Credo's Hyperscaler Exposure and Valuation Risks in the AI Infrastructure Boom

Credo Technology Group (CRDO) has emerged as a standout player in the AI infrastructure boom, fueled by surging demand for its high-speed connectivity solutions. In fiscal year 2025, the company delivered a staggering 126.34% year-over-year revenue increase, reporting $436.77 million in revenue, and transitioned from a net loss of -$28.37 million in FY24 to a net income of $52.18 million in FY25. Its Q4 FY25 results were particularly eye-catching, with revenue rising 180% year-over-year to $170 million. These metrics have propelled Credo's market cap to $18.53 billion and its stock price to $107.95, despite a trailing P/E ratio of 372.24 and a forward P/E of 63 for FY26. But does this rapid growth and expanding customer base justify its elevated valuation in the face of emerging industry headwinds?

The AI Infrastructure Tailwind and Credo's Strategic Position

Credo's success is rooted in its role as a critical supplier of optical DSPs and Active Electrical Cables (AECs), which are essential for building high-speed, low-latency data center interconnects. The company's ZeroFlap AECs, designed to reduce power consumption and improve signal integrity, have gained traction among hyperscalers like Amazon Web Services (AWS), Microsoft, and xAI. By Q4 FY25, AWS accounted for 61% of Credo's revenue (down from 86% in Q3 FY25), with Microsoft and xAI contributing 12% and 11%, respectively. This diversification is a strategic win, reducing reliance on a single customer and positioning Credo to capitalize on broader AI adoption trends.

The company's balance sheet further strengthens its case. As of April 30, 2025, Credo held $236.33 million in cash and $431.34 million in short-term investments, with net debt of -$223.63 million. This financial flexibility allows for R&D investments and strategic acquisitions to sustain innovation in a rapidly evolving market.

Valuation Metrics: A Double-Edged Sword

Credo's valuation is anchored by its explosive revenue growth and improving margins. Its Price-to-Sales (P/S) ratio of 42.19 is significantly higher than the median for the semiconductor industry, reflecting investor enthusiasm for its AI-driven growth story. Analysts project FY26 revenue to exceed $800 million (a +85% increase) and non-GAAP net margins to approach 40%, which could justify a lower forward P/E of 63. However, the current P/E of 372.24 implies a steep discount to future earnings, raising questions about sustainability.

The company's Return on Equity (ROE) of 4.95% lags behind industry benchmarks, suggesting inefficiencies in capital utilization. While this is partly offset by a strong Return on Assets (ROA) of 4.32%, the ROE discrepancy highlights a need for operational refinement. Additionally, Credo's debt-to-equity ratio of 0.03 is conservative, but its reliance on short-term liquidity could become a vulnerability if interest rates rise or capital expenditures spike.

Industry Risks: Trade Tensions, Competition, and Slowdown Signals

The AI infrastructure market is not immune to macroeconomic and geopolitical risks. US-China trade tensions pose a direct threat, with proposed 25% tariffs on semiconductor imports from China potentially squeezing Credo's gross margins. The company's global supply chain and reliance on Chinese manufacturing make it vulnerable to these tariffs, which could erode its competitive edge.

Competitive pressures from industry giants like Marvell and Broadcom also loom large. While Credo's niche focus on AECs and SerDes chiplets provides differentiation, larger rivals could undercut pricing or innovate in adjacent areas. The company's ability to maintain R&D spending—currently 30% of revenue—will be critical to staying ahead.

A more immediate concern is the potential slowdown in AI infrastructure spending. Q2 2025 data from IoT Analytics revealed a 16% quarter-over-quarter decline in data center mentions and an 18% drop in GPU discussions in earnings calls. Microsoft and Amazon, two of Credo's key customers, have reportedly paused some data center projects and leases, signaling a shift toward cost discipline. While these firms still plan to invest $300 billion collectively in AI infrastructure in 2025, the pace of spending is slowing.

Balancing Growth and Risks: Is Credo's Valuation Justified?

Credo's valuation hinges on two key assumptions: sustained demand for AI infrastructure and successful execution of its diversification strategy. The company's FY26 revenue forecast and margin expansion targets are ambitious but achievable if hyperscalers maintain their investment momentum. However, the risks of trade disruptions, competitive erosion, and a near-term slowdown in AI capex cannot be ignored.

For investors, the critical question is whether the market is overpaying for a growth story that may not materialize. Credo's P/S ratio of 42.19 is high but not unprecedented in high-growth sectors. If the company can maintain its 80%+ gross margins and expand its customer base beyond the top four hyperscalers, its valuation could be justified. Conversely, a misstep in R&D, supply chain disruptions, or a broader economic slowdown could expose its high multiples.

Investment Thesis: Buy, Wait, or Walk?

Credo remains a compelling long-term bet for investors who believe in the AI infrastructure megatrend. Its technological leadership, customer diversification, and strong balance sheet position it to outperform in a high-growth environment. However, near-term volatility is likely due to macroeconomic and industry-specific risks.

Recommendation: Investors with a 3–5 year horizon should consider a gradual entry into Credo, averaging in over its stock price volatility. For shorter-term investors, the current valuation offers limited margin of safety. Monitor key metrics:
- Customer diversification progress (targeting 3–4 hyperscalers by FY26).
- Gross margin stability amid potential tariff impacts.
- Competitive dynamics in the AEC and SerDes markets.

In a world where AI infrastructure spending could slow but ultimately accelerate, Credo's ability to adapt will define its success. For now, the company's valuation is a high-stakes bet on its execution capabilities—and the AI revolution's staying power.