Credo Technology Group Holding Ltd. (CRDO) shares are catching their breath Thursday morning after a rough Wednesday. The stock plunged 20.04% in the previous session, and in premarket trading it's hovering around $165.13, down just 0.05%. That's not a bounce, but it's a sign the selling pressure may be easing as investors digest the company's latest earnings report.
The selloff came despite a quarter that beat expectations. Credo reported fiscal 2027 first-quarter revenue of $479 million, ahead of the $471.77 million analysts were looking for. Adjusted earnings of $1.20 per share also topped the $1.17 estimate. So why the drop? The market's a forward-looking machine, and it didn't like what it saw in the margins and the cost line.
GAAP gross margin slipped to 64.5% from 68.2% in the prior quarter. That's a meaningful step down. And operating expenses? They more than doubled to $188.4 million from $89.6 million. When you're growing fast, costs go up, but that kind of jump can spook investors who worry about how much of that revenue actually trickles to the bottom line.
AI Spending Keeps the Engine Humming
CEO Bill Brennan was quick to point out that the fundamental story hasn't changed. Artificial intelligence infrastructure spending is still a major growth driver. Bigger data center clusters need faster, more reliable, and energy-efficient connections, and that's exactly what Credo sells. The company makes copper and optical connectivity products that span distances from millimeters to kilometers, covering everything from chip-to-chip links to longer-haul connections.
Brennan expects future AI systems to use a mix of architectures and connection technologies, which plays right into Credo's diversified portfolio. Active Electrical Cables (AECs) remain the company's bread and butter, and Credo already counts five hyperscalers as customers. The company is also adding NeoCloud customers, and Brennan sees deeper penetration with existing clients, new accounts, and the industry shift toward 200-gig-per-lane and 1.6-terabit connections as key growth levers.
Optics: The Second Act
Here's where things get interesting. Brennan said Credo's optical business is growing even faster than its AEC business. Management is now forecasting fiscal 2027 optical revenue to exceed $600 million. That's a big number, and it's not just one product carrying the load. ZeroFlap Optics, silicon photonics photonic integrated circuits, and optical digital signal processors are each expected to contribute more than $100 million.
Credo also recorded its first silicon photonics revenue following its acquisition of DustPhotonics. Brennan said the acquired team has already locked in two major next-generation design wins, though those should ramp mainly in fiscal 2028. The company has also joined an Open Compute Project consortium as it develops near-package optics for scale-up AI networks. That's a smart move, getting in early on standards that could shape the next wave of AI infrastructure.
What's Next: Active LED Cables and OmniConnect
Looking further out, Brennan highlighted two new products that could be game-changers. Active LED Cables and OmniConnect are both expected to start generating revenue in fiscal 2028. OmniConnect is particularly intriguing because it addresses memory capacity and bandwidth limits in AI inference systems. Management believes it could eventually generate thousands of dollars in Credo content per graphics processing unit. That's a massive total addressable market if it plays out. Positron is already on board as the first announced customer.
Brennan called Active LED Cables a "big multibillion-dollar opportunity." That's the kind of language that gets investors excited, even if the revenue is still a couple of years away.
Guidance: More Than 85% Growth Ahead
Chief Financial Officer Dan Fleming laid out the near-term numbers. For the fiscal second quarter, Credo expects revenue of $525 million to $535 million, with adjusted gross margin between 67% and 69%. For the full fiscal 2027, management is forecasting revenue growth of more than 85%, supported by a stronger optical ramp in the second half of the year. Fleming also expects adjusted net margin to stay near 50%.
Brennan described fiscal 2027 as a "stepping stone" for optics, with outsized growth expected to continue into fiscal 2028 and beyond. So while the margin compression this quarter might sting, the long-term narrative is still very much intact.
ETF Exposure and Analyst Moves
For those who like to track the flows, Credo has meaningful weightings in a few ETFs. The Invesco NASDAQ Next Gen 100 ETF (QQQJ) has a 2.14% weighting, the Fundstrat Granny Shots US Small- & Mid-Cap ETF (GRNJ) is at 2.10%, and the Corgi Lithography & Semiconductor Photonics ETF (EUV) holds a 3.12% weighting. Significant inflows or outflows from these funds could trigger automatic buying or selling of Credo shares, so it's worth keeping an eye on them.
Analysts are still bullish overall. The stock carries a Buy rating with an average price target of $273.07. Recent moves include JP Morgan maintaining an Overweight rating but lowering its target to $310.00, Evercore ISI Group keeping an Outperform with a target cut to $292.00, and Rosenblatt going to Neutral while raising its target to $235.00. All three actions came on Sept. 2.
So, what's the takeaway? Credo's stock took a hit because margins dipped and costs rose, but the underlying business is still growing like crazy. The AI connectivity story is far from over, and with optics ramping up and new products on the horizon, there's a lot to look forward to. The market might be nervous in the short term, but the long-term picture looks pretty compelling.
