What happened
Shares of Credo Technology (CRDO 2.15%) beat the market this week, rising 6% through Thursday trading. That's as compared to a flat overall market, according to data provided by S&P Global Market Intelligence. The rally added to modest gains for the high-speed data solutions specialist so far in 2023. The stock is up 12%, trailing the S&P 500 index's rally by just a few percentage points. Yet Credo Technology had been down by as much as 50% earlier in the year.
This week's rally was sparked by positive news on the earnings front, along with bullish comments from Credo's management team about demand trends for the rest of its fiscal year.
So what
Management said on Thursday that Q1 sales landed at $35 million for the period that ran through late July. That result translated into a 9% increase year over year and marked a sharp improvement over the prior quarter, when sales were down 15%. Management credited the company's unique market position, plus increasing demand for high-speed connectivity solutions, for lifting its results.
Results were more mixed around profitability. Credo maintained gross profit margins at 58% of sales, yet its expenses were also elevated. As a result, net losses improved only slightly, shrinking to $12 million in Q1 from $15 million in the prior quarter. Credo's cash position brightened as well, with cash on the books ticking up to $240 million from $220 million.
Now what
Investors are hopeful that rising demand for generative AI products will lift demand for the types of high-speed, energy-efficient connectivity solutions that Credo provides. The company is also aiming to diversify its business as it grows so that it isn't too dependent on a small set of customers or product niches.
But the path toward sustainable growth will be a rocky one. Credo projected that sales next quarter will fall to between $42 million and $44 million from $51 million a year ago. Investors can expect continued volatility in this stock while growth rates stabilize. A more sustainable rally in the stock, meanwhile, will also require concrete evidence that Credo is moving toward profitability. Those key ingredients are still missing, and that's likely a key reason the tech stock is still underperforming the market this year.
