Credo vs. Palantir: A Historical Lens on AI Infrastructure Winners

The central investor question is whether Credo Technology's explosive growth is a durable earnings engine or a classic infrastructure cycle play. The contrast with Palantir is stark. While Palantir's 63% software growth is sticky, Credo's 272% revenue surge is a direct lever on hyperscaler capital expenditure. This isn't a software license; it's a hardware component in a massive build-out. The performance cycle is different. Credo's stock is up 180% year-to-date, outpacing Palantir's 126% climb, but the underlying drivers are a race against a physical build-out that can stall.

Historical parallels ground this tension. Western Digital's 51% revenue growth in fiscal 2025 offers a clear template. It was a pure-play hardware supplier to the same AI infrastructure wave, and its success was directly tied to the spending frenzy of cloud giants. The pattern is familiar: a company becomes essential to a new technology stack, revenue explodes, and the stock soars. The risk, as history shows, is that this growth is tied to a capital cycle. When capex slows, the revenue growth does too.

Credo's current trajectory fits this hardware playbook. Its CEO confirmed that orders for a fifth hyperscaler were beginning to ramp, suggesting it has captured market share at all major cloud providers. This is the peak of the cycle. The company's bullish guidance for the next quarter implies year-over-year growth of 148%, a step-up in the growth rate itself. This is the momentum phase where expectations are highest.

The bottom line is a binary setup. If hyperscaler capex remains robust, Credo's growth is sustainable and its earnings power is real. But if the spending cycle peaks or slows, the company's dependence on a handful of customers for over 90% of its sales makes it vulnerable. The question for investors is whether to bet on the continuation of the build-out or on the inevitable correction that follows.

Profitability and the Plumbing of Scale

Credo Technology's story is a masterclass in converting top-line growth into bottom-line profit. The company's financial trajectory over the past year is a textbook case of margin expansion driving profitability. In fiscal 2025, its adjusted gross margin expanded to 65%, a significant jump from prior years. This improvement is not a one-off; management's guidance for the third quarter points to a sustained level, with the adjusted gross margin expected to land in the 64%-66% range. More striking is the operating leverage: the adjusted operating margin jumped to 26.4% in that same fiscal year. This is the critical link-hardware execution is directly translating into profit.

The scale of this conversion is staggering. In the first half of fiscal 2026, revenue surged 273% year over year, yet the company didn't just grow; it grew profitably. Its adjusted operating margin jumped from 7.9% to 44.9% in that period, and adjusted net income nearly ninefold. This demonstrates a business model where increased volume is not merely covering costs but dramatically improving the quality of earnings. For investors, this is the essential validation: Credo is not just a growth story, it is a profitable growth story.

Management's bullish outlook for the coming quarters sets a high bar for execution. Guidance for the third quarter of fiscal 2026 calls for revenue to rise 148%-156% year over year. This targets a revenue run-rate of approximately $335 million. Achieving this requires not only maintaining its current gross margin profile but also managing costs to protect the elevated operating margin. The path forward hinges on the company's ability to sustain this margin expansion as it scales, a challenge that will intensify with any competitive pressure or shifts in customer mix.

The bottom line is that Credo has built a powerful, profitable engine. Its success is built on being the essential "plumbing" for AI data centers, a role that commands premium pricing and high margins. The risk is that this very success makes it a target. The company faces tougher competition from more diversified chipmakers and is vulnerable to customer concentration, with four hyperscale clients each accounting for over 10% of revenue. For now, the plumbing is working flawlessly, but the company must navigate a crowded and competitive field to keep the flow of profit uninterrupted.

Valuation, Catalysts, and the Risk of Expectations

The investment thesis for high-growth AI plays hinges on a single, fragile assumption: flawless execution. Both Credo Technology and Palantir Technologies trade at valuations that price in perfection, making them highly vulnerable to any stumble. Credo, with its forward P/E of 93, is already demanding a smooth ramp in its AI infrastructure business. Palantir, however, is in a different stratosphere, with a forward price-to-earnings of 192 and a price-to-sales multiple of 114.9. This isn't just a premium; it's a bet that its software model, which boasts a gross margin of 80.81%, can sustain its explosive growth indefinitely.

The catalysts for both are clear and tied to the same engine: hyperscaler capex. Credo's revenue surged 273% year over year in its first half of fiscal 2026, driven by data center upgrades for AI. Palantir's revenue growth accelerated to 63% year over year in its third quarter, fueled by its AI platform. The primary risk for both is a slowdown in that spending. Goldman Sachs has targeted $533 billion in hyperscaler capex for 2026. If that figure comes in below expectations, the demand for both Credo's connectivity "plumbing" and Palantir's analytics software would be directly impacted.

The risk/reward profiles are starkly different. Credo's valuation, while high, is anchored in a hardware business with a gross margin of 66.76%. Its growth is tied to physical product shipments and data center build-outs, which are cyclical and capital-intensive. A slowdown here would hit revenue and margins, but the company's recent profitability provides a buffer. Palantir's risk is more existential. Its valuation assumes not just continued revenue growth, but a massive expansion in its operating leverage. A deceleration in its 63% year-over-year growth would likely trigger a severe multiple contraction, given its already sky-high forward P/E. The software model is powerful, but it cannot hide from the math of a slowing top line.

The bottom line is that both stocks are now pricing in the best-case scenario. For Credo, the path is to maintain its hardware momentum and margin expansion. For Palantir, it is to accelerate its commercial adoption and compound AI leverage. Any deviation from these paths will be punished severely by a market that has priced in near-flawless execution.