Credo's AI-Driven Revenue Surge Masks Severe Valuation and Concentration Risks

What happened

Credo Technology reported a 272% year-over-year revenue jump in Q2 FY26 to $268 million, driven by AI infrastructure demand for its Active Electrical Cables. However, filings reveal that over 95% of this growth comes from AECs shipped to a handful of hyperscalers, with one customer accounting for 64% of revenue and orders being short-term and cancellable. The stock has surged 96% over the past year to $150, trading at extreme valuations of 123x P/E and 421x EV/EBITDA, which already price in sustained triple-digit growth and high margins. Market sentiment is increasingly crowded, with narratives framing Credo as a top AI pick, but this optimism overlooks critical vulnerabilities like customer dependence and competitive threats from larger rivals. Despite strong near-term execution, the DeepValue report rates it a 'POTENTIAL SELL' due to poor risk-adjusted returns, as any slowdown could trigger significant downside from current levels.

Implication

Credo's explosive growth is real but fragile, heavily reliant on AI capex cycles and a few hyperscaler customers, making revenue streams vulnerable to abrupt cuts. At 123x P/E, the market embeds perfection, so any demand hiccup or margin pressure could lead to severe multiple contraction and drawdowns. Diversification into optical and PCIe products is unproven, and competition from incumbents like Marvell threatens pricing power and long-term margins. The report suggests an attractive entry below $115, but current levels offer poor risk-adjusted returns, compounded by ongoing share dilution from equity issuance. Long-term investors should monitor customer diversification and product ramps, but for now, caution is warranted, with trimming or waiting for a better entry point being prudent strategies.

Thesis delta

The news article confirms Credo's strong AI-driven revenue growth, which aligns with the positive momentum noted in the DeepValue report. However, it does not alter the core investment thesis, which remains bearish due to extreme valuation, customer concentration risks, and poor risk-adjusted returns at current prices. No material shift is indicated; the 'POTENTIAL SELL' rating is reinforced by the heightened market optimism that overlooks underlying fragilities.