Credo Technology Just Proved It's an AI "Picks-and-Shovels" Stock Worth Watching

Credo Technology (NASDAQ: CRDO) continues to deliver for investors. The stock made several new all-time highs this year and just vaulted to another one after posting record-setting numbers for the second quarter of its 2026 fiscal year.

Credo stock is now up more than 180% so far this year, demonstrating that there are outstanding opportunities for investors as artificial intelligence (AI) continues to take center stage in the stock market.

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About Credo Technology stock

Based in San Jose, California, Credo is a technology company that provides high-performance connectivity for data centers, 5G carriers, AI, and high-performance computing markets.

The stock was valued at less than $50 per share until late 2024 when the market began to recognize the massive opportunity for data center and AI growth. Grand View Research estimates that the overall AI market opportunity will rise from $279 billion to $3.5 trillion by 2033, and the data center market will expand from $347.6 billion to $652 billion by 2030. Both opportunities are massive tailwinds for Credo, which is why investors started running the stock price up.

Credo has several products for AI workloads that perhaps fly under the radar when you're thinking about the most dynamic products for AI development. For instance, Credo's Active Electrical Cables (AECs) are considered superior to copper cables in connecting clusters of graphics processing units (GPUs) and central processing units (CPUs) in data centers. AECs use signal processors within the wiring to help move the data faster and more efficiently.

Its OmniConnect next-generation architecture is designed to overcome memory bottlenecks and improve AI inference scalability. And the ZeroFlap optical transceivers provide network stability and improved efficiency for AI workloads.

Earnings for fiscal 2026's second quarter (ended Nov. 1, 2025) brought revenue of $268 million, up 272% from a year ago and up 20.2% from Q1. Gross margins were a whopping 67.5%, with operating expenses of $102.4 million and net income of $86.2 million. On the bottom line, Credo reported earnings per share of $0.44 and ended the quarter with a cash balance of $813.6 million.

"These are the strongest quarterly results in Credo's history, and they reflect the continued build-out of the world's largest AI training and inference clusters," CEO Bill Brennan said.

Management issued guidance for Q3 revenue in the range of $335 million and $345 million, which at the midpoint would be a jump of 151% from a year ago. Gross margins are projected to be in a range of 63.8% to 65.8%.

The valuation is eye-watering

Any stock that sees gains like Credo enjoyed in the last year is going to have a crazy valuation. For Credo, that means a price-to-earnings (P/E) ratio of 276 and a forward P/E of 90. That's not nearly as high as a company like Palantir Technologies, which is infamous for its valuation. But it's higher than a competitor like Vertiv Holdings, which also makes data center infrastructure.

But is that OK? That's up to the risk tolerance of individual investors. Analysts at MarketWatch appear to be unfazed by the valuation, as they overwhelmingly have buy ratings with a median price target of $230 -- a 21% jump from current levels.

Analysts at Mizuho raised its price target to $225 following Credo's strong earnings report, and Bank of America analysts boosted their target from $165 to $240. https://www.investing.com/news/analyst-ratings/credo-technology-stock-price-target-raised-to-240-from-165-at-bofa-93CH-4385399

Why Credo is a pick-and-shovel AI stock

AI stocks, such as Nvidia, Broadcom, Advanced Micro Devices, and Taiwan Semiconductor, will always grab the headlines. But it's also important to remember that their high-end chips and foundry services don't amount to much if the clusters of chips can't talk to each other.

That's where Credo comes in, and that's where it's seizing an opportunity to become an important company as data centers continue to grow around the globe.

Definitely keep this on your radar and look for opportunities to buy on the dip during any downturns.

Bank of America is an advertising partner of Motley Fool Money. Patrick Sanders has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.