Credo Technology: Positive On Growth Acceleration And Customer Base Diversification

seekingalpha04-10

Buy rating for Credo Technology stock due to accelerating growth and customer diversification.Strong product revenue growth and margin improvements in recent results.Gaining traction with new ...

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Diversification\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-10 15:32 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683026-credo-technology-crdo-stock-positive-on-growth-acceleration-customer-base-diversification><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Buy rating for Credo Technology stock due to accelerating growth and customer diversification.Strong product revenue growth and margin improvements in recent results.Gaining traction with new ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683026-credo-technology-crdo-stock-positive-on-growth-acceleration-customer-base-diversification\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE00BMPRXN33.USD","symbol_name":"NEUBERGER BERMAN 5G CONNECTIVITY \"A\" (USD) 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Technology：增长加速和客户群多元化的积极因素","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"MSFT":1,"CRDO":1},"content_text":"Buy rating for Credo Technology stock due to accelerating growth and customer diversification.Strong product revenue growth and margin improvements in recent results.Gaining traction with new hyperscale customers and being well-positioned for future demand in high-speed data center connectivity.   shulz Overview My recommendation for Credo Technology (NASDAQ:CRDO) is a buy rating, as I have become more confident that growth will accelerate in the coming years. CRDO is also gradually diversifying its customer base, which is great as it reduces the volatility of growth. Given this positive outlook, I have shifted my view that CRDO’s valuation multiple would see a mean reversion to sustaining at a premium multiple. Note that I previously rated the buy rating for CRDO as the growth outlook remains positive and that even if valuation were to revert to mean, the upside was still attractive. Recent results and updates CRDO reported 3Q24 revenue of $53.1 million, implying -2% y/y growth. Revenue performance was driven by IP revenue of $1.3 million and product revenue of $51.8 million. Product revenue was the key driver, as it grew 24% vs. last year and 41% vs. last quarter. Adj gross margin saw 62.2%, a 230bps sequential improvement, and this improvement flowed down to the EPS line, leading to a modest EPS beat ($0.04 vs. $0.03). The results were overall encouraging and appear to be on track to meet my FY24 estimates, assuming 4Q24 guidance plays out as guided. Fundamentally, CRDO continues to show multiple positive signs of a strong growth outlook in the coming years. Firstly, there is a re-acceleration in growth at its largest customer, Microsoft (MSFT), which is clearly a good sign of demand recovery. Secondly, broadening design activity gives me greater confidence in the upcoming growth acceleration. Across numerous product lines, CRDO continues to supply volume production to numerous global hyperscalers. A notable achievement is that CRDO's third AEC customer has completed the first program qualification. Revenue contributions are anticipated to begin as early as 2H25. Given CRDO's history of success with major, well-known clients, I have faith that the two other hyperscalers, which are still in the early stages of development, will also have promising outcomes. This additional revenue from these two remaining clients is expected to materialize in FY26, according to management. While there is always uncertainty around the timing of specific projects, I see the diversification of revenue contributing to a less volatile revenue profile in AECs going forward. In addition, hyperscalers that have not yet implemented AEC-based in-rack connectivity will likely be incentivized to do so as a result of the shift to 100 Gbps/lane and 200 Gbps/lane technologies. The bearish argument is that customers can adopt a multi-sourcing approach; hence, CRDO may not be able to capture as much value as it could. In my opinion, though, the requirement for close engagement makes the acquisition of an AEC system as a whole the better option, especially considering the pace of innovation. I agree with management that these are key growth drivers because CRDO can bring an AEC to production more quickly and with more reliability as a single vendor (since they oversee the entire production and know they will be responsible for service and support during production).. Next, there is good customer traction in optical DSP. Despite optical DSPs making up a small portion of CRDO's total revenue, I found the company's continued customer traction to be encouraging. I am optimistic about the company's medium-to-long-term prospects as an optical DSP disruptor because of its n-1 technology advantage and its introduction of LRO (Linear Receive Optics) technology, which aims to drastically reduce data center power consumption. Finally, it is on-margin performance. As I gain more confidence in the growth acceleration potential of CRDO, the business should see strong operating leverage, which is already happening as can be seen from the material improvement in adj. EBIT margins from -1.7% in 2Q24 to 4.6% in 3Q24. Valuation and risk   Author's valuation model According to my model, CRDO is valued at $23.89 by the end of FY24 and $36.23 by the end of FY25. My modeling philosophy remains the same as how I did previously, where I expect growth deceleration given the growing size of the business. For FY24, I assumed CRDO would achieve 4Q24 guidance. As for the next 2 years, to better illustrate my view, I have modeled growth relative to FY22 growth performance, using FY23 vs. FY22 deceleration as a base (800 bps deceleration). Assuming the same trend for FY25 (down 1600 bps vs. FY22) and FY26 (down 2400 bps vs. FY26), I am expecting CRDO to generate $319/$502 million in revenue in FY25/26. With the growing visibility and acceleration, I believe the market will continue to stay positive on the near-term outlook; hence, multiples could continue to stay at 11x forward revenue, which contrasts to my previous view that CRDO would see mean reversion. Risk While CRDO is gradually broadening its customer base, visibility is still somewhat lacking due to existing customer concentration and the inherently lumpy nature of hyperscale capex projects. This could potentially lead to CRDO missing its FY25 significant growth expectations. But I think from a revenue profile standpoint, we've been pretty consistent in saying that we see an inflection point in the second half of fiscal '25. So really, really no change. from: 3Q24earnings call Summary  Summarizing this post, the recommendation for CRDO is a buy rating due to its accelerating growth and customer diversification. Recent results show strong product revenue growth and margin improvements. Notably, CRDO is gaining traction with new hyperscale customers, and I believe its products positions it well for future demand in high-speed data center connectivity. While customer concentration remains a risk, if CRDO could deliver, I expect the market to continue sustaining the current 11x forward revenue valuation (a premium to its historical average).","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426143744"}