Shares of AI networking up-and-comer Credo Technology (CRDO -0.64%) sank this week, falling 29.5% through Thursday trading, according to data from S&P Global Market Intelligence.
Credo delivered its first fiscal quarter 2027 earnings results this week, and while the headline numbers technically beat analyst expectations, the stock plunged due to some less-than-perfect margin figures. Even after this week's plunge, Credo trades at a high valuation, so anything less than a big beat and raise beyond bullish expectations was probably bound to be met with a pullback.
NASDAQ: CRDO
Key Data Points
Credo's financial results take off, even as the stock reverses
In its fiscal first quarter, Credo grew revenue 114.7% to $479.0 million, while adjusted (non-GAAP) earnings per share rocketed 130% higher to $1.20. Both figures actually beat expectations. Management also guided for strong quarter-over-quarter revenue growth in the current period, which also came in well above expectations.
So, what was the problem? Well, Credo trades at a very high valuation. Heading into this week, its market cap was around $45 billion, relative to its current revenue run rate of about $2 billion. Even though Credo is growing at a triple-digit rate and revenue will be higher in the year ahead, the early week valuation was still about 18 times the upcoming year's revenue estimate of $2.49 billion.
Credo does generate relatively high margins on its specialized networking equipment, but the past quarter's gross margins also saw some pressure. GAAP gross margins fell to 64.5%, down from 68% last quarter and 67.4% in the year-ago quarter. While adjusted gross margins were within the range of the prior quarters, there was apparently a big uptick in stock-based compensation that investors didn't like. The current quarter's guidance also forecasts an even lower GAAP gross margin, so the trend is going the wrong way.
Image source: Getty Images.
Credo is an AI winner, but not a cheap stock
After its 30% drawdown this week, Credo trades at around 26 times this year's adjusted earnings estimates. That's a very reasonable valuation, given Credo's strong AI-oriented growth outlook.
However, investors should be cognizant that the adjusted earnings estimates exclude stock-based compensation, which is a real cost because it dilutes shareholders. Last quarter, GAAP net income was just a little more than half of non-GAAP income. So, investors should probably regard Credo's true forward earnings multiple as something closer to 50 than 26. In that light, Credo may be seen as more fully valued. That being said, if Credo can maintain triple-digit growth figures beyond next year or something close to it, this past week's pullback could be seen as an opportunity to buy.
