CRDO is potentially a buying opportunity given its strong balance sheet and valuation near a one-peg ratio, despite the 20% drop caused by margin concerns.

CRDO, I don't even know who that is. CRDO CRDO Credo Technologies is down 18% today despite earnings be I literally know nothing about the company. I don't mind looking.

So, Credo Technology Investor relations. So, if I go to the SEC filings, I got an AK. Do they just have earnings? Is that why everybody's freaking out about them or something? Uh annual report was here.

Quarterly filings. Oh, yep. Might be exactly what just happened. Credo. This is an 8K. Yeah. This has Outlook. This has earnings numbers.

business transform connectivity at scale reliable reliable energy efficient system solutions the company's hypers speed copper and optical interconnect products. Oh okay okay. So this is a hardware play for for data centers.

I see I see I see. So hardware play for data hard way play hardware play for data centers um copper and optical. So, you're competing with uh Broadcom, uh Marll, you know, they've they've all had pain after earnings.

Credo Q's are rising. That's nice. So, this is a $ 31 billion company. had a little 100week moving average bounce right here. We could actually probably use on a retracement. It's coming off of its highs now.

I mean, so far numbers look pretty good. And we'll see what the revenue looks like.

GP gross profit 309 divided by 298. So their gross profit moved about 3.69%. Gross profit move. I've got revenue moved up 479 divided by 437 9.6%. Oh, so is there some weaker pricing power here?

Their costs must have gone up like double digits then 169.9 divided by 138.9. Yeah, exactly. 22.3%. So weaker pricing power here. SGNA also popped divided by 1422 32% also weaker pricing power.

So their net income actually fell. Net income fell despite uh rev growth. So that's interesting. That's not that desirable, right?

this is $6.25 is the projection for April. It's coming off some massive growth. terminal growth rate is is slowing a lot, but this is going to be trading for like 28 times. It's not particularly expensive, but that weakening margin is interesting.

if I go 169 / 6.25 25 equals 27x based on April 2027 data forecast growth which could be all over the place. I mean it sort of is all over the place. 26% 4-year average forecast growth close to a one peg net margins around 50%.

So you did have some weakening this quarter. Weakening margins this quarter. Um not ideal. Worth checking why. But that's that's probably a contributor. But otherwise, you know, even even with these numbers they're bringing divided by let's see 129.4 divided by 479.

They're still bringing 27% to the bottom line in a bad quarter to bottom line in bad quarter uh in in last year's quarter 169 by 437 38.6% last year this quarter. So what's going on with the pricing power trend is probably the big question.

what I really want to do is just look at the credo earnings call really quick and just finish that and just see what's going on with those margins because that's kind of critical to the analysis here.

Like what? We can we can see the PP slipped, but why?

Margin midpoint of our guidance range high-end due to strong R&D investment. Uh-huh. Due to our strong R&D investment. Okay. Disciplined approach to managing operating expenses.

Strong gross margins. I mean they say that but but they fell down. Cash flow is down primarily due to changes in working capital. I mean that's fine. It's just like when you're paying your bills.

Turning to guidance, we expect gross margins will be in the 67 to 69% range. We expect Q2 non-GAAP will be between 100 and 105. Operating expenses non-GAAP. Okay. Well, I don't know how they're reconciling that because the operating expenses here were 188.

they bought a company called Dust Photonix substantial cash cash buffer. This is true. heavy investments in R&D is what they keep saying significant growth opportunities. You've given us a lot of color on optical and kind of dug into how you're approaching it. the fact that we are owning the entire stack also think expect the advantage of the COGS level average selling price but I do think long-term or pace setter and innovation whatever more on margin please that's it

we continue to expect an inlection in the second half driven by more than 600 million in optical revenue with zero flaps, 85% year-over-year growth for the full year. So that's that would be very bullish.

So why did the pricing weaken? They just said R&D, but you also had headline price reductions or or cost of goods sold grew grew more. Active LEDs scaleups near package optics cradle level boring nothing on cost and look again cogs advantage on cogs I go to market cogs level we also expect an advantage on average selling price as we compare our solution to more standards.

Okay, I do think the long term we're a pace setter.

where memory capacity, bandwidth, packaging, and costs are becoming increasingly important constraints. That's it. Business is expanding. Important quarter. There's not a lot of color on that.

So, they argue beat on top and bottom, better than expected guidance, miss on gross margin big time. Right. That was the complaint. That's that was the first thing I saw too. I didn't even know what the expectations were.

Continue to make progress. Continue to see inflection in the second half. Optical community. We expect additional customer ramps. Our initial wins. Uh continue to see outside growth.

D credo del of revenue growth this quarter grew 114%. That must be 114% year-over-year. Yeah. Yeah. Okay. Year over year. 98%. That was Dell. I think it was a margin story. It's a perfect example of how sensitive I feel like markets are to pricing power.

So they're calling this R&D spend an investment. But you also have to look at SGNA sales were up, you know, 43%. 43% on selling. Uh they uh only pitch the R&D part.

So it's possible the it's possible the data center uh infrastructure plays are just getting hyper competitive uh faster than expected you know hence some of the weakness in uh recently in in Marll Broadcom and you know now uh CRDO whereas enterprise uh is dominating But the problem is uh enterprise is much lower margin.

And then Credo down now 20%.

That could also be why you're seeing some more of that pain in some of the data center plays like like even a credo.

But more importantly, Credo is down 20% after earnings.

And what's going on with companies like Credo?

Credo, which is down 20 almost 21% today, is a supplier of data center copper and photonix.

Let's just do a quick look on Credo. Take a look at this. Credo, their their revenue goes up 9.6%. Oops. Revenue up 9.6%. But their cost of revenue went up 22.3%. So, their costs went up way higher than their revenue, leading their gross profit to only rise by 3% compared to May.

Now, in fairness, these are not year-over-year numbers, but it shows you a weakening from August to May when you divide these numbers here. If I look at sales and administrative, like what they're spending on selling these their hardware, you're up 43%.

The R&D part is up about uh 32%. Which then somewhat suggests or or sorry, they only pitched the R&D portion and total operating expenses are up 32%. Which is obviously way higher than their revenue growth.

So their margin really got hit this quarter. I don't think they're necessarily overpriced. I actually think they're, you know, with net margins around 50%, they're selling relatively close to a one peg on, uh, you know, 26% 4-year forward growth.

Could actually be a whole, it could be a buying opportunity, but I think the stock is down. I don't own it. I think the stock is down 20% today because the market hates when margin starts faltering.

Uh well, also uh a company like Credo would be sad because you're seeing less of those optics or cabling going into big data centers, more going into enterprise artificial intelligence.