Why Credo Stock Is Down Today Despite an Earnings Beat

Credo beat Wall Street estimates, but the size of the beat and its reiterated optical outlook fell short of much higher investor expectations.

Credo Technology shares were down about 21% near $163 as of roughly 2 p.m. ET Wednesday following the company's fiscal first-quarter earnings report.

This was not part of a semiconductor selloff. The VanEck Semiconductor ETF was up about 1% at the time, while Nvidia was up more than 3%. Credo's report, released after Tuesday's close, is the clear catalyst.

The confusing part is that the reported numbers were strong:

• Revenue: $479 million, up 114.7% year over year and 9.6% sequentially
• Adjusted earnings: $1.20 per share, up from $0.52 last year
• Adjusted gross margin: 68%, down slightly from 68.3% last quarter
• Second-quarter revenue guidance: $525 million to $535 million
• Fiscal 2027 revenue outlook: More than 85% growth
• Fiscal 2027 optical revenue outlook: More than $600 million

Nothing there looks like an obvious 21% problem. Published Wall Street estimates, however, were no longer the bar investors were using.

A thin beat against very high expectations

Credo's $479 million in revenue beat the $473.3 million FactSet consensus by about 1.2%. The $530 million midpoint of next quarter's guidance was roughly 2% above the $519.8 million consensus.

For most companies, that would be a good quarter. Credo entered this report after seven straight quarters of triple-digit revenue growth, including several much larger beats. The stock had also rallied roughly 31% from July 29 through August 28 before giving back part of the gain ahead of earnings.

Investors were looking beyond the published estimates and expecting another meaningful increase to the outlook. JPMorgan analyst Joseph Cardoso wrote that investors had anticipated “more material upside”, particularly from optics. The firm lowered its price target to $310 from $335.

Bank of America kept its Buy rating but cut its target to $275 from $340, describing Credo's growth mix as shifting from decelerating active electrical cables, or AECs, toward faster-growing optics.

Management still describes the AEC business as being on a healthy growth trajectory, helped by new customers and the shift to faster 1.6-terabit connections. On the earnings call, CEO Bill Brennan said AECs “will continue to grow,” while acknowledging “clearly a slower growth overall” as optics expands from a much smaller base. Cable revenue can keep rising and still create a timing problem if its growth rate cools before optics fully takes over as the next major growth engine.

Credo reiterated its expectation for more than $600 million of optical revenue in fiscal 2027 and said the ramp should produce a second-half inflection. Brennan summarized the changing mix plainly: “AECs continue to grow. Optics is growing faster.” The market appears to have wanted the optical forecast raised, or at least more evidence that the ramp is running ahead of plan.

Margins offered no extra upside

Adjusted gross margin slipped 30 basis points sequentially to 68%. Management guided to another 67% to 69% range next quarter and expects the full-year margin to remain broadly consistent with fiscal 2026.

Credo still has exceptional economics. Adjusted net margin reached 49.3% during the quarter, even as the company increased research and development spending. Yet a richly valued growth stock generally needs revenue estimates moving higher, expanding margins, or some combination of the two. This report offered little incremental upside on either front.

What it means for investors

Credo's long-term story still rests on a real shift inside the business. Management expects ZeroFlap optical transceivers, silicon photonics components and optical processors to each contribute more than $100 million of revenue this year. Brennan called fiscal 2027 “just a steppingstone” for the broader optical opportunity.

The execution burden is also becoming more visible. Credo's two largest customers accounted for 61% of first-quarter revenue. Inventory rose $62.2 million sequentially, or nearly 25%, to $313.1 million. Brennan said Credo is “leaning in from a supply chain standpoint” and feels good about its ability to support higher volumes in the second half and beyond. That makes the inventory build a deliberate preparation for the optical ramp, but it also raises the stakes if customer deployments slip.

Credo is still growing at a pace few semiconductor companies can match. After this quarter, though, another reiteration probably will not carry much weight. The market will want to see the optical ramp arrive in reported revenue, with margins holding as that inventory moves out the door.