Can Credo maintain its profit margin amidst rapid rise?

Chip giant Credo Technology's first quarter earnings report is quite impressive — revenue of $223 million, a quarter-over-quarter rise of 31%, and a year-over-year big pump of 274%. Behind this is the crazy demand for high-speed, low-power connectivity solutions driven by AI infrastructure.

But what really stands out is the profit margin. The non-GAAP gross margin is 67.6%, which has exceeded the company's expected upper limit, and has increased by 20 basis points sequentially. The operating profit margin jumped from 36.8% last quarter to 43.1%, and the non-GAAP net profit margin reached 44.1%—what does this mean? It has already reached the ceiling level in the chip industry.

Where is the growth engine? It mainly relies on the AEC (Active Cable) business. The top three customers each contribute over 10% of the revenue, and it is expected that the number of such major customers will increase to 3-4 by the end of the year. Credo is also expanding its optical DSP and PCIe adapters, with optical revenue expected to double in the fiscal year 2026.

But the question arises - can such a high profit margin be sustained? Let's take a look at the competitors:

Marvell: Gross margin of 59.4% in the second quarter, down 250 basis points year-on-year, although operating profit margin expanded significantly quarter-on-quarter.

Broadcom: The gross margin for the third quarter reached a record high of 78%, with an EBITDA margin of 67.1%. This is the real profit monster.

Credo's Expectations: The gross margin is expected to decline to 64%-66% in the next quarter, while the annual net profit margin is expected to remain around 40%. This indicates that the company is also aware that high profit margins may be difficult to sustain - factors such as scale expansion, intensified competition, and trade frictions are all variables.

From the stock price perspective, CRDO has risen 120% in the past 6 months, far exceeding the semiconductor industry's rise of 43.2%. However, the valuation has also taken off— the 12-month rolling price-to-earnings ratio is 20.81 times, nearly 3 times the industry average of 7.56 times.

Key Question: Can Credo maintain its profit margin at a high level like Broadcom? Or will it be forced to lower prices during expansion like Marvell? The answer to this largely determines the next direction of the stock price.