Data center interconnect solutions provider Credo Technology Group Holding Ltd (CRDO.US) reported third fiscal quarter results and fourth-quarter guidance that surpassed Wall Street expectations. However, a trend of narrowing profit margins raised investor concerns, leading the stock to close down nearly 15% on Tuesday. The earnings report released after Monday's market close showed that for the third quarter of fiscal year 2026, ended January 31, the company's revenue surged 201% year-over-year to $407 million. Adjusted earnings per share were $1.07, both exceeding analyst estimates. Furthermore, the company provided fourth-quarter revenue guidance with a midpoint of $403 million, slightly above the analyst consensus of $428.5 million. Despite these strong figures, the company's gross margin is declining noticeably. The non-GAAP gross margin for the third quarter was 68.6%, while the midpoint of the fourth-quarter guidance has fallen to 65%. This downward trajectory in profitability disappointed some investors.

Following the earnings release, investment firm Needham maintained its "Buy" rating on the stock with a $220 price target. Analysts, led by N. Quinn Bolton, stated, "Credo again delivered a quarter of results and guidance above expectations, with revenue growth continuing to be driven by the adoption of Active Electrical Cables (AEC) and customer diversification." The analysts raised their revenue forecast for fiscal year 2027 to $2.0 billion from $1.92 billion. Key points highlighted by the analysts include management's expectation for mid-single-digit percentage quarter-over-quarter revenue growth throughout fiscal 2027. This growth is attributed to accelerating demand for AECs from hyper-scale cloud providers and emerging cloud companies. The analysts also noted that Credo's management reaffirmed that they are not currently seeing hyper-scalers rushing to deploy Co-Packaged Optics (CPO) technology and expect these customers to continue relying on copper solutions where feasible. Other positive points mentioned were strong demand for ZR Optics products, which is pulling production forward, and the announced acquisition of CoMira Solutions.

As global AI training and inference clusters continue to expand, demand for high-speed interconnect products in AI data centers is experiencing explosive growth. Credo, as a leader in the AEC space, is well-positioned to benefit from this AI data center construction wave. Third-quarter data revealed that AEC revenue was approximately $317 million, accounting for about 78% of total revenue. Revenue from AEC-related chips was about $57 million, representing roughly 14% of total revenue. AEC is a copper-based connection technology invented by Credo. It integrates Digital Signal Processor (DSP)-based Retimer chips at both ends of a traditional copper cable. Through signal amplification and equalization techniques, it achieves longer transmission distances and high reliability while maintaining the cost advantage of copper. Compared to traditional Direct Attach Copper Cables (DAC), AEC overcomes signal attenuation issues with built-in chips, supporting longer distances and higher data rates, while the cables are thinner and more flexible, aiding space savings and thermal management within data center racks. Compared to Active Optical Cables (AOC) or optical modules, AEC holds significant advantages in cost, power consumption, and reliability.

French bank BNP Paribas also expressed optimism for Credo. Despite recent market concerns about the rise of CPO technology and its potential threat to traditional interconnect solutions, BNP Paribas stated in a newly released industry research report that fears driven by this technological iteration are overblown. Within this technological context, the bank remains positive on Credo, which holds a core position in this segment. BNP Paribas analyst Karl Ackerman, after in-depth research at the DesignCon technology conference, pointed out that while CPO technology theoretically offers higher integration, traditional copper interconnect solutions still possess a strong lifecycle at 224G per lane speeds. He believes this technical advantage could extend into the future 448G per lane evolution phase. Ackerman suggests that over the next three to four years, copper connectivity, with its excellent cost-performance, high reliability, and low power consumption for within-rack communication, will remain the preferred choice for data center architecture, rather than being rapidly replaced by optical solutions.