CRDO - Credo: Super Growth On HiWire Adoption

2023-07-27 07:05:08 ET

Summary

• Credo Technology Group experienced exceptional growth of 73% in FY2023, driven by a robust annual growth rate of 132% in its Product Sales segment over the past three years.
• Despite competition from larger companies like Broadcom and Marvell, CRDO is well-positioned to capitalize on the rapidly growing Active Electrical Cables market, forecasted to grow at a CAGR of 113.3%.
• As a founding member of the HiWire consortium, Credo could benefit from the increasing adoption of AECs in data centers, supporting its Product.

In this analysis of Credo Technology Group Holding Ltd ( CRDO ), we delve into the company's role as a semiconductor provider, specializing in networking solutions for data centers. Remarkably, in FY2023, Credo experienced exceptional growth of 73% following FY2022 where it grew by 81%. To gain further insights, we closely examine the company's revenue breakdown, which reveals an astonishingly robust annual growth rate of 132% in its Product Sales segment during the past 3 years.

Our analysis focuses on Credo's Product segment, where we identify and evaluate the range of products it offers. Additionally, we conduct a comparative analysis against prominent competitors in the networking market, such as Broadcom and Marvell, to ascertain if Credo possesses a competitive edge with its product portfolio and examine the growth outlook of its products. Furthermore, we explore the HiWire consortium and its member companies to understand the advantages and potential benefits that Credo gains through its involvement in this industry collaboration.

Product Sales Segment Growth of Over 100%

Source: Company Data, Khaveen Investments

Based on the company's annual report, the company's Product sales and product engineering services revenue segment represented 77% of total revenue while its IP license and IP license engineering services revenue represented 23% of total revenue. The company's Product segment consists of ICs such as its Optical PAM4 DSPs and Line Card PHYs as well as HiWire AECs. On the other hand, its IP segment includes its "SerDes IP and related support and royalties".

According to Fiber Mall, a DSP chip "refers to the chip that can realize digital signal processing technology" and is used to enable reliable and efficient transmission of data over optical fibers. Additionally, PAM4 enables the transmission of data over communication channels and uses various levels of signal amplitudes to optimize the transmission of data signals. Moreover, a Line Card is used in networking equipment including switches or routers and facilitates the conversion of data signals during physical transmission and reception. Furthermore, Active Electrical Cables ( AECs ) are "high-speed Ethernet cables" that facilitate electrical signals for the transmission of data in data centers to extend the reach of signals and enable data transmission over longer distances. They are used in server racks such as ToR switches , which are network infrastructures used to facilitate the connectivity between server equipment in data centers.

Its Product Sales segment has been its key growth driver since 2021 with an immense average growth of 153%. According to the company's FY2023 annual report , its strong sales in 2022 were driven by strong AEC growth which accounted for 90% of its revenue gain.

The increase in product sales revenue was primarily due to an increase in the volume of unit shipments of AEC cables, which contributed more than 90% of the increase in product sales revenue. The AEC sales increase was primarily driven by the introduction of the AEC product category in fiscal 2021 and ramping of our AEC solutions at our first hyperscale data center customer in fiscal 2023 - Credo Annual Report

Overall, we identified that the company's high growth in the past year was attributed to the incredibly strong performance of its Products segment which has a 3-year past average growth rate of 132 % and accounted for the majority or 77% of its total revenues. In the following point, we analyze the company's reasons for the high growth by comparing its product portfolio with notable competitors and the market growth outlook.

Opportunity in High Growth Niche AEC Market

Based on its annual report, the company's key competitors include Broadcom ( AVGO ) and Marvell ( MRVL ) in its Products segment. To determine whether the company has a competitive advantage over Broadcom and Marvell, we compared their connectivity and ethernet product breadth in the table below.

Source: Company Data, Industry Arc , Spherical Insights , Straits Research , JP Morgan , Persistence Market Research , Khaveen Investments

In the table above, based on their annual reports and company websites, we compiled the companies' product portfolio which includes AECs, PAM DSP and Line Cards. Ethernet Switch Chips, Ethernet NIC, Custom ASICs and Fibre Channel products. Additionally, we compiled the market sizes in 2022 and market forecast for comparison.

As seen in the table, Marvell and Broadcom both have an extensive product portfolio in comparison with Credo. This is unsurprising as both of these companies are significantly larger compared to Credo with revenues of only $106 mln. We believe Broadcom and Marvell's product breadth advantage is its portfolio of Ethernet switch chips, NICs, Custom ASICs and Fibre Channel products serving a larger market compared to Credo.

These three companies overlap in PAM4 DSP and Line Card products where Credo features its Dove and Seagull DSPs as well as Screaming Eagle and Heron Line Cards . Marvell's Line Card PHY products include its Marvell Alaska family whereas Broadcom's products include the BCM84784. Broadcom's PAM4 DSPs include its recently launched "5nm 100G/lane optical PAM-4 DSP PHY with integrated transimpedance amplifier (TIA) and laser driver". Moreover, Marvell previously launched its "Spica™ Gen2 800Gbps PAM4 electro-optics platform" in 2022. In comparison, Credo's Dove 800 family includes the 800-Gbps offerings as well, thus we believe this indicates no major product performance advantage for the company as its competitors have launched similar products supporting 800Gbps as well.

*a = b x c

Source: Business Market Insights , 650 Group, Khaveen Investments

Notwithstanding, the main difference between Credo with Broadcom and Marvell is its portfolio of AECs. According to 650 Group , the breakdown of AECs in the US and Chinese hyperscale cloud companies is forecasted to grow "from 3% of NIC-ToR connections in 2021 to 49% of NIC-ToR by 2025". The Business Market Insights stated that the high-speed cable market was valued at $3.65 bln in 2021 with a CAGR of 6.1%. Based on 650 Group's data, we estimated the size of the AEC market based on the share of AEC forecast of 49% by 2025, assuming a share growth rate of 101% per year. By multiplying our estimated share of AEC cables and high-speed market forecast, we derived an estimated market size reaching $2.26 bln by 2025 at a 113.3% CAGR. Overall, we believe the company is positioned with an opportunity to capitalize on the AEC market growth and support its Product segment's rapid growth.

Thus, despite the advantage of larger key competitors Broadcom and Marvell with a vast product portfolio of connectivity products, we believe Credo is positioned to continue capitalizing on the AEC market growth which we derived a rapid market forecast CAGR of 113.3% and support its Product segment's growth outlook which has been growing at an average of 132% in the past 3 years.

HiWire Consortium Could Support Industry AEC Adoption

Credo is one of the founding members of the HiWire Consortium along with 24 other companies. According to its website, the consortium....

is a non-profit corporation supporting the advancement and adoption of HiWire Active Electrical Cables ((AEC)) by facilitating the development of high-quality compatible HiWire AEC devices and promoting end-user demand for HiWire AEC products through increased public awareness.

The role of the HiWire Consortium is that it...

defines the standards of the underlying electrical and mechanical specifications, and contains options that may enable significantly different implementations of the same functions.

Furthermore, it defines specific AEC implementations based on user input to achieve standardized features, simplify cable adaptation, establish qualification requirements through testing, and ensure consistent quality for HiWire AECs.

Furthermore, the current members of the consortium include companies such as CPU market leader Intel ( INTC ), networking semiconductor companies such as Broadcom and Innovium and networking equipment companies Alpha Network ( OTC:ANAV ), Dell EMC ( DELL ), Juniper Networks ( JNPR ), and Quanta Computer (QUCCF). Additionally, the members include the company's cloud customers such as Microsoft ( MSFT ) (the second-largest cloud provider in the world) and Tencent ( OTCPK:TCEHY ). According to the company, its customers for its AEC products include the top hyperscale cloud data centers in the US including Microsoft and Amazon ( AMZN ).

High speed, low power interconnect is a critical technology in our next generation data centers. We support the HiWire Consortium's objective of creating a true plug-&-play low-power interconnect standard and upstreaming qualification work to reduce friction in adoption of Active Electrical Cables. - Gerald Degrace, Head PM for Networking Hardware and Networking OS for Microsoft Azure Networking

In addition, the consortium also includes server vendors such as Inventec, Juniper, Quanta Computer, QCT and Wistron. Additionally, the consortium also includes Credo's competitors, Broadcom and Marvell.

According to Broadcom, the company is optimistic about working with HiWire "to drive development and adoption of HiWire AECs."

HiWire AECs are a key enabling interconnect technology for the most demanding cloud and service provider environments. This is especially true for systems that use the industry's highest-bandwidth switches such as Broadcom's 10Tbps Jericho2 and 26Tbps Tomahawk4, - Ram Velaga, senior vice president and general manager, Core Switching Group at Broadcom.

Therefore, we believe as a founding member of the HiWire consortium, which is its trademarked AEC brand, Credo could benefit as the consortium sets standards for the implementation of HiWire AECs together with partners which include its cloud service provider customers, server vendors as well as networking product competitors and support the increasing adoption of AECs in data centers which we believe would benefit the company's Product segment growth outlook.

Risk: Competition from Other Vendors

One of the risks of the company is its competition with other companies in the AEC market. Although we highlighted its competitors Broadcom and Marvell do not compete with the company in AECs, the company competes against smaller players such as Molex and Approved Networks . Also, other competitors such as Mellanox (Nvidia) ( NVDA ) and Finisar produce AOC/DAC cables and could compete with the company if they develop AEC solutions.

Verdict

To conclude, we have identified that the company's impressive growth over the past year is primarily driven by the exceptional performance of its Products segment, which boasts a remarkable 3-year average growth rate of 132% and contributes to 77% of total revenues. To further understand the reasons behind this high growth, we conducted a comparative analysis of the company's product portfolio against key competitors and assessed the market growth outlook. Despite facing competition from industry giants like Broadcom and Marvell, known for their extensive connectivity product portfolios, we are optimistic about Credo's ability to continue capitalizing on the rapidly growing AEC market. Our market forecast indicates a robust CAGR of 113.3%, which supports the growth outlook of Credo's Product segment, averaging 132% growth over the past 3 years.

Furthermore, as a founding member of the HiWire consortium, which represents Credo's trademarked AEC brand, we believe the company stands to benefit significantly from working with partners such as cloud service providers, server vendors, and networking product competitors which we see could support the increasing adoption of AEC in data centers, further benefiting Credo's Product segment growth outlook. Based on analyst consensus, the company has a price target of $18.22 , presenting an upside potential of 11.3%. Due to its superb growth, we have rated the company as a Buy.

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