Credo Tech (CRDO) Has 1 Problem. Here's Why I'm Buying Anyway.

Credo Technology Group (NASDAQ: CRDO) just posted its latest quarterly results, highlighting $407 million in revenue -- a 201% year-over-year increase. Its gross margin sits at 68.5%, and it has $1.3 billion in cash. Its non-GAAP (adjusted) net income hit $208.8 million in a single quarter. All are metrics that suggest very positive results.

So what's the problem that seems to have investors still hesitant about Credo? Two customers account for roughly 80% of that revenue.

That kind of concentration makes portfolio managers nervous, and it should. When your business is built on the spending cycles of a handful of hyperscalers, one delayed AI build-out or one inventory digestion quarter can crater the stock overnight.

Image source: Getty Images.

Concentration is a risk, but one that is easing

Just such a cratering happened in early 2023, when Credo's largest buyer cut demand forecasts, and the company's growth flatlined for two quarters.

But that was then; here's what matters about concentration risk at Credo going forward: The customer base is diversifying. In fiscal 2024, Credo had two hyperscalers above the 10% revenue threshold. By Q1 of fiscal 2026, that number was three, with a fourth approaching the mark. These customers aren't being lured with discounts. They're coming to Credo because no one else makes what it makes at this level of reliability.

Credo's core product is its Active Electrical Cable (AEC), which connects GPUs inside data centers. In clusters with 100,000 or more GPUs, a single faulty link -- called a link flap -- can crash an entire AI training run. The system has to reload from a checkpoint. Millions of dollars in compute time, gone. Credo's AECs are up to 1,000 times more reliable than the optical modules they replace. That's the difference between completing a training run and failing.

The practical result is that hyperscalers aren't evaluating Credo's cables on price. They're evaluating them on whether their multibillion-dollar AI clusters actually function. That changes the competitive dynamic entirely.

Management is guiding for Q4 fiscal 2026 revenue of $425 million to $435 million. For fiscal 2027, it projects more than 50% year-over-year growth, putting the company on a path toward nearly $2 billion in annual revenue.

Credo's new technology is the moat

New product lines are ramping simultaneously on top of all this. The company is ramping up ZeroFlap optics for longer-reach connections, advanced line cards for switching fabrics, and OmniConnect gearboxes. All these product lines are expanding Credo's total addressable market by billions of dollars.

Credo also has three new multibillion-dollar TAM expansions announced in recent quarters. PCIe retimers are gaining traction across AI servers. Optical DSP demand is increasing at 50, 100, and now 200 gig per lane. These are revenue streams that barely existed 18 months ago.

Yes, customer concentration is a real risk. But Credo isn't selling a commodity. It's selling infrastructure that keeps hundred-thousand-GPU clusters online.

I'm buying because the moat is the product, and the product pipeline is widening, not narrowing.

Micah Zimmerman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.