Credo's AEC Sales Surge on AI Demand, But DeepValue Report Highlights Critical Risks

What happened

A recent Zacks article emphasizes that Credo's Active Electrical Cable (AEC) sales are surging due to rising AI and cloud data center connectivity needs. This aligns with Credo's strong financial performance, where Q2 FY26 revenue reached $268.0M with a 67.5% gross margin, driven primarily by hyperscale AEC shipments. However, the DeepValue master report reveals that over 95% of this growth comes from a single hyperscale customer, which accounted for 64% of Q2 revenue, indicating extreme concentration. Despite the apparent strength, the report rates Credo as a 'POTENTIAL SELL' due to this reliance, high valuation with a P/E of 108.89x, and competitive pressures from larger players like Broadcom. The market narrative extrapolates current growth into a durable AI franchise, but fundamentals show fragility with no long-term purchase commitments and ongoing equity dilution risks.

Implication

Credo's AEC surge, while driven by real AI tailwinds, masks significant risks that demand careful scrutiny. First, the company's heavy dependence on a single customer for most revenue creates high volatility and exposure to procurement changes. Second, with a P/E over 100x, the stock prices in sustained high growth and mid-60s gross margins that may not be sustainable as competition intensifies. Third, the lack of long-term purchase commitments means revenue stability is low, and recent cash flow improvements could reverse. Fourth, ongoing ATM equity usage raises dilution concerns without clear high-return capital deployment. Therefore, while the growth story is compelling, the risk-reward remains unfavorable without evidence of customer diversification or a margin of safety at current prices.

Thesis delta

The new article on rising AEC adoption confirms Credo's near-term growth momentum but does not shift the core investment thesis from the DeepValue report. The critical issues of extreme customer concentration, unsustainable valuation multiples, and competitive threats remain unchanged, reinforcing the 'POTENTIAL SELL' rating. No material evidence of diversification or improved economics has emerged to warrant a more bullish stance.