Credo Technology Shares Slide 30% as Margin Concerns Eclipse Strong Earnings

Key Points

• Credo posted a revenue and earnings beat, with revenue surging 115%.
• The company’s networking solutions are in high demand from AI data centers.
• Margin compression and elevated stock-based compensation triggered a sharp sell-off.

Shares of AI networking specialist Credo Technology (NASDAQ: CRDO) tumbled this week, declining 29.5% through Thursday’s session, according to S&P Global Market Intelligence data.

The company reported fiscal first-quarter 2027 results that topped consensus estimates on both the top and bottom lines. However, the stock retreated as investors digested disappointing margin trends. Given Credo’s elevated valuation heading into the report, the market appeared to require a more decisive beat-and-raise to sustain the prior rally.

Credo’s financial results take off, even as the stock reverses

In its fiscal first quarter, Credo grew revenue 114.7% year over year to $479.0 million, while adjusted (non-GAAP) earnings per share jumped 130% to $1.20. Both metrics exceeded analyst projections. Management also issued current-quarter revenue guidance that implies robust sequential growth, again surpassing expectations.

The disconnect stems from valuation. Prior to the report, Credo commanded a market capitalization near $45 billion against a revenue run rate of roughly $2 billion. Even accounting for triple-digit growth, the stock traded at approximately 18 times forward revenue estimates of $2.49 billion.

While Credo’s specialized networking gear typically carries healthy margins, the latest quarter showed pressure. GAAP gross margin contracted to 64.5%, down from 68% in the prior quarter and 67.4% a year earlier. Although adjusted gross margins remained consistent with recent periods, a notable increase in stock-based compensation alarmed investors. Furthermore, guidance points to an even lower GAAP gross margin in the current quarter, suggesting the downward trend may persist.

Image source: Getty Images.

Credo is an AI winner, but not a cheap stock

Following the 30% pullback, Credo trades at roughly 26 times this year’s adjusted earnings estimates—a seemingly reasonable multiple given its AI-driven growth trajectory.

However, investors should note that adjusted earnings exclude stock-based compensation, a real economic cost that dilutes existing shareholders. Last quarter, GAAP net income amounted to just over half of non-GAAP income. Consequently, the effective forward earnings multiple may be closer to 50 times, indicating the stock is more fully valued. Nevertheless, if Credo can sustain triple-digit growth rates beyond the next fiscal year, this week’s decline could represent a buying opportunity.

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