Shares of Credo Technology Group (CRDO -1.77%) rallied 37.3% in December, according to data from S&P Global Market Intelligence.
All of Credo’s gains occurred in the wake of its early-December earnings report, in which the company beat expectations and issued blowout forward guidance, indicating an uptake in its unique technologies for artificial intelligence (AI) data centers.
Credo’s active cables go electric
Credo makes a few different products in data center connectivity equipment, including serializer/deserializer (SerDes) and digital signal processor technologies, which are productized into chipsets; active electrical cables (AECs); and SerDes chiplets, which Credo licenses to other larger chipmakers.
A big differentiator is Credo’s AEC cables, which take up less space and are more power-efficient than competing data center networking cable technologies. The AECs specifically connect servers to other networking equipment.
Of note, Credo says it partners closely with Microsoft on its AEC and data center communications technology, though it also sells to multiple hyperscalers.
In its second fiscal quarter, Credo handily beat expectations, with revenue up 63.6% to $72 million, while also delivering blowout guidance of $115 million to $125 million for the third quarter. That would amount to 67% quarter-over-quarter growth, indicating a massive acceleration and suggesting Credo’s technology is starting to catch on in a big way. Credo said in its quarterly filing that 95% of the growth came from its AEC and optical products.
Where can Credo go from here?
It’s hard to judge how much upside there could be with Credo’s sales potential, as the AI data center opportunity appears open-ended, at least for now. Yet after December’s run, Credo looks pretty expensive, with a market cap of $12.6 billion, as of this writing. Even contemplating the high end of next quarter’s guidance of $125 million and extrapolating an annualized run-rate of $500 million, that’s a 25 times price-to-forward sales ratio.
In addition, there is now a fair amount of customer concentration risk, with one customer accounting for 33% of Credo’s revenue in the second fiscal quarter and 42% of total sales over the first six months of this fiscal year. It’s unclear if this customer is Microsoft, though it wouldn’t be surprising. That much concentration means a lot of revenue could be at risk if anything should change regarding that one relationship.
As with most stocks deemed AI beneficiaries, investors will have to judge whether the growth opportunity is worth the high valuations at which these stocks trade today.
Billy Duberstein and/or his clients have positions in Microsoft. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
