CRDO

In the fast-moving world of technology investing, finding companies that combine explosive revenue growth with healthy profitability is like discovering gold. Credo Technology Group (NASDAQ: CRDO) has delivered exactly this rare combination, reporting record-breaking fiscal 2025 results with revenue up 126% year-over-year to $436.8 million while simultaneously achieving both GAAP net income and positive free cash flow.

The Perfect Storm: Growth Meets Profitability

Most growth investors face an uncomfortable trade-off: chase revenue growth at the expense of profitability, or settle for modest growth with healthy margins. CRDO breaks this false dichotomy. The company achieved GAAP net income of $36.6 million and generated $57.8 million in cash flow from operations in Q4 2025, all while revenue accelerated from $59.7 million in Q1 to an extraordinary $170 million in Q4.

This inflection point didn't happen by accident. CEO Bill Brennan noted they "experienced the inflection point in our business that we had expected," driven primarily by their AEC (Active Electrical Cables) product line. When management can predict and deliver on such dramatic operational improvements, it signals deep business understanding and execution capability.

The AI Infrastructure Goldmine

CRDO sits at the center of one of technology's most compelling secular trends: the exponential demand for high-speed connectivity in AI data centers. The company provides the critical infrastructure that enables hyperscale networks to handle the massive bandwidth requirements of modern AI applications.

The customer concentration tells a powerful story. With three hyperscalers as core customers—including Microsoft and Amazon—CRDO has earned trust from the world's most demanding infrastructure operators. Even more compelling, the company expects two additional hyperscaler customers to sign on during fiscal 2026, which just began.

Looking ahead, CRDO anticipates fiscal 2026 revenue to exceed $800 million, reflecting growth above 85% year-over-year. This guidance suggests the revenue inflection isn't a one-time event but the beginning of a sustained growth trajectory.

Technology Moat: Patents and Product Leadership

In technology investing, sustainable competitive advantages often prove fleeting. However, CRDO appears to have built a legitimate moat through patent-protected technology and continuous innovation. The company's next-generation products, available now, maintain their technology lead in an increasingly competitive market.

The launch of their PILOT platform—a proprietary Predictive Integrity, Link Optimization, and Telemetry system—demonstrates ongoing innovation across their entire product suite, from SerDes IP to retimer ICs to Active Electrical Cables. This comprehensive platform approach creates switching costs and deepens customer relationships beyond simple product sales.

Financial Quality: The Numbers That Matter

CRDO's financial progression tells a story of operational leverage and improving business quality:

Revenue Trajectory (Fiscal 2025):

• Q1: $59.7 million

• Q2: $72.0 million

• Q3: $135.0 million

• Q4: $170.0 million

Profitability Metrics:

• Q4 GAAP gross margin: 67.2%

• Q4 GAAP operating income turned positive

• Strong cash generation with ending cash and short-term investments of $431.3 million

The gross margin expansion to over 67% demonstrates pricing power and operational efficiency. More importantly, the company achieved this while scaling rapidly, suggesting strong unit economics that improve with scale.

Valuation: The Elephant in the Room

Here's where the investment thesis encounters its primary challenge. Current valuation metrics suggest the market has already priced in significant future growth:

• Enterprise value to EBITDA ratio of 65.7x (top 10% globally)

• Enterprise value to free cash flow ratio of 105.5x (top 10% globally)

• Current trading price represents approximately a 7% over my fair value calculation of $43.14

These metrics would typically signal overvaluation. However, traditional valuation frameworks often struggle with companies experiencing dramatic business inflections. When revenue grows 126% year-over-year while transitioning to profitability, historical multiples become less relevant.

The Long-Term Perspective

For investors focused on companies that compound over decades, CRDO presents an interesting case study in timing versus price. The business fundamentals—dominant market position, patent protection, hyperscaler customer relationships, and AI infrastructure tailwinds—suggest a company with significant long-term potential.

The risk lies in valuation timing. Current metrics indicate the market has priced in substantial future growth, leaving little room for execution disappointments. However, if CRDO continues executing on its growth trajectory and expands its hyperscaler customer base as planned, today's seemingly expensive valuation could prove prescient.

Technology Moat Durability: The Reality Check

While CRDO's current technology leadership appears strong, technology moats face constant threats from innovation. Patent protection provides some defensibility, but the semiconductor and connectivity space attracts massive R&D investments from well-funded competitors.

The company's ability to maintain its lead will depend on continued innovation cycles and the strength of its customer relationships. Hyperscaler switching costs help, but technology advantages can erode quickly in this sector.

Investment Conclusion: Quality at a Price

CRDO represents a rare case where healthy GAAP profitability and strong free cash flow arrive precisely as revenue hits a dramatic inflection point. The combination of hyperscaler customer relationships, patent-protected technology, and AI infrastructure tailwinds creates a compelling long-term investment thesis.

However, current valuation multiples suggest the market has already recognized and priced much of this potential. For investors building positions in high-quality compounders, CRDO merits careful consideration despite premium pricing.

The key question isn't whether CRDO is a quality business—the evidence strongly suggests it is. The question is whether paying today's prices provides adequate risk-adjusted returns over a long-term holding period.

For growth investors comfortable with premium valuations for exceptional businesses, CRDO offers exposure to one of technology's most compelling secular trends through a company with proven execution capabilities. For value-oriented investors, patience may be required until market volatility provides more attractive entry points.

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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