On Thursday, BofA Securities updated its outlook on Credo Technology Group Holding Ltd. (NASDAQ: NASDAQ:CRDO) shares, raising the price target to $22 from $21, while maintaining an Underperform rating on the stock.
The revision comes after the company reported a modest beat and raise for its fourth fiscal quarter and first fiscal quarter results, attributed primarily to a significant increase in intellectual property revenue.
This was despite a noticeable quarter-over-quarter drop in non-recurring engineering (NRE) revenue, which returned to levels below $4 million.
Credo Technology's core product sales showed a 2% increase quarter-over-quarter and a substantial 71% year-over-year growth in the fourth fiscal quarter. This performance was supported by four customers, each contributing more than 10% to the company's sales.
Revenue from products designed for AI workloads formed 75% of the mix in the fourth fiscal quarter, amounting to $45 million. This segment is projected to double by the fourth fiscal quarter of 2025, reaching $90 million.
The anticipated growth in AI-related sales is driven by the expectation of a sales surge in the second half of fiscal year 2025, led by Advanced Error Correction (AEC) technology adoption by two hyperscaler customers, including Microsoft (NASDAQ:MSFT), which accounted for approximately 26% of fiscal year 2024 sales.
Additionally, a third hyperscaler is currently in the qualification stage. Optical DSP products, benefiting from the AI market's momentum, are expected to represent 10% of fiscal year 2025 estimated sales, with one hyperscaler already in production and another in the qualification process.
Despite the promising early reception to next-generation Long Reach Optics (LRO) architectures, BofA Securities cautions investors about the intense competition Credo Technology faces, particularly from companies like Marvell (NASDAQ:MRVL) Technology and others.
The analyst notes that while a growth inflection point appears to be on the horizon, the majority of the sales ramp is still more than two quarters away, and there is a risk of further delays.
Additionally, the lower midpoint guidance for fiscal year 2025 gross margins, expected to be between 62% and 63% compared to 62.5% in fiscal year 2024, coupled with a forecasted operating expense compound annual growth rate of over 20% through fiscal years 2024 to 2027, could limit near-term and intermediate-term model leverage potential.
In light of these factors, the firm has reiterated its Underperform rating but has slightly increased its fiscal year 2025 and 2026 sales estimates by 4-6%.
The price objective adjustment to $22 is based on an unchanged 9x calendar year 2025 enterprise value to sales multiple, which is near the middle of the comparable company range of 8x to 11x.
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