On Tuesday, BofA Securities analyst Vivek Arya upgraded Credo Technology Group Holding Ltd. (NASDAQ: NASDAQ:CRDO) stock from Underperform to Buy, significantly increasing the price target to $80.00 from the previous $27.00.
Trading near $47.80, the stock has demonstrated remarkable momentum with a 150% return over the past year according to InvestingPro data. This upgrade follows what the firm considers a strong earnings call from the company, leading to a reassessment of Credo's financial projections and market position.
The analyst noted that after a solid beat and a material raise during the earnings call, they have revised their fiscal year 2026/2027 estimated earnings per share (EPS) upwards by 65% and 88% to $1.01 and $1.51, respectively. The company maintains impressive gross profit margins of 62.5% and operates with minimal debt, as revealed in InvestingPro's comprehensive financial analysis.
The new price objective is based on a 60x calendar year 2026 estimated price-to-earnings (PE) ratio, which aligns with the higher end of comparable companies. This shift from a 10x calendar year 2025 estimated enterprise value-to-sales (EV/S) ratio reflects Credo's transition towards a model that better translates sales growth into earnings growth.
Credo's outlook indicates the beginning of a multi-year adoption cycle for its Active Electrical Cable (AEC) product, which is designed to enable power-efficient artificial intelligence (AI) clusters. The AEC product is expected to drive a strong second half for fiscal year 2025, bolstered by robust AI growth at Amazon (NASDAQ:AMZN) Web Services, a notable customer and investor in Credo.
The analyst's previous cautious stance was due to limited total addressable market (TAM) assumptions for AEC. However, the recent earnings call has addressed these concerns, highlighting Credo's expansion with three customers that each contribute over 10% of revenue (Microsoft (NASDAQ:MSFT), Amazon, and Tesla (NASDAQ:TSLA)) and growing momentum in adjacent areas such as optical digital signal processors (DSP), line card physical layer devices (PHY), and retimers.
Despite the positive outlook, the analyst also acknowledged risks associated with the upgrade, including Credo's premium valuation, the high sensitivity of the stock to shifts in sentiment around AI deployments, and increasing competition in the AEC market from companies like Marvell Technology Group (NASDAQ:MRVL) and Broadcom Inc. (NASDAQ:AVGO). Based on current metrics, InvestingPro analysis indicates the stock is trading above its Fair Value, with 17 additional ProTips and a detailed Pro Research Report available for deeper insight into Credo's market position and growth potential.
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