An under-the-radar AI play that's doubled in six months has even more room to run, BofA says

Credo Technology reported stronger-than-expected Q1 results, with EPS of $0.52 on $223.1 million revenue, significantly beating analyst estimates. Bank of America subsequently reiterated a Buy rating and hiked its price target 38% to $165, identifying Credo's active electrical cables (AEC) business as a top AI-leveraged growth driver. The bank projects the AEC market to double to $2 billion by 2027-2028 due to rapid hyperscaler adoption for AI clusters, underpinning Credo's strong performance and outlook despite a noted premium valuation.

Analysis

Credo Technology (CRDO) delivered a significant first-quarter earnings surprise, posting earnings per share of $0.52 on revenue of $223.1 million, substantially exceeding analyst consensus of $0.36 and $190.6 million, respectively. This robust performance, which prompted a share price surge of over 12%, is primarily attributed to the accelerating adoption of its active electrical cables (AECs) in AI data center clusters. Bank of America underscored this momentum by reiterating a Buy rating and increasing its price target by 38% to $165, forecasting the AEC market will double to $2 billion by 2027-2028. Credo is strengthening its market position by diversifying its customer base, having added a fourth hyperscaler to a list that includes Amazon and Microsoft, with a fifth reportedly imminent. While the company is demonstrating operating leverage and pursuing margin expansion through higher-speed products, it faces a key risk in its 'premium multiple' following a 130% stock increase in six months, a concern somewhat offset by management's conservative guidance. Furthermore, its expansion into the optical systems market will test its ability to compete with established players like Broadcom and Marvell.

Key Decisions for Investors

• Given the strong earnings beat and accelerating demand for its core AEC products in the AI sector, investors may consider the stock a compelling, albeit high-valuation, play on critical data center infrastructure.
• Investors should remain cognizant of the stock's premium valuation, as its significant recent run-up makes it vulnerable to corrections on any signs of slowing growth or failure to meet elevated market expectations.
• Key performance indicators to monitor going forward are the successful onboarding of new hyperscaler clients, evidence of continued operating leverage, and the company's ability to gain traction against incumbents in the optical market.