Why Credo's 54% Rally Might Just Be the Beginning of Its AI Play

Credo Technology has been on a tear lately. In the past six months, the semiconductor stock climbed roughly 54.5%, significantly outpacing both the Electronic-Semiconductors sector (26.3% gain) and the broader Computer and Technology index (19.1%). The question on every investor’s mind: is this momentum already baked into the valuation, or does the upside story still have legs?

The Real Growth Engine: Why AECs Matter in the AI Era

Strip away the hype, and Credo’s strength comes down to one core product line: Active Electrical Cables (AECs). As AI infrastructure scales from hundreds of thousands of GPUs toward million-GPU configurations, data center operators face an unforgiving reality—reliability, latency, power consumption and total cost of ownership become non-negotiable.

This is where AECs step in. These cables deliver up to 1,000 times more reliability compared to optical alternatives while consuming 50% less power. Credo’s zero-flap AEC technology has quickly become the “de facto” standard for inter-rack connectivity at major cloud providers, replacing traditional optical connections for distances up to 7 meters.

The real inflection point? In Credo’s latest quarter, four hyperscalers each represented more than 10% of revenues—a sign of deep adoption. Even more bullish: a fifth hyperscaler just entered the fold and is ramping into volume. Customer demand signals across the board have strengthened, suggesting this isn’t a one-time spike but a structural shift in how data centers get built.

Expanding the Opportunity Beyond AECs

While AECs dominate the current narrative, Credo is laying groundwork in adjacent markets. The company’s IC portfolio—including retimers and optical DSPs—continues to perform steadily. Its PCIe retimer program is tracking toward design wins in fiscal 2026 and meaningful revenue contributions shortly after.

More importantly, three new product pillars are emerging: Zero-Flap optics, active LED cables and OmniConnect gearboxes. Combined with existing AEC and IC solutions, management estimates the total addressable market could exceed $10 billion—more than triple where it stood 18 months ago. That’s not just incremental growth; that’s a redefinition of the company’s scale potential.

The Numbers Don’t Lie: Profitability Is Accelerating

Here’s where Credo separates from typical high-growth stories. The company isn’t just scaling revenue; it’s doing so with improving unit economics.

In the most recent quarter, non-GAAP gross margins expanded 410 basis points to 67.7%, beating guidance. Non-GAAP operating income surged to $124.1 million versus $8.3 million a year ago—a 15x jump. Operating leverage is kicking in hard.

On the balance sheet front, Credo sits on $813.6 million in cash and short-term investments (as of November 1, 2025), up from $479.6 million just three months prior. This financial flexibility gives management optionality to invest in R&D, pursue M&A or weather any unexpected headwinds.

Looking ahead, management guides to Q3 revenues between $335-345 million (27% sequential growth at midpoint). For fiscal 2026, the company projects over 170% year-over-year growth with net income more than quadrupling. Those aren’t conservative targets.

Valuation: Premium but Not Unreasonable

Trading at a forward 12-month price-to-sales ratio of 17.22, Credo commands a premium relative to the Electronic-Semiconductors sector average of 8.58. Yes, that’s elevated, but context matters.

For comparison, Broadcom trades at 16.34x forward P/S, while Marvell Technology sits at 7.68x. Newer competitor Astera Labs, which surged 100% in six months, trades at 25.96x. Credo’s multiple, while rich, reflects both its growth trajectory and the structural tailwinds from AI infrastructure buildout.

The Risks Are Real

No bull case is complete without acknowledging headwinds. Rising operational expenses, intensifying competition from established players and newer entrants, plus macroeconomic uncertainty could all crimp growth. The AI infrastructure cycle, while powerful, is also subject to investment cycles and potential overcapacity risks if adoption outpaces demand normalization.

The Bottom Line: Still a Buy

Credo is squarely positioned to capitalize on a multi-year AI infrastructure cycle. AEC adoption is accelerating, hyperscaler wins are broadening, and new product platforms are expanding the addressable market substantially. Margin expansion and robust revenue visibility provide ballast for near-term volatility.

Despite the sharp stock run-up and premium valuation, Credo remains attractive for long-term investors with conviction in the AI infrastructure thesis. For those willing to weather near-term choppiness, the risk-reward still tilts favorably higher.