PCIe Products And Optical DSP Will Expand Connectivity Opportunities

Key Takeaways

• Credo's expansion into PCIe products and AEC business will diversify revenue streams and enhance future revenue growth.
  
• Strategic focus on optical DSP and PCIe retimers positions Credo for long-term growth via energy-efficient solutions and scale-up network opportunities.
  
• Revenue stability is at risk due to heavy reliance on one customer and few hyperscalers, with challenges in product adoption and market diversification.

Catalysts

Provides various high-speed connectivity Credo Technology Group Holding Ltd provides various high-speed connectivity solutions for optical and electrical Ethernet applications in the United States, Taiwan, Mainland China, Hong Kong, and internationally.

• Credo is set to expand its TAM significantly with the introduction of PCIe products, which will address a larger connectivity opportunity, impacting future revenue growth.
  
• The company expects to see continued revenue growth in its AEC business due to new qualifications, customer forecasts, and design engagements with additional hyperscalers, diversifying its revenue base.
  
• Credo is advancing its optical DSP business with opportunities for 1.6T port deployments, which could boost revenue as the need for energy-efficient optical connectivity grows.
  
• Credo's successful execution in ramping up operations and delivering innovative solutions is expected to drive operating leverage, increasing future earnings and margins.
  
• The potential for PCIe retimers in scale-up networks represents a significant long-term revenue opportunity, with the market forecasted to exceed $1 billion by 2027.

Credo Technology Group Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Credo Technology Group Holding's revenue will grow by 40.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 27.7% in 3 years time.
• Analysts expect earnings to reach $253.4 million (and earnings per share of $1.48) by about April 2028, up from $5.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $290.4 million in earnings, and the most bearish expecting $105 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 63.1x on those 2028 earnings, down from 1228.2x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 2.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.8%, as per the Simply Wall St company report.

Credo Technology Group Holding Future Earnings Per Share Growth

Risks

• High concentration of revenue from a single customer (86% in Q3) could pose significant risks if the customer reduces orders, impacting revenue stability and margins.
  
• Dependency on a few major hyperscalers for a significant portion of revenue could lead to volatility if market dynamics shift or competitive pressures increase, affecting overall company earnings.
  
• The focus on scaling up new products like PCIe AECs and retimers still requires successful market adoption and design wins, which, if delayed or unsuccessful, could hinder revenue growth and profitability.
  
• The shift from 25-gig to higher lane speeds like 50-gig and 100-gig per lanes may encounter delays in customer adoption, affecting the expected revenue increase from these technologies.
  
• Any failure to diversify the customer base or expand successfully into new product markets like PCIe could result in stagnant growth, negatively impacting long-term revenue and net margins.

Valuation

• The analysts have a consensus price target of $67.472 for Credo Technology Group Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $84.0, and the most bearish reporting a price target of just $34.13.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $914.7 million, earnings will come to $253.4 million, and it would be trading on a PE ratio of 63.1x, assuming you use a discount rate of 8.8%.
• Given the current share price of $37.02, the analyst price target of $67.47 is 45.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.