Hook & thesis
Credo Technology (CRDO) just gave you a straightforward setup: a blowout quarter and a balance sheet that looks like a fortress, followed by a sharp, emotionally-driven price pullback. The market punished the stock in December, creating a window to buy exposure to high-speed connectivity solutions that sit squarely in the AI/data-center infrastructure story.
Thesis in plain terms - this is a tactical long: Credo's most recent quarter (fiscal Q2 ended 11/01/2025) showed 20%-plus quarter-over-quarter revenue growth, 67% gross margins and operating margins approaching 30%. Those are not hobbyist numbers for a growth semiconductor supplier. The risk/reward looks attractive right now if you are willing to accept near-term volatility and define your risk with a hard stop.
What the company does and why the market should care
Credo Technology builds high-speed wired connectivity solutions used in data infrastructure - the sort of silicon that matters when customers push bandwidth limits inside data centers and networking equipment. As AI models scale, the industry needs better links between compute and memory and between racks - that increases demand for higher data-rate SerDes and related connectivity ICs. If AI-related buildouts continue, Credo's addressable market expands and its product mix should keep benefiting from favorable pricing and scale.
The quarter that matters
Look at the numbers from the most recent reported quarter (fiscal Q2 ended 11/01/2025):
- Revenue: $268.0 million (Q2 fiscal 2026)
- Gross profit: $181.0 million - implying a gross margin of roughly 67.5% (181,046 / 268,027)
- Operating income: $78.8 million - operating margin ~29.4%
- Net income: $82.6 million and diluted EPS of $0.44
- Operating cash flow: $61.7 million in the quarter
- Balance sheet: current assets $1.243 billion vs current liabilities $140.4 million (current ratio ~8.9); total equity $1.286 billion
Those are high-quality profitability metrics for a semiconductor supplier and they come with a very liquid current-assets position. Creditors and capital markets worry less about companies that have several quarters of cash on the balance sheet and operating cash flow turning positive.
Momentum and trend
Quarter-to-quarter there's visible acceleration: Q1 fiscal 2026 revenue was $223.1 million and net income $63.4 million; Q2 improved to $268.0 million and $82.6 million net income. If you sum the last four reported quarters in the filing set (Q2 2026 + Q1 2026 + Q3 2025 + Q2 2025), you get roughly $698 million of revenue across those periods - a run-rate that's moved sharply higher in the latest pair of quarters.
Valuation framing (pragmatic)
Latest market snapshot shows the stock trading around $132 (last close 132.08). Using the most recently reported diluted average shares (187,659,000 from Q2 filings) as a proxy produces an approximate implied market capitalization near $24.8 billion (187.66M shares x $132). I flag that as an approximation - diluted average shares are not a precise measure of diluted outstanding at a moment in time and financing events in the period (see below) can shift the share count.
Put differently: the market has already priced a lot of growth into the equity at these levels, but the fundamentals backing the valuation gap are stronger than many growth-chip names. Where Credo distinguishes itself is the combination of high gross margins, profitable operations and a current balance-sheet cushion - unusual for a high-growth semiconductor firm.
Why this is a trade (not a buy-and-forget) — execution plan
The risk profile after the dip supports a tactical trade with defined risk. Execution I like:
- Entry zone: $125 - $135. Prefer to scale in; start a partial position near $132 and add toward $125 if weakness continues.
- Initial stop: $98 (hard stop). That's roughly a 25% downside from the current snapshot and sits below prior support levels around $105-$110 seen in the last two months.
- Targets:
- Target 1 (near-term): $175 — ~32% upside from $132. This is in line with prior consolidation highs and a first realistic re-rating level.
- Target 2 (medium-term): $220 — ~66% upside from $132. This assumes continued secular AI/data-center demand and continued margin expansion or multiple re-rating.
- Position sizing: Risk no more than 2-4% of portfolio value on this single trade (meaning the fraction of capital you would lose if stop hits). Scale in rather than all-in at once.
Risk/reward on the base plan: from $132 to $175 is ~+32% upside vs ~-26% to the $98 stop — an asymmetric setup if Cadre of buyers returns and fundamentals hold.
Catalysts to watch (2-5)
- Continuation of AI/data-center buildouts and design wins that translate into higher bookings and revenue in the next 1-4 quarters.
- Subsequent quarterly reports that replicate or improve on the 67% gross margin and ~30% operating margin profile.
- Reduced volatility as the market digests the cash/financing event and the company converts cash into productive uses (R&D, M&A or share buybacks) without significant dilution.
- Evidence of sustained pricing power in connectivity silicon or multi-quarter revenue backlog growth disclosed by management.
Risks and counterarguments (be explicit)
- Dilution / financing risk: Q2 shows a large net cash inflow from financing activities (+$377.9 million). That likely reflects a capital raise which improves the balance sheet but can dilute existing holders and weigh on near-term multiples.
- Valuation already rich: The implied market cap (approx. $24.8B using diluted average shares) requires sustained high growth and multiple expansion. If growth slows or multiples compress, the stock can fall sharply again.
- Customer concentration / design risk: Semiconductor vendors often face customer concentration and timing lags as design wins convert to revenue. If a major customer delays deployment, revenue can be lumpy.
- Competition and technology risk: Players like Broadcom and other high-speed connectivity suppliers compete aggressively on performance and price; rapid innovation cycles can alter product advantages.
- Geopolitical / supply-chain risk: Credo has geographic presence in Hong Kong, Mainland China and Taiwan; any cross-border restrictions, export controls, or supply-chain hiccups could hurt production or sales.
Counterargument: The market may have already priced Credo for near-term dominance in the AI-connectivity niche. That case is conceivable - if Credo's share counts expand materially via follow-on equity issuance or if large incumbents accelerate competing product ramps, upside could be limited. Additionally, insider selling or sizable secondary supply could pressure the stock for weeks even with solid fundamentals.
What would change my mind
- If the next two quarterly reports show revenue deceleration or gross-margin erosion relative to Q2's ~67% level, I would close the position; the thesis relies on Credo maintaining premium margins as volumes scale.
- If the company issues a materially larger share count than current diluted averages without clear productive uses of capital (e.g., repeated equity raises with little revenue leverage), I would reassess or exit.
- If geopolitical actions materially limit Credo's ability to ship to major customers or source critical components, that would also force a downgrade.
Bottom line / stance
Credo is a high-quality player in a market with a clear secular tailwind. The most recent quarter provides proof-of-concept: accelerating revenue, very healthy gross margins (~67.5%), positive operating cash flow and a fortified balance sheet. That said, the stock has been volatile and the company recently raised financing that could imply dilution and short-term pressure. For traders with a medium-risk tolerance, the current pullback offers a favorable risk/reward to add a tactical long with a clearly defined stop at $98 and upside targets at $175 and $220.
Disclosure: This is a trade idea, not investment advice. Size positions relative to your risk tolerance and portfolio plan. I base this write-up on the company financials and market snapshot from the most recent filings and intraday price data.
If you want a quick checklist version of the trade plan to copy: Entry 125-135, Stop 98, Target1 175, Target2 220, scale in, risk 2-4% of portfolio on the initial plan.