BofA Upgrades Credo Technology Stock

BofA Securities analysts have upgraded Credo Technology Group Holding Ltd (NASDAQ:CRDO) stock from Underperform to Buy following the company's strong earnings report that resulted in a 30% rise in premarket trading.

The bank increased its price target for Credo shares to $80, up from $27. Credo exceeded forecasts for its fiscal third quarter and shared an optimistic outlook, prompting BofA to adjust its earnings estimates for fiscal year 2026/27 up by 65% and 88%, to $1.01 and $1.51, respectively.

The new price target reflects a 60x PE multiple based on the earnings of 2026, aligning with comparable companies. Analysts noted that this adjustment indicates Credo's shift towards a profitable earnings growth model, especially as it enters a multi-year adoption phase for its Active Electrical Cable (AEC) product, crucial for power-efficient AI clusters.

In the near term, BofA predicts a strong second half for fiscal year 2025, driven by substantial AI growth at Amazon Web Services, a significant customer and investor in Credo.

Analysts, led by Vivek Arya, acknowledged that earlier concerns around limited market assumptions for AEC have been addressed during Credo’s earnings call, which revealed customer momentum.

BofA indicated that Credo is poised to keep operational expenditure growth beneath half of its sales growth in the coming years, while gross margins are projected to remain stable, yielding a 74% CAGR in earnings per share for 2024-2027, compared to 45% in sales growth.

Notably, the company has expanded its customer base, now having seven customers each contributing over 5% to sales, up from two previously.

Additionally, BofA noted Credo’s expanding product exposure, particularly in relation to NVIDIA Corporation (NASDAQ:NVDA) GPUs and Amazon’s AI chip Trainium2.

Despite the optimistic forecast, potential risks include Credo's premium valuation and sensitivity to changes in AI deployment sentiment, along with increased competition in the AEC market from Marvell (NASDAQ:MRVL) Technology and Broadcom (NASDAQ:AVGO). Gross margins are expected to hold steady in fiscal year 2025, with concentrated sales risks evident, as three major hyperscale AEC customers contribute 58% of total sales.