Rising Trade Tensions And Hyperscale Chip Trends Will Erode Outlook

Key Takeaways

• Geopolitical risks, customer concentration, and hyperscaler in-house chip development threaten Credo's revenue stability, market access, and long-term growth prospects.
  
• Heightened competition and volatile industry cycles necessitate elevated R&D spending, increasing margin pressure and exposing the company to financial and operational volatility.
  
• Accelerating demand for high-speed, energy-efficient connectivity, industry partnerships, and leading technology position Credo for sustained growth in revenue, profit, and market leadership.

Catalysts

Provides various high-speed connectivity solutions for optical and electrical Ethernet, and PCIe applications in the United States, Taiwan, Mainland China, Hong Kong, and internationally.

• Rising geopolitical tensions and the growing prevalence of protectionist trade policies continue to threaten Credo's global supply chain stability, with the risk of abrupt export controls or tariffs potentially driving up production costs, restricting market access, and eroding both revenue growth and gross margins in coming years.
  
• The rapid acceleration of in-house semiconductor development by hyperscale data center operators poses a substantial long-term threat to Credo's business model, as major customers are increasingly incentivized to develop proprietary connectivity solutions, undermining Credo's addressable market and likely leading to revenue stagnation or decline and significant gross margin compression.
  
• Customer concentration remains a major structural risk, with one customer accounting for 61 percent of revenue in the most recent quarter; any shift in purchasing strategy, competitive displacement, or loss of a key hyperscaler means that revenues could contract sharply and net margins could collapse, given the fixed cost base.
  
• Intensifying industry competition, particularly from larger integrated players and fast-moving startups, will force Credo to continuously increase R&D investments and sales expenses to defend and grow market share, resulting in shrinking operating margins and increased risk of innovation-driven write-downs if new products fail to meet rapid technological changes.
  
• The increasingly cyclical and volatile nature of demand for connectivity chips-driven by unpredictable AI infrastructure investment cycles and inventory corrections by hyperscalers-will create substantial revenue and earnings volatility, making long-term financial planning unreliable and increasing the risk of overproduction, inventory buildup, and sudden margin declines.

Credo Technology Group Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Credo Technology Group Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Credo Technology Group Holding's revenue will grow by 36.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.9% today to 30.7% in 3 years time.
• The bearish analysts expect earnings to reach $341.6 million (and earnings per share of $1.9) by about August 2028, up from $52.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 53.1x on those 2028 earnings, down from 364.6x today. This future PE is greater than the current PE for the US Semiconductor industry at 28.3x.
• Analysts expect the number of shares outstanding to grow by 3.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.09%, as per the Simply Wall St company report.

Credo Technology Group Holding Future Earnings Per Share Growth

Risks

• The ongoing global expansion of data center traffic, rapid adoption of AI workloads, and increasing demand from hyperscale customers are driving insatiable demand for high-speed, energy-efficient connectivity-a trend Credo is capitalizing on and which could support strong multi-year revenue growth.
  
• Credo's differentiated portfolio in both copper (AEC) and optical solutions, combined with their proprietary SerDes IP and comprehensive system-level approach, is enabling high gross margins and increasing adoption from a broader customer base, which may support sustained profit expansion and earnings growth.
  
• Strategic design wins and deepening partnerships with leading hyperscalers position Credo for recurring, high-volume business under multi-year supply agreements, thus improving revenue visibility and predictability even as the customer base diversifies.
  
• The industry-wide shift from copper to optical interconnects and the push for greater energy efficiency in networking infrastructure directly play to Credo's technological strengths, suggesting its addressable market and gross profit pool could expand over time.
  
• As the market migrates to higher speed standards like 100 gig and 200 gig per lane and new protocols such as PCIe Gen6, UALink, and NVLink Fusion, Credo's ongoing innovation and early mover advantage in these areas may help maintain their leadership, supporting both top-line and margin growth in the years ahead.

Valuation

• The assumed bearish price target for Credo Technology Group Holding is $72.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Credo Technology Group Holding's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $72.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $341.6 million, and it would be trading on a PE ratio of 53.1x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $110.86, the bearish analyst price target of $72.0 is 54.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.