Credo Technology Stock Edges Down Despite Powerful Artificial Intelligence (AI)-Driven Revenue and Earnings Growth

Shares of Credo Technology (NASDAQ: CRDO), which makes high-speed connectivity solutions for data centers, declined 2.9% in Tuesday's after-hours trading, following the company's release of its report for the third quarter of its fiscal year 2025 (ended Feb. 1).

Credo's report was very strong with the quarter's revenue and earnings along with third-quarter revenue guidance all crushing Wall Street's estimates. The initial market reaction was positive, with Credo stock popping about 11% within about five minutes after the report was released. However, shares quickly gave back that gain and moved lower throughout the after-hours trading session, which ends at 8 p.m. ET.

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Why did the stock decline? It seems safe to assume that traders quickly took some profits off the table because of the extreme volatility of the current market. Major U.S. stock indexes declined notably on Monday and Tuesday due to the Trump administration's tariffs enacted on Tuesday on imports from Canada, Mexico, and China. Canada and China immediately responded with retaliatory tariffs, with Mexico's response expected on Sunday.

Credo Technology's key quarterly numbers

Data source: Credo Technology. GAAP = generally accepted accounting principles. *Calculations by author, except for revenue change, which was provided by Credo. YOY = year over year. Fiscal Q3 2025 ended Feb. 1.

Wall Street was looking for adjusted EPS of $0.18 on revenue of $120 million, so Credo sprinted by both expectations.

The company has a hearty balance sheet. It ended the period with $379.2 million in cash and short-term investment, and has no long-term debt.

Segment performance

Data source: Credo Technology. *Calculations by author. YOY = year over year.

What the CEO had to say

Here's a blurb from CEO Bill Brennan's opening remarks on the earnings call:

Credo achieved record revenue in Q3 as we saw the expected inflection point in our business. This ramp was led by our largest hyperscale customer [known to be Microsoft] as they scaled production of AI [artificial intelligence] platforms. Additionally, we received solidified forecasts and saw increased design activity for our products with additional hyperscalers and other customers as the performance, reliability, and power benefits of our connectivity solutions have become increasingly clear throughout the industry.

More specifically, the quarter's great results were driven by robust demand for the company's active electrical cable (AEC) product line.

Guidance crushed Wall Street's estimate

For the fourth quarter of fiscal 2025, management guided for revenue between $155 million and $165 million, which translates to growth of 155% to 171% year over year. This outlook sped by Wall Street's consensus estimate, which was for revenue of $136.3 million.

Management also expects Q4 adjusted gross margin to be between 63% and 65%. The midpoint of this outlook is in line with the Q3 adjusted gross margin, which was 63.8%, but lower than the year-ago adjusted gross margin, which was 66.1%.

A stock worth watching -- but beware the extremely high concentration risk

For growth investors, Credo stock is worth a place on your watch list. Demand for its products should remain strong as tech companies and others are rapidly building out AI-enabled data centers to support the powerful demand for AI capabilities.

However, the stock is high-risk because the company has an extremely high concentration risk. In the just-reported quarter, 86% of revenue was generated from just one customer (known to be Microsoft), CFO Dan Fleming said on the earnings call. The concentration was particularly high during the quarter and should steadily decrease.

Fleming addressed this topic on the call: "So as far as customer concentration goes, Q3 was a bit of an outlier for us, especially considering the customer diversity that we had in Q2 and what we expect in the coming quarters. [W]e expect three to four 10%-plus end-customers in the coming quarters and fiscal year."

For context, in Q2, Credo had three end-customers contributing more than 10% of its revenue and another four customers that each contributed between 5% and 10% of its revenue, according to information shared by Fleming on the Q2 earnings call.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.