Shares of Credo Technology Group Holding Ltd. rallied sharply in Thursday trading, recovering a portion of the steep losses sustained earlier in the week. The stock advanced approximately 9% to reach $111.94 by mid-afternoon, according to market data. This upward move provided some relief to investors after the company's share price had tumbled 14.8% on Tuesday, closing at $97.30 following its quarterly earnings report.
Earnings Context and Margin Pressure
The prior sell-off occurred despite Credo posting record financial results for its fiscal third quarter, ended recently. The company reported revenue of $407 million, a staggering increase of 201.5% compared to the same period last year. Non-GAAP diluted earnings per share rose to $1.07. For the current quarter, management provided revenue guidance in the range of $425 million to $435 million. However, investor focus shifted to the company's projection for non-GAAP gross margin, which is expected to be between 64% and 66%, a figure that disappointed the market and triggered the initial decline.
Broadcom's Wiring Endorsement Sparks Rally
Thursday's recovery was fueled by commentary from semiconductor giant Broadcom regarding the optimal technology for connecting artificial intelligence chips within server racks. Broadcom expressed support for using direct-attach copper cabling for short-range, high-speed "scale-up" links within AI data centers. The company argued that copper offers superior performance in terms of latency, energy efficiency, and overall cost compared to alternative optical solutions for these specific applications.
This endorsement carries significant weight in the ongoing industry debate. An alternative approach, known as co-packaged optics (CPO), involves placing optical components directly alongside the chips themselves and is viewed as a longer-term technological evolution. Analyst Sebastian Naji of William Blair noted that Broadcom's remarks aligned with his view, suggesting meaningful adoption of CPO remains "2-3 years away from seeing a meaningful inflection."
Strategic Moves and Customer Concentration
Credo's CEO, Bill Brennan, characterized the recent quarter as delivering "record results," driven by strength in active electrical cables (AECs)—which use chips to maintain signal integrity—and integrated circuits. He also noted growing momentum for the company's ZeroFlap optics, active linear cables, and OmniConnect products. In a strategic expansion, Credo recently acquired CoMira Solutions, gaining intellectual property for link-layer processing, error correction, and security, which are critical for moving data reliably within AI infrastructure.
During the earnings call, CFO Daniel Fleming highlighted that Credo's three largest customers all showed sequential growth from the prior quarter. He echoed the copper argument, stating, "where you can use copper, you will use copper," citing its reliability, power efficiency, and total cost of ownership. This customer growth, however, underscores a notable risk: a regulatory filing revealed that these three clients accounted for 39%, 32%, and 17% of quarterly revenue, respectively, meaning they collectively represented 88% of total sales. This high concentration makes Credo vulnerable to any spending pauses, design changes, or project delays from these major cloud providers.
Broader AI Investment Landscape
The discussion over data center wiring is occurring against a backdrop of massive and sustained investment in AI infrastructure. Broadcom itself projected on Thursday that its AI chip sales would exceed $100 billion next year. Meanwhile, the combined capital expenditure on AI infrastructure from technology titans Alphabet Inc., Microsoft Corporation, Amazon.com Inc., and Meta Platforms Inc. could surpass $600 billion in 2026, according to industry reports.
Not all industry players are aligned on the copper-versus-optics path. In a contrasting move this week, NVIDIA Corporation disclosed plans to invest $2 billion each in optical component specialists Lumentum Holdings Inc. and Coherent Corp., signaling a significant bet on photonics and light-based networking for future AI data centers.
Market Implications and Outlook
The sharp reversal in Credo's stock price illustrates the market's sensitivity to technological endorsements from industry leaders like Broadcom. While Credo benefits from the current preference for copper in near-term AI rack deployments, the company faces the dual challenge of navigating near-term margin pressures and a high dependence on a small number of large customers. The competitive landscape also remains in flux, with heavy investments continuing in both copper and optical interconnect technologies, ensuring the debate over the optimal AI data center architecture is far from settled.
