Credo Stock Dives on Worries About Amazon Dependence

Credo Technology Group Holding Ltd (CRDO) stock took a nosedive on Tuesday, March 4, 2025, following the company's release of its third-quarter fiscal 2025 financial results. The stock initially popped about 11% within five minutes after the report was released but quickly gave back that gain and moved lower throughout the after-hours trading session. The decline in Credo stock can be attributed to several factors, primarily the company's high dependence on Amazon for revenue.

In the just-reported quarter, 86% of Credo's revenue was generated from just one customer, Amazon. This high level of customer concentration exposes the company to significant risk if Amazon's demand for Credo's products were to decrease or if there were any disruptions in their relationship. Credo's CFO, Daniel Fleming, acknowledged this risk and stated that the company expects customer diversification in the coming quarters, with 3 to 4 customers contributing more than 10% of revenue. However, the high customer concentration in the recent quarter raised concerns about the sustainability of Credo's growth.

Credo's inventory increased by $16.9 million sequentially, which could indicate potential future write-downs if demand forecasts are not met. This inventory build-up may be a result of the significant product ramp driven by Amazon's demand, but it also raises concerns about the sustainability of this growth. Additionally, the sequential decline in cash flow from operations and free cash flow suggests potential revenue air pockets, which could lead to a sudden drop in revenue if large customer projects conclude without immediate follow-up projects.

The extreme volatility of the current market, exacerbated by geopolitical tensions and trade disputes, may have contributed to traders taking profits off the table, leading to a decline in Credo stock. However, the primary concern for investors is Credo's dependence on Amazon, which poses a significant risk to the company's financial performance.

To mitigate this risk and ensure sustainable growth, Credo can employ several strategies to diversify its customer base:

1. Expanding its customer base: Credo should focus on attracting and retaining more customers, particularly in the hyperscaler and enterprise segments. By increasing the number of customers, the company can reduce its reliance on a single customer and spread its risk more evenly.
2. Innovating and expanding product offerings: Credo can develop new products or enhance existing ones to cater to a broader range of customers. For instance, the company is expanding its market opportunity with the introduction of PCIe products, which are expected to significantly increase its total addressable market (TAM). By offering a diverse range of products, Credo can attract a wider customer base and reduce its dependency on a single product line.
3. Strengthening relationships with existing customers: Credo should work on building stronger relationships with its existing customers to ensure continued demand for its products. This can be achieved by providing exceptional customer service, addressing customer needs proactively, and maintaining open lines of communication. By fostering strong relationships, Credo can encourage existing customers to increase their purchases or recommend the company to other potential customers.
4. Monitoring and managing customer concentration: Credo should regularly assess its customer concentration risk and implement strategies to mitigate it. This can involve setting internal targets for customer diversification, tracking customer spending patterns, and adjusting business strategies as needed to reduce dependency on a single customer.

In conclusion, Credo's stock dive on worries about Amazon dependence highlights the risks associated with high customer concentration. To mitigate these risks and ensure sustainable growth, Credo must focus on diversifying its customer base and reducing its dependency on a single customer. By implementing the strategies outlined above, Credo can improve its long-term growth prospects and maintain a strong financial performance.