As the technology industry grows rapidly, a topic that is rarely discussed is data creation and distribution. According to Statista, global data creation is expected to exceed 180 zettabytes by 2025. This surge in data creation and consumption is putting data centers and network infrastructure under immense pressure to support higher data rates and larger volumes.
Credo Technology Group Holding Ltd (CRDO), with a market capitalization of $5.22 billion, offers secure, high-speed connectivity solutions that improve power and cost efficiency as data rates and corresponding bandwidth requirements grow exponentially across the data infrastructure market. Let’s consider whether investors should consider buying CRDO now.
Credo’s connectivity solutions are tailored for optical and electrical Ethernet applications including 100G (Gigabits per second), 200G, 400G, 800G and the emerging 1.6T (Terabits per second) port markets. The company’s diverse product portfolio leverages its proprietary Serializer/Deserializer (SerDes) and Digital Signal Processor (DSP) technology.
CRDO’s products include HiWire active electrical cables, optical digital signal processors, low power line card PHYs, SerDes chiplets and SerDes IP, integrated circuits (ICs) and active electrical cables (AECs).
For the fourth quarter of fiscal 2024, CRDO announced mixed financial results. The technology services company reported revenue of $60.78 million, failing to beat analysts’ expectations of $60.82 million. However, CRDO reported non-GAAP net income of $0.07 per share, beating analysts’ expectations of $0.05.
“Our success in fiscal 2024 will be driven primarily by our customers’ adoption of AI, and we expect demand for AI infrastructure to accelerate going forward. Our focus on delivering innovative, high-performance and energy-efficient solutions to our customers gives us confidence that they will continue to choose Credo for their most complex connectivity needs,” said Bill Brennan, Credo’s president and CEO.
The company expects first-quarter 2025 revenue to be between $58 million and $61 million, with non-GAAP gross margins expected to be between 63% and 65%.
CRDO shares have risen 12.9% in the past month and 68.7% in the past six months, closing the most recent trading session at $31.80.The stock has also surged 93.3% over the past year.
Let’s take a look at factors that could impact CRDO’s performance in the coming months.
Recent positive developments
On March 25, CRDO and Applied Optoelectronics, Inc. (AAOI) announced the availability of two new multimode designs: 400G QSFP-DD and 800G OSFP. Both available as optical fibers or transceivers, these designs feature industry-leading performance and lower power consumption compared to previous generation solutions.
“As the number of Ethernet links increases in both front-end and back-end AI networks, there is a clear industry need to push the boundaries of performance, energy efficiency and system costs. These new designs from AOI are a real home run for data center operators looking to optimize next-generation connectivity,” said Chris Collins, vice president of sales and optical product marketing at Credo.
On March 19, CRDO announced its new HiWire active electrical cable (AEC) family dedicated to 400G AI/ML backend network connectivity to top-of-rack (TOR) switches. Credo’s cutting-edge HiWire AEC can bridge this gap by providing in-cable speed shifting capabilities and enabling the use of traditional 12.8T TOR as well as 25Tb and 51Tb Y-cable configurations.
Strong Financial Position
For the fourth quarter ended April 27, 2024, CRDO’s total revenue increased 89.4% year over year to $60.78 million. Non-GAAP operating income was $7.46 million, up compared to an operating loss of $8.48 million in the same period last year. Non-GAAP net income was $11.81 million, up compared to a net loss of $5.73 million in the same period last year.
Additionally, the company’s non-GAAP net income per share was $0.07, up compared to a loss per share of $0.04 in the same quarter in 2023. As of April 27, 2024, CRDO had cash and cash equivalents of $66.94 million.
Analysts’ positive expectations
Analysts expect CRDO’s revenues for the first quarter (ending July 2024) to grow 69.4% year-over-year to $59.43 million. EPS for the current quarter is expected to be $0.04, compared to a loss per share of $0.03 in the same period last year. Additionally, the company has beaten consensus EPS estimates in all of the past four quarters.
The Street expects CRDO’s revenue and EPS to increase 61.6% year over year to $311.86 million and EPS to increase 296.7% to $0.36 for the fiscal year ending April 2025. Additionally, the company’s revenue and EPS are expected to increase 50.4% year over year to $469.01 million and EPS to increase 97.9% to $0.71 for fiscal 2026.
Profitability is mixed
CRDO’s trailing 12 month gross margin is 61.89%, 26.3% higher than the industry average of 49.01%. Trailing 12 month CAPEX/Sales ratio is 8.11%, 257.6% higher than the industry average of 2.27%. However, trailing 12 month EBITDA margin and net profit margin are negative 11.67% and negative 14.70%, lower than the industry average of 9.94% and 3.02%, respectively.
Additionally, ROCE, ROTA, and ROTC over the past 12 months are -6.39%, -4.95%, and -4.71%, respectively, which compare unfavorably to the industry averages of 4.06%, 2.87%, and 1.85%. Also, asset turnover over the past 12 months is 0.39x, which is 38% lower than the industry average of 0.62x.
Overrated
On a non-GAAP forward P/E basis, CRDO is trading at 89.08x, 261.7% higher than the industry average of 24.63x. The company’s forward EV/sales multiple is 15.57, 424.2% higher than the industry average of 2.97. Similarly, its forward price-to-cash flow multiple is 112.18x, significantly higher than the industry average of 23.91x.
Additionally, the company’s forward price-to-sales multiple is 16.84x, 472.7% higher than the industry average of 2.94x, and its forward EV/EBITDA multiple is 84.99x, 467.5% higher than the industry average of 14.98x.
POWR Ratings Reflect Uncertainty
CRDO’s complex fundamentals are reflected in its POWR Ratings. The stock receives an overall rating of C, which equates to Neutral in our proprietary rating system. POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system rates each stock based on eight categories: CRDO receives a B in Sentiment, which is in line with analysts’ optimistic forecasts, and a C in Quality, which is in line with mixed profitability.
CRDO also received a D grade for Value, which is in line with the higher rating in the industry.
In the Technology – Services industry, CRDO is ranked 59th out of 79 stocks.
In addition to what we’ve mentioned above, we also rated the CRDO on Growth, Stability, and Momentum. You can see all CRDO ratings here.
Conclusion
CRDO reported mixed results for the fourth quarter of 2024, with profits beating analyst expectations but revenues below expectations. The company’s long-term outlook appears promising, supported by growing market demand for high-speed connectivity solutions, an increased focus on cutting-edge technologies, and strategic partnerships that are driving growth and expanding its market reach.
However, given CRDO’s rising valuation and increasing volatility (its 24-month beta is 2.24), it seems prudent for now to wait for a better entry point into the stock.
how CREDO TECHNOLOGY GROUP HOLDINGS CO., LTD. (CRDO) How does it compare to its peers?
With an uncertain near-term outlook, it’s unlikely CRDO will perform well in the coming weeks and months, but there are many companies in its industry with much better POWR Ratings, so let’s consider the following three stocks in the Technology – Services industry that are rated A (Strong Buy) or B (Buy).
Leidos Holdings, Inc. (LDOS)
BOX Co., Ltd.
Dropbox Inc. (DBX)
To explore more A- or B-rated technology services stocks, click here.
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CRDO shares rose $0.10 (+0.31%) in pre-market trading on Tuesday. Year-to-date, CRDO has gained 63.84%, while the benchmark S&P 500 index has risen 17.72% during the same period.
About the Author: Mangeet Kaur Bounce
Mangeet’s keen interest in the stock market led him to become an investment researcher and financial journalist. With a fundamental approach to stock analysis, Mangeet aims to help individual investors understand the underlying factors before taking any investment decision. Read more…
