On Thursday, BofA Securities adjusted its outlook on Credo Technology Group Holding Ltd. (NASDAQ: NASDAQ:CRDO), raising the price target to $27 from $25, while maintaining an Underperform rating on the stock. The price target increase follows a modest beat in the company's fiscal second quarter top-line results and a positive forecast for product sales momentum.
Credo Technology reported in-line financial results for the first fiscal quarter and a slight outperformance in the second quarter, driven by strong core product sales. This was balanced by an uneven performance in the intellectual property (IP) business. The company anticipates the second half of fiscal year 2025 to remain on track, bolstered by expansion in application-specific integrated circuits (AECs) and optical digital signal processors (DSPs).
Starting from the second fiscal quarter, management expects a new emerging hyperscaler customer to contribute over 10% to sales, adding to the existing business from two major hyperscalers, Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN).
This reflects a diversifying customer base for AECs, which are increasingly used at the in-rack level, with long-term potential for rack-to-rack connections. Additionally, management signaled growing traction for optical DSPs, projecting they will account for more than 10% of sales in fiscal year 2025, equivalent to over $30 million in revenue.
Credo Technology is recognized for its innovation in long-reach optics (LRO) architectures, which could be significant for next-generation 1.6 terabit deployments. However, the competitive landscape, including rivals like Marvell (NASDAQ:MRVL) Technology, poses a significant risk. The mix of product versus IP sales and below-scale volume continue to constrain the gross margin outlook, despite the anticipated ramp-up in artificial intelligence (AI) applications.
Despite acknowledging the proximity of a growth inflection point, BofA Securities cautions that risks of delays persist, especially concerning AI deployment and capital expenditure uncertainties. Furthermore, with Credo Technology's valuation at 13 times enterprise value to sales (EV/S), there seems to be limited margin for error. The revised price objective of $27 is based on an unchanged 10 times the calendar year 2025 estimated EV/S, which sits near the midpoint of the comparative range of 8 to 11 times.
In other recent news, Credo Technology Group Holding Ltd reported its first-quarter fiscal 2025 results, showing earnings and revenue figures in line with analyst expectations. The company reported adjusted earnings per share of $0.04, aligning with estimates, and revenue of $59.7 million, slightly surpassing the consensus of $59.48 million. This represents a significant 70% YoY increase.
Credo's product revenue also marked a record, reaching $57.3 million in Q1, a 30% sequential increase. CEO Bill Brennan attributed this growth to customers' AI infrastructure deployments and anticipates further contributions from the company's suite of high-speed connectivity solutions.
In terms of future prospects, Credo forecasts revenue between $65 million and $68 million for the second quarter, surpassing the analyst consensus of $64.91 million. Brennan reiterated that their customers' AI infrastructure deployments remain the catalyst for their recent and expected growth. As of the end of Q1, Credo's financial standing includes $398.6 million in cash and short-term investments.
InvestingPro Insights
As Credo Technology Group Holding Ltd. (NASDAQ: CRDO) continues to navigate the competitive landscape and capitalizes on its product sales momentum, InvestingPro data and tips offer a deeper dive into the company's financial health and market performance. With a market capitalization of $5.19 billion and a notable gross profit margin of 61.89% over the last twelve months as of Q4 2024, Credo's ability to generate revenue from its core operations remains robust. Despite not being profitable over the past year, analysts are optimistic about the company's future, expecting net income growth and sales growth in the current year.
InvestingPro Tips highlight that Credo holds more cash than debt on its balance sheet, a reassuring sign of financial stability, and analysts have revised their earnings upwards for the upcoming period, reflecting confidence in the company's trajectory. Additionally, the company's stock has experienced significant volatility, with a strong return of 83.58% over the last year, yet it has taken a big hit over the last week with an 11.08% decline in price total return. It's also worth noting that Credo's stock is trading at a high Price/Book multiple of 9.61, suggesting a premium valuation compared to its book value.
For investors interested in a more comprehensive analysis, there are 17 additional InvestingPro Tips available on InvestingPro, providing further insights into Credo's performance and potential investment opportunities.
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