Credo's 26% Pullback Highlights Persistent Overvaluation and Concentration Risks

What happened

Credo Technology's stock has dropped approximately 26% ahead of its Q3 earnings, as highlighted in a Seeking Alpha article that frames this as a growth-at-a-reasonable-price opportunity. The article points to guided Q3 revenue of $340 million and strong EPS growth, suggesting no fundamental deterioration. However, the DeepValue master report reveals that Credo's valuation remains extreme at a P/E of 106.1 and EV/EBITDA of 381.3, pricing in hyper-growth that may not be sustainable. Critical risks include extreme customer concentration, with 93% of Q2 FY26 revenue from just four hyperscalers, and cancellable orders that expose the company to sudden demand shifts. This decline likely reflects market skepticism about these underlying vulnerabilities rather than a mere buying opportunity.

Implication

The stock's decline brings it closer to the report's attractive entry point of $95, but it remains above this level, offering limited margin of safety. High customer concentration and reliance on cancellable purchase orders mean any hyperscaler slowdown could trigger significant revenue volatility. Competition from Broadcom, Marvell, and Astera Labs threatens to compress gross margins from current highs of 67.5% toward the long-term target of 63-65%. Consensus expectations for sustained triple-digit growth may be unrealistic given the cyclical nature of AI capex and Credo's narrow focus on AEC products. Thus, investors should await clearer diversification or a deeper price correction before considering an entry, aligning with the report's 'POTENTIAL SELL' rating.

Thesis delta

The article's bullish stance does not alter the core thesis that Credo is overvalued with high risk. The price drop partially addresses valuation concerns but fails to mitigate customer concentration or competitive pressures. No fundamental shift has occurred; investors should maintain caution until evidence of sustainable growth or a more attractive entry point emerges.