Can Credo Maintain Margin Strength as Its Business Accelerates?

Core Insights - Credo Technology Group Holding Ltd (CRDO) achieved a record-setting quarter in Q2 of fiscal 2026, with a non-GAAP gross margin of 67.7%, exceeding guidance and improving sequentially by 11 basis points [1][2] - The company reported a 20% sequential revenue increase and a remarkable 272.1% year-over-year growth, driven by strong demand in its Active Electrical Cable (AEC) and Integrated Circuit (IC) segments [2][9] - Credo's diversified growth strategy includes five high-growth connectivity pillars, targeting a total addressable market expected to exceed $10 billion in the coming years [3][4] Financial Performance - Non-GAAP operating margin reached 46.3%, expanding 319 basis points from the previous quarter, indicating effective management of operating expenses relative to revenue growth [2] - Non-GAAP net margins for Q2 were 47.7%, showcasing the company's efficient scaling despite ongoing investments in optical and system-level products [2] - For Q3 fiscal 2026, management anticipates a revenue growth of approximately 27% sequentially, with gross margins projected to moderate to a range of 64-66% [5] Market Position and Competition - Credo's AECs are becoming the standard for inter-rack connectivity, with expectations for significant growth in optical DSP deployments, particularly in 50-gig and 100-gig per lane designs [4] - The company faces competition from semiconductor giants like Broadcom and Marvell Technology, which are also experiencing strong growth in their respective markets [6] Valuation and Stock Performance - CRDO is currently trading at a forward 12-month Price/Sales ratio of 27.68, significantly higher than the Electronic-Semiconductors sector average of 7.9 [11] - Over the past three months, CRDO shares have increased by 22.6%, outperforming the Electronics-Semiconductors industry growth of 15.9% [12] - The Zacks Consensus Estimate for CRDO's earnings for fiscal 2026 has been revised upward in the last 60 days, indicating positive market sentiment [13]