BofA double upgrades Credo stock after strong Q3 print

Investing.comDec 3, 2024 2:16 PM

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Investing.com -- BofA Securities analysts double upgraded Credo Technology Group Holding Ltd (NASDAQ:CRDO) stock from Underperform to Buy on Tuesday, following the company’s strong earnings report that sent its shares rocketing over 30% in premarket trading Tuesday.

The bank also raised its price objective for Credo shares to $80, up from the previous target of $27.

Credo exceeded expectations for its fiscal third quarter and provided an optimistic outlook, prompting BofA to raise its fiscal year 2026/27 earnings per share (EPS) estimates by 65% and 88%, respectively, to $1.01 and $1.51.

The new price target is rooted in a 60 times calendar year 2026 earnings per share (PE) multiple, aligning with the higher end of comparable companies. Analysts said this change reflects Credo's transition towards a more profitable earnings growth model, particularly as it enters a multi-year adoption cycle for its Active Electrical Cable (AEC) product, which is instrumental for power-efficient AI clusters.

For the near term, BofA anticipates a strong second half for fiscal year 2025, driven by robust AI growth at Amazon Web Services, a key customer and investor in Credo.

“Our prior cautious view was based on limited TAM assumptions for AEC, but CRDO’s earnings call addressed those concerns nicely, with 3x 10% customers, and growing momentum in other adjacent areas,” analysts led by Vivek Arya wrote.

According to BofA’s note, Credo is expected to maintain operational expenditure growth at less than half of its sales growth over the next few years, with gross margins remaining resilient. This suggests significant operational leverage and a compound annual growth rate (CAGR) of 74% in earnings per share between calendar years 2024-2027, compared to a 45% CAGR in sales.

Furthermore, the company now boasts seven customers that each contribute more than 5% to sales, up from two in the previous quarter.

BofA also highlights Credo’s broadening product exposure and growing exposure to coveted NVIDIA Corporation (NASDAQ:NVDA) GPUs and Amazon.com Inc (NASDAQ:AMZN)’s AI chip Trainium2.

Despite the positive outlook, BofA notes potential risks associated with Credo's premium valuation, sensitivity to shifts in AI deployment sentiment, and intensifying competition in the AEC market from companies like Marvell (NASDAQ:MRVL) Technology and Broadcom (NASDAQ:AVGO).

Also, gross margins are expected to remain flat in fiscal year 2025, while competitive pressures persist in AECs and other AI-related products. Additionally, sales concentration remains high, with three large hyperscale AEC customers comprising 58% of total sales.

Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.

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