Investing

Why This High Flying AI Stock is Up 90% the Past Month

Joel South

Published: December 16, 2024 9:05 am

Last Updated: December 16, 2024 9:06 am

From a closing share price just over $40 on November 11, to Friday’s close just a nickel short of $76, Credo Technology (Nasdaq: CRDO) stock has been on an absolute tear this past month, gaining roughly 90% in just over 30 days. And it’s not hard to figure out why.

24/7 Wall St. Key Points:

• Credo crushed earnings expectations two weeks ago, delivering better than expected Q2 sales and earnings.
• Management guidance for its Q3 report, three months away, strongly suggests that Credo is about turn profitable.
• The problem is that even Credo doesn’t think it will earn as much as Wall Street is promising it will earn in Q3.
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Most of Credo’s gains this past month, you see, the stock racked up on just one single day: December 2. And in case you hadn’t already guessed, I’ll solve the riddle for you: December 2 was when Credo reported its fiscal Q2 2025 earnings results.

Get to know Credo Technology

If you’re not familiar with Credo Technology, then welcome to the (very large) club. Prior to and for quite a while after its January 2022 IPO, Credo stock mostly bounced around in a stock range from the mid-teens to the mid-single digits, until finally breaking into the 20s early in 2024. But from there, it’s been a rocket ride higher, as Credo rode a wave of enthusiasm for artificial intelligence stocks that’s more than tripled its share price over the past year.

Credo, you see, is one of a select few companies manufacturing “secure, high-speed connectivity … Active Electrical Cables” that are “optimized for optical and electrical Ethernet applications” such as connecting AI data center servers to networking switches. The company also produces Serializer/Deserializer (SerDes) and Digital Signal Processor (DSP), SerDes Chiplets, and integrated circuits (ICs) for the AI industry.

Credo’s Q3 earnings report

And it seems these are becoming quite popular products. In Credo’s Q2 report earlier this month, the company recorded stellar sales growth of 64% year over year, and 21% growth quarter over quarter, to $72 million. Granted, Credo didn’t actually earn a profit on these sales. (Instead, it reported a $0.03 per share net loss).

Still Credo cut its loss by about one quarter from one year ago, and lost only half as much money in fiscal Q2 2025, as it did in fiscal Q1.

Credo’s forecast for the future

And now for the best news of all: Credo is on the cusp of turning profitable, potentially as soon as next quarter. In this month’s report, CEO Bill Brennan stated definitively that Credo’s long awaited “inflection point in our revenues … has arrived.” And more than that: “We are experiencing even greater demand than initially projected, driven by AI deployments and deepening customer relationships.”

In the fiscal Q3 2025 already underway, Credo expects to book between $115 million and $125 million in revenue (i.e. at least 60% sequential growth), and to earn at least a 60.6% gross profit margin on this revenue (so $69.7 million, minimum, and potentially as much as $78.2 million).

Subtracting expected operating expenses of between $58.6 million and $60.6 million, this all but guarantees Credo will earn an operating profit for Q3, and presumably a net profit as well. Taken at the midpoint of management’s guidance range, I calculate the company’s operating earnings should be in the neighborhood of $0.09 per share before taxes.

But now here’s the bad news: According to Yahoo! Finance data, analysts on Wall Street are leaning towards irrational exuberance over Credo’s good Q2 news, and currently expect the company to earn roughly twice the $0.09 per share this current Q3, that Credo’s own guidance suggests it will earn: $0.18 per share.

On the one hand, this helps to explain why investors have basically doubled Credo’s share price since Q2 earnings came out. On the other hand, it also suggests that these same investors have let enthusiasm get the better of them. Unless Credo has incredibly lowballed the Street on its Q3 guidance, this company may be gearing up to deliver a big earnings “miss” three months from now.

Buyer beware.