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Can Sound Cost Management Continue Driving Credo's Margin Growth?

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Credo Technology Group Holding Ltd CRDO has established itself as a formidable player in the high-speed connectivity space, strategically aligning with the surging demand for data infrastructure and artificial intelligence (AI)-driven workloads. Its focus on innovation, operational discipline and cost efficiency has enabled it to scale rapidly while expanding profitability.

Credo’s financial strength is its impressive margin profile. For the fourth quarter of fiscal 2025, the company reported a non-GAAP operating margin of 36.8%, up 538 basis points (bps) from 31.4% in the prior quarter. Non-GAAP net margin reached 38.4%, well above the upper end of the company's long-term target range of 28% to 33%. In fiscal 2025, operating margin expanded by 2,500 bps, driven by strong revenue growth and tight cost control. Operating expenses increased at a significantly slower pace than revenues, underscoring the company’s ability to achieve meaningful operating leverage and boost bottom-line results.

This profitability was backed by substantial product momentum. Credo’s revenues nearly tripled from the first to the fourth quarter of fiscal 2025, as the company capitalized on a key market shift toward more efficient connectivity solutions. Notable growth came from its Active Electrical Cables (AECs), optical products and retimers. Additionally, Credo continues to gain share in the optical segment, with a major DSP win for an 800G transceiver and the launch of ultra-low-power optical DSPs based on 5nm technology. It also reported a healthy pipeline of PCIe Gen6 AECs and retimers, with further customer wins expected to support fiscal 2026 growth.

Credo's outlook remains strong. For fiscal 2026, the company expects revenues to exceed $800 million, implying year-over-year growth of more than 85%. Non-GAAP operating expenses are projected to rise at less than half the pace of revenues, which is expected to drive non-GAAP net margin to nearly 40%, a clear signal of ongoing operating efficiency.

For the first quarter of fiscal 2026, Credo expects revenues between $185 million and $195 million, implying a 12% sequential increase at the midpoint. The non-GAAP gross margin is projected to range from 64% to 66%, while non-GAAP operating expenses are forecasted between $54 million and $56 million. These projections suggest a continuation of the company’s strategy to manage costs while accelerating growth.

However, rising market competition and ongoing macroeconomic uncertainty may weigh on the company’s growth trajectory. Credo competes with semiconductor giants like Broadcom Inc. AVGO and Marvell Technology, Inc. MRVL.

Taking a Look at AVGO & MRVL’s Margins

Broadcom continues to demonstrate solid margin performance, driven by strong demand for its AI semiconductor solutions and VMware. For the second quarter of fiscal 2025, the company reported revenues of $15 billion, marking a 20% year-over-year increase, while adjusted EBITDA surged 35% to $10 billion. For the third quarter, the company forecasts consolidated revenues of $15.8 billion, up 21% year over year, with semiconductor revenues rising 25% to $9.1 billion. AI semiconductor revenues are expected to reach $5.1 billion, a 60% year-over-year increase. However, gross margin is projected to decline 130 bps sequentially due to a higher mix of XPUs in AI revenues. Despite this, Broadcom expects adjusted EBITDA to remain strong at 66%, reflecting continued margin strength.

Marvell continued to demonstrate solid margin performance, driven by strong revenues from AI-focused data center demand and a recovery in enterprise networking and carrier infrastructure in the first quarter of fiscal 2026. The company reported a GAAP gross margin of 50.3% and a non-GAAP gross margin of 59.8%, with GAAP and non-GAAP operating margins of 14.3% and 34.2%, respectively. For the second quarter of fiscal 2026, Marvell forecasts revenues around $2 billion plus or minus 5%, with gross margins between 50% and 51%. The company highlighted that product mix and revenue levels will be key to gross margin outcomes. Additionally, the planned sale of its Automotive Ethernet business to Infineon will enhance the capital allocation strategy.

CRDO’s Price Performance, Valuation and Estimates

Shares of CRDO have surged 197.8% in the past year compared with the Electronics-Semiconductors industry’s growth of 18.5%.

In terms of the price/book ratio, CRDO is trading at 24.54, higher than the Electronic-Semiconductors sector’s multiple of 9.91.

The Zacks Consensus Estimate for CRDO earnings for fiscal 2026 has seen upward revision over the past 60 days.

CRDO currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

This article originally published on Zacks Investment Research (zacks.com).

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