Credo Technology Group (CRDO) Report Interpretation

Overview

This earnings and guidance update assesses Credo Technology Group’s transition toward optical connectivity products. Goldman Sachs sees strong optical momentum and raises longer-term earnings estimates, but expects the stock to trade modestly lower initially because the guidance increase is modest relative to already elevated investor expectations.

Core views

Goldman Sachs expects CRDO shares to trade modestly lower following the quarter, even though the operating results were solid and FY27 revenue guidance increased. The institution attributes this expected near-term reaction to elevated investor expectations after bullish capital-expenditure commentary from key hyperscaler customers. In particular, Goldman Sachs believes some investors had anticipated that management would increase its FY27 optical-revenue guidance beyond $600 million, rather than maintain its existing guidance of more than $600 million. The reported 2Q results were modestly ahead of expectations. Revenue was $479 million, versus Goldman Sachs at $470 million and Visible Alpha consensus at $472 million. Gross margin excluding stock-based compensation was 68.0%, in line with both Goldman Sachs and the Street. Operating margin excluding stock-based compensation was 48.2%, below Goldman Sachs’s 49.2% estimate and the Street’s 49.3%. Non-GAAP EPS excluding stock-based compensation was $1.20, above Goldman Sachs’s $1.15 and the Street’s $1.17. Management raised FY27 overall revenue-growth guidance to 85% year-on-year from 80%, while maintaining optical-revenue guidance of more than $600 million. It continues to expect each of Optical DSPs, Silicon Photonics PICs, and ZF Optics to contribute more than $100 million. Goldman Sachs expects ZF Optics to be the largest contributor, at roughly $400 million in FY27, compared with approximately $100 million each for DSPs and PICs. The report expects the three optical lines to continue growing in FY28 and expects Active LED Cables to become a material FY28 contributor. This expansion is being driven both organically and through DustPhotonics, and is the main reason Goldman Sachs raises its FY28 outlook. The report views profitability as supportive: gross margin remains strong, and FY27 guidance reflects pricing power. However, Credo is increasing investment in optical products to sustain revenue growth, which raises operating-expense expectations. For 3Q, midpoint revenue guidance of $530 million is above Goldman Sachs’s $522 million forecast and the Street’s $512 million forecast. Guided gross margin of 68% is broadly in line with Goldman Sachs at 67.9% and the Street at 67.8%, while non-GAAP OpEx guidance of $102.5 million is above Goldman Sachs’s $97.5 million and the Street’s $96.8 million. Customer concentration remains relevant, but Goldman Sachs highlights progress on diversification. Credo reported four customers representing more than 10% of revenue in FY1Q, similar to the previous quarter though with somewhat different concentration among them. Management was positive on opportunities with neoclouds, which Goldman Sachs considers a developing opportunity that could ultimately reduce revenue lumpiness. Goldman Sachs raises its 2027-29 EPS estimates by an average of 4%, mainly because of higher revenue assumptions from the optical ramp and a modestly higher gross-margin assumption. Its revised estimates show FY27 revenue of $2.553 billion, down 2.7% from the prior $2.624 billion estimate, followed by FY28 revenue of $4.073 billion, up 5.3%, and FY29 revenue of $5.016 billion, up 6.0%. Revised EPS is $6.35 for FY27, down 3.8% from $6.60, then higher at $10.40 for FY28 versus $9.65 and $12.75 for FY29 versus $11.80. Goldman Sachs reiterates Buy and sees favorable risk/reward as Credo pivots to optical products while copper-based solutions remain relevant in data centers. The 12-month target price remains $285. Goldman Sachs values the shares at 27x next-twelve-month P/E, reduced from 30x because peer multiples are lower, applied to a Q5-Q8 EPS estimate of $10.75, raised from $9.60 through higher estimates and a one-quarter roll-forward. The report’s base-case valuation summary shows $285 and 51.5% upside/downside, while the stock snapshot lists a $206.63 price and 37.9% upside.

Analysis framework

Goldman Sachs compares reported revenue, margins and EPS with its own estimates and Visible Alpha consensus; evaluates management’s forward guidance by product line; updates revenue, margin and EPS assumptions for FY27-FY29; and applies a next-twelve-month P/E multiple to its forward EPS estimate to derive the target price. It also considers customer concentration, diversification and the relative roles of optical and copper connectivity products.

Methodology notes

• Valuation methodsP/E and PEG Valuation

  Next-twelve-month P/E valuation

  Goldman Sachs applies a 27x next-twelve-month P/E multiple to its Q5-Q8 EPS estimate of $10.75 to set the unchanged $285 12-month target price. The multiple was reduced from 30x because peer multiples declined.

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Optical-product mix and data-center connectivity transition

  The report links demand for optical DSPs, silicon photonics PICs, ZF Optics and Active LED Cables to Credo’s growth outlook, while assessing how copper-based solutions remain relevant in data centers and how a faster optical transition could affect the company.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Credo Technology Group (CRDO)

  Primary covered company; Goldman Sachs expects optical products to drive longer-term revenue and earnings growth while copper solutions remain relevant in data centers.

  Strengths

  Strong gross margin, pricing power, a growing optical portfolio, expected ZF Optics contribution of about $400 million in FY27, and potential customer diversification through neoclouds.

  Weaknesses

  Higher operating expenses as the company shifts investment toward optical products; the guidance increase may be modest relative to investor expectations.

  Comparison

  2Q revenue and EPS were above Goldman Sachs and Street estimates, while operating margin was below both; the 27x target multiple is down from 30x because peer multiples are lower.

  Risks

  Faster-than-expected adoption of optical solutions at the expense of copper, increased competition in AECs, and revenue lumpiness from customer concentration.

Key data

• 2Q revenue$479 millionAbove Goldman Sachs at $470 million and Visible Alpha consensus at $472 million.
• 2Q gross margin excluding SBC68.0%In line with Goldman Sachs and the Street, both at 68.0%.
• 2Q operating margin excluding SBC48.2%Below Goldman Sachs at 49.2% and the Street at 49.3%.
• 2Q non-GAAP EPS excluding SBC$1.20Above Goldman Sachs at $1.15 and the Street at $1.17.
• FY27 revenue-growth guidance85% YoYRaised from 80% YoY; optical-revenue guidance remained above $600 million.
• 3Q midpoint revenue guidance$530 millionAbove Goldman Sachs at $522 million and the Street at $512 million.
• 3Q non-GAAP OpEx guidance$102.5 millionAbove Goldman Sachs at $97.5 million and the Street at $96.8 million.
• 2027-29 EPS estimate changeAverage increase of 4%Mainly reflects a stronger optical-revenue ramp and modestly higher gross-margin assumptions.
• 12-month price target$285Unchanged; based on 27x next-twelve-month P/E applied to Q5-Q8 EPS of $10.75.

Impact & implications

The report argues that Credo’s expanding optical portfolio can drive stronger FY28 and FY29 earnings, even as higher optical investment lifts operating expenses. Near-term market reaction may be constrained because the maintained optical-revenue guidance did not exceed the high expectations that had formed after hyperscaler CapEx commentary.

Risks

• Optical solutions could be adopted faster than expected at the expense of Credo’s copper offerings.
• Competition in active electrical cables could increase.
• Customer concentration could continue to make revenue lumpy.

What to watch

• Whether management increases its FY27 optical-revenue guidance beyond $600 million.
• The relative revenue contributions of ZF Optics, Optical DSPs and Silicon Photonics PICs during FY27.
• Whether Active LED Cables become a material revenue contributor in FY28.
• Progress in customer diversification and growth in neocloud opportunities.
• The extent to which higher optical investment increases operating expenses.