As the technology industry grows rapidly, a topic that is not covered often is the creation and distribution of data. According to Statista, the global data creation is expected to exceed 180 zettabytes by 2025. The surge in data creation and consumption places immense pressure on data centers and network infrastructure to support higher data rates and larger volumes.

Valued at $5.22 billion market cap, Credo Technology Group Holding Ltd (CRDO) provides secure, high-speed connectivity solutions that deliver improved power and cost efficiency as data rates and corresponding bandwidth requirements increase exponentially throughout the data infrastructure market. Let’s explore whether investors should consider buying CRDO now.

Credo’s connectivity solutions are tailored for optical and electrical Ethernet applications, such as the 100G (Gigabits per second), 200G, 400G, 800G, and emerging 1.6T (Terabits per second) port markets. The company’s diverse product portfolio utilizes its proprietary Serializer/Deserializer (SerDes) and Digital Signal Processor (DSP) technologies.

CRDO’s products include HiWire active electrical cables, optical digital signal processors, low-power line card PHY, SerDes chiplets and SerDes IP, integrated circuits (ICs), and active electrical cables (AECs).

For the fourth quarter of the fiscal year 2024, CRDO delivered mixed financial results. The tech services company reported revenue of $60.78 million, which failed to surpass the analyst estimates of $60.82 million. However, Credo posted a non-GAAP net income per share of $0.07, beating the analysts’ expectations of $0.05.

Bill Brennan, Credo’s President and Chief Executive Officer, stated, “The Company’s success in fiscal 2024 was primarily driven by our customers’ AI deployments. Looking forward, we anticipate accelerating demand for AI infrastructure. We believe customers will continue to choose Credo for their most complex connectivity needs, due to our customer centric focus on innovative, high-performance and energy-efficient solutions.”

For the first quarter of 2025, the company expects its revenue to be between $58 million and 61 million. The company also expects its non-GAAP gross margin to be between 63% to 65%.

Shares of CRDO have gained 12.9% over the past month and 68.7% over the past six months to close the last trading session at $31.80. Also, the stock has surged 93.3% over the past year.

Let’s look at factors that could influence CRDO’s performance in the upcoming months.

Positive Recent Developments

On March 25, CRDO and Applied Optoelectronics, Inc. (AAOI) announced the availability of two new multimode designs, a 400G QSFP-DD and an 800G OSFP. Both are available as an optical fibre or a transceiver, and these designs feature industry-leading performance and lower power consumption compared to prior-generation solutions.

“With the growing number of Ethernet links in both frontend and backend AI networks, there is a clear industry need to push the envelope on performance, energy efficiency, and system cost. These new designs from AOI are a real home run for datacenter operators seeking to optimize next generation connectivity,” said Chris Collins, Credo’s Vice President of Sales and Optical Product Marketing.

On March 19, CRDO introduced a new family of HiWire Active Electrical Cables (AECs) targeted explicitly for 400G AI/ML Backend Network Connections to Top of Rack (TOR) Switches. Credo’s cutting-edge HiWire AECs can bridge the gap by offering in-cable speed shifting to allow the use of legacy 12.8T TORs and Y cable configurations for 25 and 51Tb.

Robust Financials

For the fourth quarter that ended April 27, 2024, CRDO’s total revenue increased 89.4% year-over-year to $60.78 million. Its non-GAAP operating income was $7.46 million, compared to an operating loss of $8.48 million in the prior year’s quarter. Its non-GAAP net income came in at $11.81 million, compared to the net loss of $5.73 million in the previous year’s quarter.

Additionally, the company’s non-GAAP net income per share was $0.07, compared to a loss per share of $0.04 in the same quarter of 2023. As of April 27, 2024, CRDO’s cash and cash equivalents stood at $66.94 million.

Favorable Analyst Expectations

Analysts expect CRDO’s revenue for the first quarter (ending July 2024) to grow 69.4% year-over-year to $59.43 million. Its EPS for the current quarter is expected to be $0.04, compared to a loss per share of $0.03 in the prior year’s quarter. Moreover, the company has topped consensus EPS estimates in all four trailing quarters.

For the fiscal year ending April 2025, Street expects CRDO’s revenue and EPS to grow 61.6% and 296.7% from the prior year to $311.86 million and $0.36, respectively. In addition, the company’s revenue and EPS for the fiscal year 2026 are expected to increase 50.4% and 97.9% year-over-year to $469.01 million and $0.71, respectively.

Mixed Profitability

CRDO’s trailing-12-month gross profit margin of 61.89% is 26.3% higher than the 49.01% industry average. Its trailing-12-month CAPEX/Sales of 8.11% is 257.6% higher than the 2.27% industry average. However, its trailing-12-month EBITDA margin and net income margin of negative 11.67% and negative 14.70% compared to the respective industry averages of 9.94% and 3.02%.

Furthermore, the stock’s trailing-12-month ROCE, ROTA, and ROTC of negative 6.39%, negative 4.95%, and negative 4.71% are unfavorably compared to the industry averages of 4.06%, 2.87%, and 1.85% respectively. Also, its trailing-12-month asset turnover ratio of 0.39x is 38% lower than the industry average of 0.62x.

Stretched Valuation

In terms of forward non-GAAP P/E, CRDO is trading at 89.08x, 261.7% higher than the industry average of 24.63x. The stock’s forward EV/Sales multiple of 15.57 is 424.2% higher than the industry average of 2.97. Likewise, its forward Price/Cash Flow of 112.18x is considerably higher than the industry average of 23.91x.

Moreover, the stock’s forward Price/Sales multiple of 16.84 is 472.7% higher than the industry average of 2.94. Its forward EV/EBITDA of 84.99x is 467.5% higher than the industry average of 14.98x.

POWR Ratings Reflect Uncertainty

CRDO’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CRDO has a B grade for Sentiment, consistent with optimistic analyst estimates. It also has a C grade for Quality, in sync with its mixed profitability.

Also, CRDO has a D grade for Value, consistent with its higher-than-industry valuation.

Within the Technology – Services industry, CRDO is ranked #59 out of 79 stocks.

Beyond what I have stated above, we have also given CRDO grades for Growth, Stability, and Momentum. Get all CRDO ratings here.

Bottom Line

CRDO reported mixed fourth-quarter 2024 results that exceeded analyst expectations for earnings but fell short on revenue. The company’s long-term outlook appears promising, buoyed by expanding market demand for high-speed connectivity solutions, enhanced focus on cutting-edge technologies, and strategic partnerships driving its growth and expanding market reach.

However, given CRDO’s elevated valuation and enhanced volatility (24-month beta of 2.24), waiting for a better entry point in this stock seems wise now.

How Does Credo Technology Group Holding Ltd (CRDO) Stack Up Against Its Peers?

Given its near-term uncertain prospects, the odds of CRDO outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A (Strong Buy) or B-rated (Buy) stocks from the Technology – Services industry:

Leidos Holdings Inc. (LDOS)

Box, Inc. (BOX)

Dropbox, Inc. (DBX)

To explore more A or B-rated tech services stocks, click here.

What To Do Next?

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CRDO shares rose $0.10 (+0.31%) in premarket trading Tuesday. Year-to-date, CRDO has gained 63.84%, versus a 17.72% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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