Credo's Q2 FY26 Growth Confirms AI Boom but Amplifies Valuation and Concentration Risks

What happened

Credo Technology reported record Q2 FY26 revenue of $268 million, a 272% year-over-year increase, driven by surging demand for Active Electrical Cables (AECs) in AI data-center clusters. This explosive growth confirms the company's position as a key beneficiary of hyperscaler AI infrastructure spending, with gross margin reaching 67.5% and net income of $82.6 million. However, filings reveal that over 90% of this revenue comes from just four hyperscaler customers, with the largest accounting for 42% in Q2, highlighting extreme concentration risk on cancellable purchase orders. The stock trades at a P/E of 124x and EV/EBITDA of 446x, pricing in sustained hypergrowth and premium margins without margin for error. Despite the strong quarterly performance, underlying vulnerabilities—including competitive pressures, rising inventory commitments, and reliance on an 'emerging' AI market—remain unchanged, reinforcing the cautious stance from the DeepValue report.

Implication

The revenue beat underscores Credo's execution in the AI boom, but it doesn't mitigate core risks; customer concentration could amplify revenue volatility if any hyperscaler reduces orders, given over 90% reliance on four customers. High multiples at 124x P/E and 446x EV/EBITDA require flawless growth continuation, which is precarious with emerging competition from Marvell and Broadcom and potential AI capex moderation. Inventory and unconditional purchase commitments have risen to over $95 million, increasing downside exposure if demand slows. Any deceleration in revenue growth below 20% or margin compression below 60% would likely trigger significant multiple compression. Therefore, trimming positions or waiting for a pullback toward the $110 attractive entry remains prudent, as the base case value of $140 still implies downside from current levels.

Thesis delta

The news article confirms the Q2 FY26 financial data already disclosed in filings, so there is no material shift in the investment thesis. The call for a potential sell or reduction persists, as the explosive growth does not address the extreme valuation, customer concentration, or risks from cancellable orders and competitive pressures.