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Credo Tech (CRDO +43%) is surging following its Q2 (Oct) report last night. This supplier of interconnection gear (both copper and optical) in the data center has been saying for several quarters that it had expected an inflection point in revenue during the second half of FY25. Credo said on its call last night that this inflection point has arrived. It is experiencing greater demand than initially projected, driven by AI deployments and deepening customer relationships.

• Credo reported its typical modest EPS upside, but revenue grew a robust 63.6% yr/yr and 20.6% sequentially to $72 mln, which was nicely above the high end of its $63-68 mln prior guidance. What jumped out even more was its huge Q3 (Jan) revenue guidance at $115-125 mln, which was way above analyst expectations. We think the guidance is largely responsible for today's outsized move.
• The company describes Q2 as its most successful to date with record revenue across its three main product lines: AECs (Active Electrical Cables), optical DSPs, and line card re-timers. Credo explained that AI cluster architectures are enabling increasingly dense and scalable clusters. Addressing or eliminating link flaps, which are momentary disruptions in network links, are essential. As such, high-speed connectivity gear is crucial. Credo says its AECs excel in maintaining signal integrity, optimizing power efficiency and delivering unparalleled reliability as data speeds continue to increase.
• Starting with AECs, Credo reported record revenue in Q2, driven by strong demand from its top two customers and an emerging hyperscaler. Credo believes AEC technology is still in the early stages of widespread adoption and that Credo is well-positioned as the market leader. The company explains that AECs outperform laser-based optics, offering lower power, reduced cost, and maybe most importantly, greater reliability.
• Credo says its 2H revenue growth will be driven by AECs with continued growth beyond FY25 as market adoption expands across the data center ecosystem. Its optical DSP segment also posted record revenue, fueled by a broad range of 50-gig and 100-gig per lane offerings. Credo is seeing robust industry demand. Looking ahead, Credo is enthusiastic about the potential of its 200-gig per lane technology.

Overall, this was an impressive quarter for Credo, especially the Q3 guidance. Credo's talk about revenue finally hitting that long-talked-about inflection point is helping propel the stock as well. Credo is not one of the first names investors think about as a play on the buildout of AI infrastructure at data centers. However, it is clearly benefitting, especially its AEC segment. While not directly involved in the AI servers, having reliable connectivity gear between the servers is extremely important for them to work at their best.