heritage, while for Irene Forte, she believe there is a set of consumers who are very focused on the natural category.

She’s also bullish about color cosmetics, highlighting how Dibs is making color really easy to understand with color combinations that are preset for the consumer.

In addition to skin care and color cosmetics, Aleardi sees a lot of opportunities in hair in terms of the skinification of hair, graying and wellness. Another area that she’s focused on is the fragrance category and how does fragrance invoke wellness as both a mood lifter and something that brings joy into the consumer’s life.

The number of investments per year “really will depend on the opportunities that we see. We’re not gated by only being able to do a few investments or have a target that we have to get certain ones done,” Aleardi said.

“We are not wedded to a certain playbook to be successful in this category,” she continued. “If anything, we really want to be thoughtful about what are the opportunities to either be disruptive, or to make sure that the strategic growth plan of a business is very much tied to the consumer insight as opposed to saying we are only interested in making investments that go into a Sephora and Ulta. That’s not how we think about the category. We think of this as a much broader consumer base and a much broader marketplace where we can find areas to be extremely successful.”

The French company cites a falloff of Gucci sales in the Asia-Pacific region

Gucci owner Kering said it expects a decline in revenue for its first quarter, following the company’s profit warning as sales continue to slow.

The French luxury giant said Tuesday that it expects a revenue decline of about 10% from last year’s first quarter, when group revenue was 5.01 billion euros ($5.45 billion), due to a steep sales drop at Gucci in the Asia-Pacific region.

First-quarter revenue for Gucci is expected to decline by nearly 20% year on year. Gucci’s revenue amounted to EUR2.62 billion in the first quarter of 2023.

First-quarter revenue is expected to be published on April 23, after the market closes. The figure will include the positive contribution of the consolidation of Creed on full quarter basis, as well as a negative foreign exchange impact, which combined should hit revenue by around 1% to 2%.

The company had previously issued a profit warning, expecting results to take a hit in 2024 from planned investments in its fashion houses as it looks to reinvigorate its core brand.

After the height of the pandemic, shoppers splurged on high-end handbags, jewelry and garments fueling strong results but sales growth slowed last year on high inflation and rising interest rates.

Early products, primarily from the Ancora collection, have been on offer in selected Gucci stores since mid February, Kering said.