Profit margin narrowing trend leads to sharp decline after Credo's (CRDO.US) performance! Needham and Faber support: the value of copper interconnection remains

Data center interconnection solution provider Credo Technology (CRDO.US) announced third-quarter earnings and fourth-quarter guidance that exceeded Wall Street expectations, but a narrowing profit margin trend has raised investor concerns, leading to a nearly 15% drop in the stock in U.S. markets on Tuesday. Credo's financial report released after U.S. trading hours on Monday showed that in the third quarter of the fiscal year 2026 ending January 31, the company's revenue surged 201% year-on-year to $407 million, with adjusted earnings per share of $1.07, both beating analyst expectations. In addition, the company's midpoint revenue guidance for the fourth quarter was $403 million, slightly higher than analysts' expected $428.5 million. However, the company's gross margin is noticeably declining. The third-quarter Non-GAAP gross margin was 68.6%, while the midpoint of the fourth-quarter guidance has dropped to 65%. The downward trajectory of profit margins has disappointed some investors. After Credo announced its latest performance, investment bank Needham maintained a "buy" rating on the stock with a target price of $220. Analysts led by N. Quinn Bolton stated, "Credo once again delivered better-than-expected performance and raised guidance, as revenue growth continued to be driven by the proliferation of active electrical cables (AEC) and customer diversification." Analysts raised their revenue expectations for the company's fiscal year 2027 from $1.92 billion to $2 billion. Key points raised by analysts include: management expects mid-single-digit percentage sequential revenue growth throughout the entire fiscal year 2027, driven by continued acceleration in demand for AEC from hyperscale cloud service providers and emerging cloud vendors. Analysts also added that Credo management reiterated that they have not yet seen hyperscale cloud service providers keen on deploying Co-Packaged Optics (CPO) technology, and expect these customers to continue relying on copper cable solutions wherever feasible. Other points include: strong demand for ZF Optics products is driving production ahead of schedule; and analysts mentioned the company's announced acquisition of CoMira Solutions. As global AI training and inference clusters continue to expand, the demand for high-speed interconnect products in AI data centers is experiencing explosive growth. Credo, as a leader in the AEC field, fully benefits from the wave of AI data center construction. The third-quarter data shows that AEC revenue for the quarter was approximately $317 million, accounting for about 78% of total revenue; AEC-related chip revenue was approximately $57 million, accounting for about 14% of total revenue. It is reported that AEC is a copper cable-based connection technology invented by Credo. It integrates Retimer chips based on digital signal processors (DSP) at both ends of traditional copper cables, achieving longer transmission distances and high reliability while maintaining the low cost advantage of copper cables. Compared to traditional passive copper cables (DAC), AEC overcomes signal attenuation issues with built-in chips, supports longer transmission distances and higher data rates, and the cables are thinner and more flexible, facilitating space savings and heat dissipation management within data center racks. Compared to active Optical Cable Corporation (AOC) or optical modules, AEC offers significant advantages in cost, power consumption, and reliability. Credit Suisse also has a positive view on Credo. Despite recent market concerns about the rise of CPO technology and its potential threat to traditional interconnection solutions, Credit Suisse clearly stated in its latest industry research report that the panic caused by technological iteration has been overstated. In this technological context, the bank continues to be optimistic about Credo's core position in this field. After in-depth research at the DesignCon technology conference, Credit Suisse analyst Karl Ackerman pointed out that although CPO technology theoretically has higher integration, traditional copper wire interconnection solutions still have a strong lifecycle at 224G/channel rate, with this technological advantage expected to extend further to the future 448G/channel evolution stage. During a critical window of three to four years, copper wire connections, with their outstanding cost-effectiveness, high reliability, and low power consumption in intra-rack communication, remain the preferred choice for data center architecture, rather than being rapidly replaced by optical solutions.