Key Takeaways
- Credo Technology Group’s stock has dropped 28% in two weeks, but it’s still up 839% over the past three years.
- The company’s fundamental story remains intact, with a strong opportunity in AI connectivity and a solid product roadmap.
- Credo’s biggest vulnerability is customer concentration, with its largest customer accounting for over 40% of revenue.
- The stock is not cheap, with a price-to-earnings ratio of 120 and a price-to-sales ratio of 31.
- Investors with strong stomachs and long time horizons may consider buying the dip, but should be prepared for continued volatility.
Introduction to Credo’s Stock Performance
A 28% drop in stock price may seem alarming, but Credo Technology Group’s stock is still up by more than 800% in three years. This significant gain is comparable to Nvidia’s legendary run in the first three years of ChatGPT and generative artificial intelligence (AI). Credo’s stock has had a rough couple of weeks, with a nearly 12% drop in just five market days as of December 17. However, when looking at the bigger picture, the company’s stock is still up 103% year to date. This raises the question of whether the current dip is a buying opportunity or the start of a long-lasting retreat.
Reasons Behind the Stock Drop
The recent pullback in Credo’s stock is not due to any company-specific issues, such as missing earnings or losing a customer. Instead, it appears to be a result of garden-variety volatility in a high-flying stock. Credo’s stock has a beta value of 2.7, which means it tends to move in the same direction as the S&P 500 market index, but 2.7 times faster. This volatility is not unusual for a stock that has gained 839% in three years. Double-digit weekly swings are to be expected for a stock like Credo, and investors should be prepared for this level of volatility.
The Bull Case for Credo
Credo’s fundamental story remains intact, with a strong opportunity in AI connectivity. The company’s active electrical cables (AECs) offer significant advantages over fiber-optic alternatives, including 1,000 times better reliability and approximately 50% lower power consumption. These advantages make Credo’s products mission-critical for data centers, particularly as GPU clusters scale from thousands to millions of chips. The company is executing well, with revenue more than doubling last fiscal year, gross margins expanding, and the company recently turning profitable. Credo’s product roadmap is also compelling, with new offerings like ZeroFlap optical transceivers and OmniConnect gearboxes that could triple or quadruple the company’s total addressable market by 2030.
Risks and Challenges
Credo’s biggest vulnerability remains customer concentration, with its largest customer accounting for over 40% of revenue. This is a significant risk, as the loss of this customer could have a major impact on the company’s revenue. Additionally, the stock is not cheap, with a price-to-earnings ratio of 120 and a price-to-sales ratio of 31. These multiples are loftier than those of Nvidia, and investors should be prepared for the possibility that the stock could take a hit if growth stumbles. Furthermore, Credo faces competition from well-heeled challengers such as Marvell Technology and Broadcom, which could also impact the company’s growth.
Buying the Dip
For investors with strong stomachs and long time horizons, the current dip in Credo’s stock may be a buying opportunity. The company’s fundamental story remains intact, and the stock is trading at a modest discount. However, investors should be prepared for continued volatility, as Credo is still a relatively small company with a stock that tends to move quickly. The company’s growth has been heading in the right direction, but it’s essential to be aware of the risks and challenges that Credo faces. If you believe in the company’s long-term prospects and are willing to assume the risks, buying the dip could be a good opportunity to get in on the stock at a lower price.
