Little-Known AI Beneficiary Hits a ‘Turning Point’ and Blows Wall Street Away

Credo Technology Group Holding Reports Impressive Fiscal Results

Mid-cap technology stock Credo Technology Group Holding (CRDO) recently surprised market analysts with its fiscal second-quarter financial results released on Monday evening. For the three-month period ending November 2, Credo reported adjusted earnings per share (EPS) of $0.07, with a GAAP loss per share of $0.03. The company generated revenue of $72.034 million, both figures surpassing Wall Street’s expectations. This revenue figure represents an exceptional year-over-year growth of 63.6%. To add to this, Credo provided optimistic forward-looking guidance that has investors buzzing.

Who is Credo Technology?

Credo Technology is a Cayman Islands-based tech holding company that specializes in high-speed solutions designed to overcome bandwidth limitations in data infrastructure. The company’s products enable high-speed connectivity while enhancing power efficiency amid a rapid increase in data rates and bandwidth demands. Their solutions are particularly geared towards optimized performance in both optical and electrical ethernet applications.

There is a growing sentiment that Credo is poised to benefit from the generative artificial intelligence (AI) revolution. As AI technology advances, the heightened demand for active electrical cables is anticipated to increase, with more units attached per XPU. Credo’s established relationships with cloud leaders like Microsoft (MSFT) and Amazon (AMZN) further bolster its position in this expanding market.

Executive Insights

In a press release, Credo President and CEO Bill Brennan remarked on the company’s performance: “For the past few quarters, we have anticipated an inflection point in our revenues during the second half of fiscal 2025. I am pleased to share that this turning point has arrived, and we are experiencing even greater demand than initially projected, driven by AI deployments and deepening customer relationships.”

Operational Highlights

Credo’s revenue rose dramatically by 63.6% to reach $72.034 million. Breaking this down, product sales grew a substantial 88.2% to $64.443 million, while engineering services jumped 90.3% to $4.632 million. On the downside, IP Licensing revenue dropped 60% to $2.959 million. The company recorded a total cost of revenue at $26.522 million, representing a 48% increase. Consequently, Credo achieved a gross profit of $45.512 million, marking a remarkable 74.3% increase, resulting in a gross margin of 63.2%, up from 59.3% a year prior.

GAAP operating expenses surged by 54.1% to $53.919 million, leading to a GAAP operating loss of $8.407 million, slightly reduced from an $8.875 million loss from the same period last year. Adjusted operating income improved substantially from a loss of $731 million to an income of $8.256 million, with an adjusted operating margin turning around from -1.7% to +11.5%. After factoring in other income and losses, as well as taxes, the GAAP net loss attributable to shareholders totaled $4.225 million, an improvement from $6.623 million, translating to -$0.03 per share versus -$0.04 in the prior year.

Forward-Looking Guidance

For the current quarter, Credo anticipates generating revenue between $115 million and $125 million, significantly above Wall Street’s expectation of $85 million to $90 million. Comparatively, this aligns with a year-ago revenue of $53.1 million. The company also forecasts a GAAP gross margin of 60.6% to 62.6%, and an adjusted gross margin between 61% to 63%. Operating expenses are estimated to range from $58.6 million to $60.6 million, while adjusted figures are expected to fall between $42 million to $44 million.

Financial Fundamentals

Although Credo has not yet released its statement of cash flows, its latest balance sheet shows a strong financial position as of November 2, with cash assets totaling $382.9 million and inventories at $36.313 million, bringing total current assets to $538.252 million. Current liabilities add up to $49.645 million, featuring only minimal deferred revenue and no short-term debt. The company boasts impressive current and quick ratios of 10.8 and 10.1, respectively. Total assets are valued at $638.551 million, and total liabilities less equity stands at $70.644 million, with no recorded debt—indicative of strong management and financial health.

Wall Street’s Perspective

Though not widely analyzed by sell-side firms, some prominent analysts have recently commented on the stock. After fiscal release, five five-star rated analysts shared insights on CRDO. Richard Shannon of Craig-Hallum reiterated his “Buy” rating without a price target, while Vivek Arya of Bank of America upgraded the stock to “Buy” from “Underperform.” Arya significantly raised his price target from $27 to $80. Quinn Bolton of Needham, Thomas O’Malley of Barclays, and James Lee of Mizuho Securities all maintained “Buy” ratings, with adjustments in their price targets ranging from a low of $49 to as high as $80, showcasing the bullish sentiment within the market.

Closing Thoughts

The immediate 40% jump in CRDO stock following the positive results demonstrates strong market confidence. Although the stock trades at 140 times forward earnings, signs of rapid growth in sales, a robust balance sheet, and optimistic guidance could very well justify the valuation. With several respected analysts backing the company and acknowledging its potential as a key player in the technology sector, the question remains: will buyers seize the opportunity to invest in this rising star?