Credo's Q3 Revenue Beat Surpasses Guidance, Yet Underlying Vulnerabilities Remain

What happened

Credo Technology announced preliminary Q3 FY26 revenue of $404-$408 million, crushing its guided range of $335-$345 million. This significant beat underscores robust demand from hyperscale and AI networking sectors, aligning with the growth narrative highlighted in the DeepValue report. However, the report reveals that Credo's revenue remains heavily concentrated, with one customer accounting for 64% of recent quarterly sales and purchases being cancellable without penalty. Despite the strong performance, this does not mitigate risks such as inventory write-downs and high working capital outflows noted in filings. Thus, while the beat validates near-term momentum, it fails to address fundamental operational and valuation concerns.

Implication

The revenue beat indicates Credo is effectively capitalizing on AI infrastructure trends, potentially driving short-term stock appreciation. However, extreme customer concentration means any pullback from key hyperscalers could lead to sharp revenue declines. The cancellable purchase order structure adds significant quarterly volatility, making sustained growth unpredictable. High valuation multiples, with a P/E over 111x, offer minimal margin for error if demand softens. Therefore, this news reinforces the necessity for proof of customer diversification and stable cash conversion before committing to the stock at elevated prices.

Thesis delta

The preliminary revenue beat exceeds the base scenario's $340M expectation, suggesting stronger near-term demand than anticipated. However, the core investment thesis remains unaltered as key risks—including customer concentration, cancellable orders, and high valuation—persist unchanged. Investors should still require evidence of operational de-risking, such as customer diversification, before shifting from a 'WAIT' rating.