Networking stocks have boomed as artificial intelligence has driven a heightened need for connectivity, and Credo Technology Group Holding is a poster child for the trend.
Shares of the company, which sells cables and other products that help facilitate the flow of data, are up 180% on the year after surging 10% on Tuesday.
What’s clicking for Credo? The company’s latest earnings report, released after Monday’s close, showed its revenue nearly quadrupled from the year earlier, as well as an expanding adjusted gross margin that hit 67.7%.
The company also delivered a “massive” forecast for the January quarter, according to TD Cowen’s Sean O’Loughlin. Credo’s revenue outlook was more than a third above what he had been modeling.
Credo’s “strong results and stronger guide likely cleared even the highest of buy-side bars,” he wrote.
An issue for some AI players is that their revenue is heavily concentrated among a few customers. Credo’s largest customer, which O’Loughlin suspected is Amazon.com, amounted to 42% of sales in the latest quarter. Nonetheless, he said there is a “relatively still-diverse customer base” for Credo. The company has four customers responsible for at least 10% of revenue, with the fourth expected to stay at that level through the rest of the fiscal year, in what O’Loughlin thinks is an encouraging sign of Credo’s traction.
O’Loughlin was also upbeat about the company’s ability to cash in on other markets besides active electrical cables — its bread and butter.
“With management alluding to $5B in revenue against a $10B [total addressable market] in the ‘next several years,’ we believe investors are likely to shift incremental focus from here and now to the blue-sky scenario for the company longer-term,” O’Loughlin wrote.
Susquehanna’s Christopher Rolland also praised the opportunity for product diversification.
“Overall, this was another remarkable report from Credo as the beat and raise was far larger than we anticipated,” he wrote. “While AECs continue to scale rapidly, we are pleased to see Credo introduce (and lead in) new product categories in AI interconnects, helping to solidify solid growth through the decade.”
Before the report, analysts at S3 Partners flagged Credo as a potential candidate for a short squeeze, which is when short sellers have to buy stock to deal with increasing paper losses from their bearish positions. That can contribute to additional stock gains.
”There is a phenomenon we’ve highlighted recently where AI‑adjacent stocks can rally 20% in a single day or 30% in a week, creating serious consequences for investors holding short positions,” S3 research director Leon Gross wrote Monday.
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