Image source: Getty Images
Having re-jigged my portfolio for this year and in light of a changing market environment, I’ve made my first big investment of 2025. The stock I choose was Credo Technology (NASDAQ:CRDO). This provider of high-speed connectivity solutions has plenty of supportive trends as we move through January and it’s the highest-rated growth stock using a model that focuses on data.
What does it do?
US-listed Credo Technology specialises in high-performance connectivity solutions, including optical, electrical, and mixed-signal technologies, this also includes integrated circuits and active electrical cables (AECs). Essentially, its tech addresses demand for faster and more energy-efficient data transfer. Unsurprisingly, this is critical for artificial intelligence (AI) infrastructure such as data centres.
Here’s why it’s in focus for 2025
ChatGPT and the start of the AI revolution triggered something of a gold rush, with investors diving into the picks and shovels of the sector — namely companies like Nvidia that provide the all-important graphics processing units (GPUs).
While Nvidia’s GPUs powered the first wave of AI development, the ecosystem is evolving. Nvidia remains dominant in GPUs, but hyperscalers are now strategically searching for specialised vendors who can help them optimise and customise their infrastructure.
Hyperscalers are the companies, like Amazon’s AWS, behind large-scale data centres that provide cloud computing, networking, and data storage services. They’re packed full of Nvidia GPUs and AMD servers and are designed to be highly scalable and can accommodate massive workloads.
And networking is a key part of this efficiency of these hyperscale assets. Hyperscalers use Credo’s AEC products to build customised networking products, including network switches that help reduce redundancy and improve efficiency. Broadcom recently suggested that networking solutions market size will surge in the years through to 2027 and beyond.
Can a crazy valuation be easily justified?
The stock is currently trading at 812 times earnings from the past 12 months. That’s truly huge. But the expected earnings growth for this 2025 fiscal year is a phenomenal 450%. In turn, that takes the forward price-to-earnings (P/E) ratio down to 123 times. While earnings growth can’t carry on at 450% year after year, the subsequent forecast is still positive and very recent analysts suggests the consensus may underestimate the company’s true potential.
And while I’ve seen some reports suggesting data centre spending has peaked — near $280bn in 2024 — that simply doesn’t appear to be the case. Microsoft alone plans to spend $80bn on data centres in 2025, while the UAE’s DAMAC group just announced a $20bn plan to build data centres in the US.
The risks, of course, relate to this sky-high near-term valuation. If it fails to deliver on these huge growth expectations, then the stock could come plummeting back to earth. As such, all eyes should be on 4 March, when the company reports on its Q3 earnings. Moreover, there are some concerns about broader saturation in the sector, and companies in this fast-moving tech space will be aware that new technological developments could change the ecosystem and demand environment.
For now at least, Credo’s product line appears to be what the industry needs.
