CRDO's Profitability Test: Can Superior Margins Hold as Growth Accelerates?

Credo Technology Group Holding Ltd (CRDO) is hitting an inflection point in fiscal 2026. The semiconductor connectivity specialist just posted first-quarter results that paint a picture of explosive scaling—but also raise a critical question for investors: Will margin expansion survive hyper-growth?

The Numbers Tell a Compelling Story

The raw growth metrics are undeniable. First-quarter revenues hit $223 million, representing a 31% sequential bump and a staggering 274% year-over-year increase. Behind this surge lies a simple dynamic: hyperscale AI infrastructure deployments are demanding unprecedented bandwidth with minimal power overhead, and Credo’s high-speed, power-efficient connectivity solutions are filling that gap perfectly.

But here’s what separates Credo from typical growth stories—profitability didn’t get sacrificed on the altar of revenue expansion. The company’s non-GAAP gross margin landed at 67.6%, eclipsing guidance and expanding 20 basis points sequentially. Product-specific gross margin pushed to 66.7%, fueled by manufacturing scale efficiencies. Operating income of $96.2 million translated to a 43.1% operating margin (up from 36.8% prior quarter), while net income of $98.3 million delivered a remarkable 44.1% net margin. For context, that’s the kind of profitability profile usually reserved for software companies, not semiconductor hardware makers.

Where the Growth Actually Originates

Credo’s Active Electrical Cable (AEC) business remains the engine. The top three customers each contribute over 10% of first-quarter revenue, with management signaling that three to four customers will maintain this threshold throughout fiscal 2026 as existing hyperscalers expand deployments and two new hyperscale customers begin ramping production.

The reason AECs are winning against traditional optical interconnects? Superior reliability paired with dramatically lower power consumption—a winning combination when you’re running million-GPU clusters 24/7.

Yet Credo isn’t content riding a single product wave. Optical DSP revenues are positioned to double in fiscal 2026 on the back of next-generation 1.6T architecture and accelerating adoption of 800G and 100-gig-per-lane standards. PCIe Gen 6-ready products are gaining early momentum ahead of expected calendar 2026 production ramps. This product diversification matters because it de-risks the business model against single-technology obsolescence.

The Forward Outlook: Margin Sustainability in Question

For the next quarter, Credo projects $230–$240 million in revenue (mid-single-digit sequential growth) with non-GAAP gross margin of 64–66% and operating expenses held to $56–$58 million. For the full fiscal 2026, the company expects roughly 120% year-over-year revenue growth with non-GAAP net margin hovering near 40%.

The operating leverage narrative looks solid: expense growth kept below 50% year-over-year while revenues accelerate beyond 120% implies margin floors should hold. But “should” and “will” occupy different universes in semiconductor markets.

The Competitive Pressure Mounting

Credo faces well-capitalized adversaries racing to capture AI infrastructure connectivity demand. Marvell Technology (MRVL) is rapidly scaling its connectivity portfolio with products spanning Active Copper Cable Linear Equalizers, DSPs, AECs, and co-packaged optics. In its second quarter of fiscal 2026, Marvell posted 62.9% year-over-year gross profit growth—but its non-GAAP gross margin contracted 250 basis points to 59.4%, signaling that scale isn’t eliminating competitive pricing pressure.

Broadcom (AVGO) presents an even more formidable benchmark. The diversified chipmaker’s third-quarter fiscal 2025 non-GAAP gross margin reached 78%, up 100 basis points year-over-year, with adjusted EBITDA margin at 67.1% (up 420 bps). The company guided fourth-quarter 2025 revenue to $17.4 billion with 24% year-over-year growth, though gross margin is expected to decline 70 basis points sequentially.

The takeaway: Both competitors show that AI-driven connectivity demand is real, but margin expansion isn’t guaranteed—especially as customers consolidate procurement and competitive intensity rises.

Market Valuation: Premium Pricing Justified?

CRDO shares have appreciated 120.2% over the past six months compared to the Electronics-Semiconductors industry’s 43.2% gain. The stock commands a forward 12-month Price/Sales multiple of 20.81x versus the sector’s 7.56x—a 175% premium that assumes Credo sustains its current trajectory.

Zacks Consensus Estimates for CRDO’s fiscal 2026 earnings have undergone significant upward revision over the past 60 days, reflecting market optimism about sustained profitability amid growth. The stock currently carries a Zacks Rank of #3 (Hold), suggesting the valuation premium already reflects much of the bull case.

The Bottom Line

Credo Technology’s fiscal 2026 performance validates its thesis: hyperscale AI infrastructure does require specialized connectivity silicon, and Credo has achieved enviable market position. The real test arrives over the next 12-24 months. Can the company maintain 40%+ net margins while growing 100%+ year-over-year, or will competitive intensity and customer consolidation gradually compress profitability toward industry norms? Investors betting on Credo are essentially wagering that the company’s product differentiation and first-mover advantage in AEC technology can withstand competitive encroachment. History suggests that’s an uncertain proposition in semiconductor markets, but current results certainly keep that narrative alive.