Credo Technology: AI Infrastructure's Critical Connectivity Backbone

Credo Technology Group has emerged as the dominant supplier of high-speed connectivity solutions powering the world's largest AI clusters, delivering 272% year-over-year revenue growth in Q2 fiscal 2026. The company's Active Electrical Cables (AECs) now connect GPU clusters at all major hyperscalers, establishing Credo as essential infrastructure for the AI revolution. At a stock price of $171, investors are paying a premium valuation that implies sustained hypergrowth for years—a bet that requires careful analysis of competitive moats, growth sustainability, and embedded market expectations.

The company Nvidia needs to connect its GPUs

Founded in 2008 by semiconductor veterans and led by CEO Bill Brennan since 2013, Credo Technology has pioneered the Active Electrical Cable category that has become indispensable for AI infrastructure. The San Jose-based company operates at the intersection of two megatrends: the exponential growth in AI compute requirements and the fundamental physics constraints of moving data at terabit-per-second speeds.

Credo's product portfolio addresses the entire data center connectivity stack. Active Electrical Cables (AECs) represent the flagship product—narrow-gauge copper cables with integrated retimers, gearboxes, and forward error correction circuitry that deliver up to 1.6 terabits per second. Unlike traditional Direct Attached Cables (DACs), Credo's AECs occupy 75% less volume, consume significantly less power, and deliver what the company calls "ZeroFlap" reliability—claiming 1,000x fewer connection failures than optical alternatives.

The company's SerDes (serializer/deserializer) technology forms the foundation of all products, with signaling capabilities ranging from 28G to 224G PAM4. This proprietary IP, manufactured on TSMC process nodes from 12nm to 3nm, enables Credo's "n-1 advantage"—achieving equivalent performance to competitors while using older, more cost-effective manufacturing processes.

Beyond AECs, Credo has expanded into optical DSPs (the Dove, Lark, and Bluebird families supporting 400G to 1.6T speeds), PCIe retimers for extending compute connectivity, ZeroFlap Optics addressing transceiver reliability, and the newly announced OmniConnect gearbox solutions including the Weaver memory fanout product targeting AI inference bottlenecks. The company's acquisition of Hyperlume positions it for Active Line Cards (ALCs) using microLED technology—a potential market CEO Brennan describes as "up to 10 times" larger than AECs.

Q2 fiscal 2026 shattered all expectations

The quarter ending November 1, 2025 delivered Credo's strongest results in company history. Revenue reached $268.0 million, crushing the $234.67 million consensus estimate by 14.2%. This represented 20.2% sequential growth and an extraordinary 272.1% year-over-year expansion from the $72 million generated in Q2 fiscal 2025.

Profitability exceeded expectations across the board. Adjusted EPS of $0.67 beat estimates of $0.49 by nearly 37%, while GAAP diluted EPS came in at $0.44. Gross margins remained robust at 67.5% GAAP and 67.7% non-GAAP, well above the company's long-term target range of 63-65%. Non-GAAP net income reached $127.8 million, representing a 47.7% net margin that demonstrates significant operating leverage as revenue scales.

The balance sheet reflects financial strength, with $813.6 million in cash and short-term investments providing substantial runway for investment and potential strategic acquisitions. Operating cash flow of $54.2 million grew 427% year-over-year.

CEO Bill Brennan captured the momentum in his earnings commentary: "In the second quarter Credo delivered revenue of $268.0 million, an increase of 20% sequentially and an extraordinary 272% increase year-over-year. These are the strongest quarterly results in Credo's history, and they reflect the continued build-out of the world's largest AI training and inference clusters."

Perhaps more significant than the reported quarter was the Q3 guidance. Management projected revenue of $335-345 million, representing a midpoint of $340 million—37% above the Street's $247.6 million consensus. This guidance implies continued sequential acceleration with revenue nearly quintupling year-over-year. The gross margin outlook of 63.8-65.8% GAAP (64-66% non-GAAP) reflects product mix shifts rather than fundamental deterioration, as new product ramps typically carry different margin profiles.

Customer concentration improved meaningfully. Four hyperscalers now each contribute more than 10% of revenue—the largest at 42%, second at 24%, third at 16%, and fourth at 11%. This diversification from Q3 fiscal 2025, when Amazon alone represented 86% of revenue, reduces single-customer risk while demonstrating Credo's broad adoption across the hyperscaler ecosystem. A fifth hyperscaler has completed qualification and is expected to contribute material revenue by year-end.

Decoding the negative PEG ratio paradox

Credo's reported negative PEG ratio of -0.8 appears paradoxical for a company growing at triple-digit rates, but understanding its components reveals important context about the company's profitability evolution.

The PEG ratio divides the P/E ratio by the expected earnings growth rate. A negative value can only occur when one component is negative while the other is positive. For Credo, the negative PEG stems from historical GAAP losses in certain trailing calculation periods. The company only achieved consistent GAAP profitability in fiscal 2025 as revenues inflected dramatically—prior years showed net losses despite non-GAAP profitability.

When calculated using forward estimates—$2.12 EPS projected for fiscal 2026 growing to $2.65 in fiscal 2027 and $3.17 in fiscal 2028—the forward PEG normalizes to approximately 1.0, suggesting reasonable valuation relative to growth when using appropriate earnings baselines. At a forward P/E of roughly 80x and expected earnings growth of 65-80% annually, the stock prices in substantial growth but not excessively relative to peers like Nvidia or other AI infrastructure beneficiaries.

For investors, the negative historical PEG is a mathematical artifact rather than a warning signal. It reflects Credo's transition from investment-phase losses to breakout profitability. The meaningful metric is forward PEG, which suggests the valuation, while premium, aligns with the exceptional growth trajectory. Semiconductor peers trade at average P/E ratios around 50x with industry earnings growth of 19%—Credo's premium reflects its 270%+ revenue growth, though expectations are correspondingly elevated.

Assessing Credo's competitive moats

Credo possesses several durable competitive advantages that create meaningful barriers to entry and customer switching costs—though the sustainability of these moats requires nuanced evaluation.

Technological differentiation forms the primary moat. Credo's proprietary SerDes technology achieves equivalent performance to competitors while using older manufacturing processes—the "n-1 advantage" that enables lower costs, better supply availability, and superior power efficiency. The company's Linear Receive Optics (LRO) architecture is reportedly "the only way to achieve a sub-10 watt 800G module" meeting industry optical standards. One hyperscaler reportedly stated that competing Linear Pluggable Optics technology "sets the industry back to the Stone Age."

Market share dominance reinforces competitive positioning. Credo commands an estimated 88% share of the AEC market it invented, according to 650 Group analyst estimates. This first-mover advantage creates compounding benefits: each hyperscaler deployment validates the technology, builds operational track record, and deepens customer relationships.

Customer switching costs are substantial. Hyperscaler qualification processes require lengthy, rigorous testing cycles. Credo has developed over 20 custom SKUs for customers, with each customization creating integration depth difficult to replicate. The company's PILOT platform (Predictive Integrity, Link Optimization, and Telemetry) adds software-level stickiness similar to Cisco's enterprise transformation in the 1990s.

IP protection strengthens barriers. Credo has filed with the ITC to protect intellectual property and recently begun licensing AEC patents to third parties including The Siemon Company, Amphenol, and Volex—monetizing IP while acknowledging customer desire for supply diversification.

However, the moat faces challenges. Competition intensifies from formidable players: Broadcom dominates optical DSPs with over 80% combined market share alongside Marvell, while Astera Labs targets similar hyperscaler connectivity opportunities with chips reportedly in over 80% of AI servers. Marvell has launched Alaska AECs directly competing in Credo's core market. Alphawave Semi brings strong SerDes IP with a digital DSP-based approach. These competitors possess deeper resources, broader customer relationships, and diversified revenue streams that could pressure Credo's margins and market share over time.

Can 175% growth rates persist?

Credo's extraordinary growth—272% year-over-year in Q2 and guidance implying continued acceleration—prompts the critical question of sustainability. The analysis suggests multi-year runway remains but growth rates will necessarily moderate.

The total addressable market supports extended growth. AI data center investment is projected to reach $5.2 trillion through 2030 according to McKinsey, with some scenarios extending to $7.9 trillion. The networking portion of hyperscaler capex is rising from 5-10% historically to 15-20% by 2030. The AEC market specifically is forecast to grow from $218 million in 2024 to over $1.25 billion by 2031—a 28% CAGR that Credo is dramatically outpacing through share gains and market expansion.

Customer diversification demonstrates broadening adoption. The reduction in Amazon concentration from 86% to 61%, with Microsoft, xAI, and additional hyperscalers ramping, reduces reliance on any single customer's spending patterns. Meta and Oracle reportedly represent the next wave of potential customers, suggesting Credo is becoming standard infrastructure across the hyperscaler ecosystem.

Product portfolio expansion extends the growth curve. Management expects to double optical revenue in fiscal 2026. The 800G optical DSP design win with a major hyperscaler—described as potentially their largest ever—provides multi-year revenue visibility. PCIe retimers targeting a market exceeding $1 billion by 2027 offer additional growth vectors.

However, mathematical reality constrains triple-digit growth. A company approaching $1 billion in annual revenue cannot sustain 175% growth without becoming a $10+ billion revenue business within three years—possible but requiring near-perfect execution and continued market tailwinds. Analyst consensus projects growth moderating to 38% annually through 2028, reaching $1 billion in revenue. Management's historical under-promising (originally guiding >$800 million for fiscal 2026, now tracking toward $960+ million) suggests upside potential, but base effects will inevitably compress growth percentages.

Key risks to growth sustainability include:

• Hyperscaler capex cyclicality (AI spending could pause for consolidation)

• Competitive response from Broadcom and Marvell

• Technology transitions (co-packaged optics could disrupt connectivity architectures by 2030)

• Geographic concentration (74% of revenue from Greater China creates tariff and geopolitical exposure)

Reverse DCF reveals embedded expectations

At $171 per share with approximately 179 million diluted shares, Credo commands a market capitalization of roughly $30.6 billion. A reverse discounted cash flow analysis illuminates what growth and profitability assumptions the market has embedded in this valuation.

Using standard DCF assumptions—10% discount rate, 3% terminal growth rate, and a 25x terminal multiple on free cash flow—the current price implies the following scenario over the next decade:

Revenue trajectory required: The valuation implies revenue growing from approximately $960 million in fiscal 2026 to roughly $6-8 billion by fiscal 2035, representing a 22-25% compound annual growth rate sustained for ten years. This is aggressive but not unprecedented for category-defining semiconductor companies during secular growth phases.

Margin assumptions embedded: Achieving $6-8 billion in revenue with the current valuation requires net margins expanding to and sustaining at 35-40%—ambitious but within range of the current 44% non-GAAP net margin, suggesting the market believes margins can hold as the company scales.

Free cash flow conversion: The model implies free cash flow reaching approximately $2-2.5 billion annually by fiscal 2035, with the terminal value representing roughly 60% of the current enterprise value—a meaningful but not extreme reliance on distant cash flows.

Sensitivity analysis reveals meaningful downside risk:

• If growth averages 15% instead of 22-25%, fair value falls to approximately $80-100 per share

• If margins compress to 25% from competitive pressure, fair value falls to approximately $90-110 per share

• If both scenarios materialize, fair value could approach $50-60 per share

Conversely, bull case assumptions support substantially higher prices:

• If Credo achieves $3-4 billion revenue by 2028 (management's PILOT platform transformation scenario) with 50%+ net margins, some analysts project $375-450 per share

• Success in new product categories (ALCs, OmniConnect) could expand the addressable market dramatically

The current valuation essentially prices in Credo becoming a $5+ billion revenue company by end of decade with best-in-class profitability—achievable if AI infrastructure spending continues its trajectory and Credo maintains technology leadership, but leaving limited margin for error.

Investment perspective for long-term compounders

For investors seeking businesses that compound value over decades, Credo presents both compelling opportunity and meaningful risk that demands careful position sizing.

The bull case rests on structural positioning. Credo occupies the "picks and shovels" position in AI infrastructure—every GPU cluster requires connectivity, and Credo's 88% AEC market share makes it the default choice. The company demonstrates classic characteristics of emerging quality: founder-led culture, technology-first DNA, expanding competitive moats through IP and customer relationships, and a demonstrated ability to scale profitably. The 67.7% gross margins and 44% net margins suggest genuine pricing power rather than commodity economics.

The platform transformation potential is underappreciated. If PILOT software achieves enterprise-level stickiness—creating operational dependency beyond hardware—Credo could evolve from component supplier to infrastructure platform, dramatically expanding both margins and multiple. Management's comparison to Cisco's 1995 transformation is ambitious but instructive.

Customer quality validates technology claims. When Microsoft, Amazon, xAI, and additional hyperscalers all standardize on Credo's solutions, it provides strong third-party validation of technology differentiation. These are not customers who accept inferior products; their adoption implies genuine competitive advantage.

However, the valuation demands near-perfection. At 55x price-to-sales versus 13.7x for semiconductor peers and 5.6x for the broader industry, any growth disappointment could trigger severe multiple compression. The stock has risen 259% in the past year, absorbing substantial good news into the price. Insider selling of approximately $149 million in recent months—while common for appreciating stocks—merits monitoring.

Customer concentration remains the primary risk. Despite improvements, the top four customers still represent 93% of revenue. Hyperscaler capex decisions are made by a small number of individuals whose priorities could shift. The company's trajectory remains highly correlated with AI infrastructure spending, which could face consolidation pauses even amid secular growth.

Position sizing guidance: For a portfolio focused on compounding businesses, Credo merits inclusion but with position size reflecting the risk-reward asymmetry. A full position assumes sustained 20%+ growth, margin maintenance, and continued technology leadership—achievable but requiring optimistic assumptions across multiple variables. A starter position allows participation in the AI infrastructure theme while awaiting more attractive entry points or further execution evidence.

Looking forward, CEO Brennan's conviction is clear: "The combination of continued growth in our core AEC and IC franchises, plus the upcoming ramps of our recently announced ZeroFlap Optics, ALCs, and OmniConnect gearbox solutions, gives us an outlook with strong revenue growth and profitability through fiscal 2026 and beyond." The market appears to agree—the question is whether that agreement has pushed the price ahead of the opportunity.

The business quality is undeniable. The valuation requires conviction. Right now it sits on my watchlist, which you can access in real-time in our community.

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