Credo: Record Q2 Validates AI Interconnect Thesis

Deep Value Investing9.94K FollowersFollow5ShareSavePlay(11min)CommentsSummaryI believe Credo’s AI interconnect thesis is validated by triple-digit revenue growth, with its AECs the de facto standard for inter-rack connectivity.Q2 FY26 revenue rose 20% sequentially to $268M, beating guidance and the Street's consensus ($235M). Profitability and cash flow followed through.Non-GAAP gross margin was 67.7%, non-GAAP net income was $128M, operating cash flow was $61.7M, and free cash flow was $38.5M. The trend in margin is positive, but there are risks.Heavy customer concentration (top four customers were 42%, 24%, 16%, 11% of Q2 revenue) and margin normalization toward 63%-65% could spook some investors.Overall, I believe the setup is favorable. Fundamentals are strong, the narrative is exposed to the AI buildout, and the chart looks decent. My rating is a buy. Maks_Lab/iStock via Getty Images I initiate coverage on Credo Technology Group (CRDO) after a record Q2 FY26 that validated the AI interconnect thesis. Revenue momentum (which is up in the triple-digit growth, and projected to remain in the triple digits forThis article was written byDeep Value Investing9.94K FollowersFollowSmall deep value individual investor, with a modest private investment portfolio, split approx. 50%-50% between shares and call options. I have a B.Sc. in aeronautical engineering and over 6 years of experience as an engineering consultant in the aerospace sector. The latter statement is not relevant in any way whatsoever to my investment style, but I thought to add it for self-indulgent purposes. I have a contrarian investment style, highly risky, and often dealing with illiquid options. How illiquid? Well, you can land a Jumbo on the spread and still have clearance for take-off. From time to time, I buy shares, mostly to not be categorized as a degen by my fellow investor friends, therefore the 50%-50% allocation. My timeframe tends to be between 3-24 months.I like stocks that have experienced a recent sell-off due to non-recurrent events, particularly when insiders are buying shares at the new lower price. This is how I often screen through thousands of stocks, mainly in the US, although I may own shares in banana republics. I use fundamental analysis to check the health of companies that pass through my screening process, their leverage, and then compare their financial ratios with the sector, and industry median and average. I also do professional background checks of each insider who purchased shares after the recent sell-off. I use technical analysis to optimize the entry and exit points of my positions. I mainly use multicolor lines for support and resistance levels on weekly charts. From time to time I draw trend lines, taken for granted, in multicolor patterns. Note: I tried to keep my introduction as real, and authentic as possible. I dislike empty suits, high-level BS, deep-level BS, unnecessary jargon, and self-indulgent, third-person written introductions with an air of superiority.Thanks for reading my introduction!Analyst’s Disclosure:I/we have a beneficial long position in the shares of SOXL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.Quick InsightsHow does CRDO's customer concentration impact its risk profile?Four hyperscaler customers account for 93% of revenue, making CRDO highly exposed to continued AI datacenter CapEx; any slowdown could materially impact results.What is the outlook for CRDO's gross margins and why does it matter?Gross margins are expected to step down from 67.7% in Q2 to a long-term range of 63%–65%; with shares trading at 81x forward earnings, margin attrition could spook investors.What forward growth catalysts are highlighted for CRDO?ZeroFlap optics, now live with one customer and sampling with another, is framed as a multi-billion-dollar opportunity with initial revenues starting fiscal 2027, supporting continued top-line momentum.Recommended For You