Moving on from Credo
Making a decision before the writing is on the wall.
I have decided to close my position in Credo Technology Group ($CRDO). Given I have written about Credo a lot I wanted to ensure I disclosed my updated thesis.
This is a strategic decision based on what I think is a breakdown in thesis. The market appears to be discounting a structural shift in the connectivity landscape that caps Credo’s upside relative to its peers. The most recent earnings that were a massive beat has potentially marked peak growth and therefore the near term top for the stock.
Here is the high-level rationale:
1. The "Front-Running" of Obsolescence. A major factor weighing on the stock is likely the market trying to "front-run" the inevitable shift in optical technology. While Co-Packaged Optics (CPO)—where the laser sits directly on the chip—is likely a 2028+ story, the market is forward-looking. It is beginning to discount Credo’s terminal value today, fearing that its core technology (DSPs and active cables) will eventually be disintermediated. Worse, the market is likely conflating this long-term risk with the immediate threat of Linear Pluggable Optics (LPO), which removes the DSP entirely to save power. This creates a narrative headwind that is hard to fight.
2. The “Middle Distance” Squeeze Credo’s core thesis was built on the belief that it would own the connectivity inside the AI rack (primarily through its Active Electric Cables - AECs). That thesis is breaking.
From the Inside: NVIDIA’s GB200 NVL72 architecture confirms a shift to Passive Copper backplanes for the massive internal interconnects. This locks Credo out of the highest-volume opportunity in the AI factory.
From the Outside: The threat of Linear Pluggable Optics (LPO) is accelerating. LPO removes the DSP (Credo’s key chip) from optical modules to save power. If LPO wins, Credo loses a major growth engine.
3. The “Smart” Platform Gap. In the AI era, “smart” platforms command a premium. Competitors like Astera Labs ($ALAB) are selling software-defined connectivity systems with ~75% gross margins. Credo is selling components (cables/DSPs) with ~67% margins. The moat is simply narrower for a component vendor than a system vendor.
3. Valuation Disconnect Despite the drop, Credo still trades at a premium valuation that demands perfection. With the Total Addressable Market (TAM) being squeezed from both ends (Passive Copper and LPO), the risk/reward no longer justifies the multiple.
Conclusion: This structural squeeze is exactly why I recently added positions in Applied Optoelectronics ($AAOI), Lumentum ($LITE), and Coherent ($COHR).
I initially thought the overlap between Credo’s copper dominance and the optical transition would last longer, allowing Credo to thrive for another 12-18 months. However, the acceleration of passive copper in the NVL72 and the rapid maturity of LPO has compressed that window.
Credo is no longer worth the risk/reward relative to these pure-play optical winners, so I am shifting my Credo exposure exposure there.