A small company reported better than all AI beneficiaries. Why does Wall Street love it?

Shares of Credo Technology Group, which develops communication interfaces for AI servers, jumped more than 13% after posting strong quarterly results. The company, whose clients include Amazon, Microsoft and Elon Musk's xAI, was the beneficiary of the AI boom, analysts believe.

In trading on Sept. 4, Credo's shares rallied 13% at one point to a record high of $141 before slowing to 10%. Since the beginning of the year, the securities have risen by 105%, and since going public in February 2022 - by more than 1000%.

Credo develops solutions for high-speed data transmission, specializing in energy-efficient communication interfaces, especially demanded in data centers, including infrastructure for artificial intelligence. Depending on the product, Credo's competitors include Broadcom, Marvell, Astera Labs, Intel and Cisco.

Credo's Sept. 4 stock rally was sparked by its report released the day before for the first quarter of fiscal 2026, which ended in July. The company reported a 274% year-over-year increase in revenue to $223.1 million. Analysts were expecting $190.6 million, according to FactSet. Adjusted earnings came in at $0.52 versus the consensus forecast of $0.36, Barron's wrote.

The company's outlook was also strong. For the current quarter, Credo expects revenue of about $235 million, compared to analysts' average estimate of $201.9 million.

"The company's growth is fueled by deep strategic partnerships with hyperscalers and key customers," said Credo CEO Bill Brennan, as quoted in the company's press release. - Given the growing market demand for reliable and energy-efficient connectivity solutions, we expect to continue to grow revenue and diversify both by customer, protocol and application." In an interview with Barron's, Brennan said he sees "tremendous potential" for new contracts with the six largest U.S. hyperscalers.

Credo Technology presented the best financial results of any AI beneficiary, including Nvidia, says Bank of America. Analysts at the investment bank, led by Vivek Arya, reiterated a "buy" rating on Credo shares and raised their target price from $120 to $165, up 32% from Wednesday's closing price.

Arya particularly appreciates the direction of AEC cables (active electrical cables) production. It was Credo that developed the technology of AEC - copper wires used to connect AI servers to network switches. These cables are more reliable and consume less power than fiber optics, and can be used over longer distances than traditional passive copper cables. Credo has a 73% share of the AEC market, according to analyst firm 650 Group, Barron's writes.

According to BofA, rapid technology adoption by hyperscalers predicts that the AEC cable market will double to $2 billion by 2027-2028, while accounting for only 10-15% of the $15 billion optical transceiver market. In addition to cables, Credo is developing optical modules and data transmission chips used in data centers.

"We reiterate a 'buy' recommendation on Credo, one of the best performing stocks among mid-cap companies and a key position in our top 4 AI beneficiary list (along with Nvidia, Broadcom and Ma)," Arya wrote in a report to clients cited by CNBC. -

The analyst also noted that Credo continues to diversify its customer base, having already added a fourth hyperscaler - along with Amazon, xAI and Microsoft - and is also working to expand its product portfolio in optics.

"We see further operational efficiency gains as AEC and the optical business scales," the analyst added. - That said, the move to higher speeds (1.6T/3.2T) could further improve margins."

Arya emphasized that Credo is starting to compete strongly in the optical systems market, where major players such as Broadcom, Astera Labs and Marvell Technology are already present. He acknowledged, however, that the stock's high valuation remains a risk, but expressed confidence in the company thanks to cautious expectations from its management.

"It's hard to expect more from this reporting," TD Cowen analyst Joshua Buchalter wrote in a note to clients. - Credo is benefiting from exponential data growth within data centers ... We believe we are only at the very beginning of the company's growth story."

Jordan Klein, an analyst at Mizuho's trading desk, called Credo "one of the best stories in AI" that is "only getting better," MarketWatch writes. Klein said that even though expectations for the company were "probably among the highest in the technology, media and telecom sector," Credo was able to beat Wall Street's projections. He added that enthusiasm around its stock is only likely to increase because of the strong outlook for the current quarter.

Mizuho also noted a high gross margin of 65%, emphasizing that Credo is an attractive company with a competitive intellectual property advantage in SerDes technology, which enables high-speed data transfer within and between chips. Analysts believe this advantage has the potential to significantly reduce the total cost of ownership (TCO) of a data center compared to Credo's competitors. Mizuho estimates that the size of the potential SerDes IP market could be 15 times larger than Credo's current annual revenue from AEC products, which is about $650 million.

A total of 12 analysts are tracking Credo shares, according to MarketWatch, with 10 of them advising them to Buy (Buy) and two advising them to Hold in their portfolios (Hold). The Wall Street consensus price target is $135.25, up 8% from Wednesday's closing price.

This article was AI-translated and verified by a human editor