Credo Technology IPO: Is the connectivity provider a good buy?

By  Yoke Wong

Edited by Vanessa Kintu

14:26, 25 January 2022

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San Jose, California-based Credo Technology Group Holding – a high-speed connectivity solutions provider that supplies semiconductor chips, line cards and electric cables to data centres and 5G wireless service providers in the data infrastructure market – is going public in the US to raise up to $274.5m to fund its operation and growth.

The company has filed for an initial public offering (IPO) on the US Nasdaq Global Select Market exchange, where the company expects to be listed under the ticker CRDO.

According to Credo Technology’s amended filing to the US Securities and Exchange Commission (SEC) on 18 January, the group will be offering 23.38 million or 27.13 million of its ordinary shares, this only applies if the underwriters exercise their option to purchase the 3.75 million shares in full, which will be exercisable for 30 days after 18 January.

The group estimates that the net proceeds from this IPO will be approximately $253.9m–$274.5m if the underwriters exercise their option in full. This is based on the midpoint of $11 of the range as offered, as well as after deducting estimated underwriting discounts, commissions and estimated offering expenses. It is expected that each Credo Technology (CRDO) stock will be offered in the range of $10–$12.

The Nasdaq IPO calendar shows Credo Technology’s shares will be available for trading on 27 January, with 1.62 million of the ordinary shares on offer to be sold by existing shareholders. The group will not receive any proceeds from the sale of these shares.

Several cornerstone investors have indicated an interest in purchasing up to an aggregate of $120m of shares in this IPO, though these indications are not binding agreements. Credo Technology plans to use the net proceeds from this IPO for working capital and other general corporate purposes. It may also use a portion of the net proceeds for acquisitions or strategic transactions.

The Credo technology valuation is expected at around $1.6bn if the offered shares (including its underwriters’ option) were sold at the midpoint of the offered stock price range.

The IPO review and analysis provider IPO Market Watch gave the deal a valuation score of 3.5/5. According to the analyst, Credo’s stock value could rise because of the growth in the data infrastructure market: 

“If it goes public at $10, I will buy… the industry it is in has lots of growth; it will have lots of opportunities for Credo to improve on its financials.” 

Ahead of the Credo Technology group IPO date, let’s analyse the company’s business model, revenue, growth strategy and risk factors to help you navigate the IPO launch.

Credo Technology Group Holding IPO: what you need to know

San Jose, California-based Credo Technology Group Holding – a high-speed connectivity solutions provider that supplies semiconductor chips, line cards and electric cables to data centres and 5G wireless service providers in the data infrastructure market – is going public in the US to raise up to $274.5m to fund its operation and growth. The company has filed for an initial public offering (IPO) on the US Nasdaq Global Select Market exchange, where the company expects to be listed under the ticker CRDO. According to Credo Technology’s amended filing to the US Securities and Exchange Commission (SEC) on 18 January, the group will be offering 23.38 million or 27.13 million of its ordinary shares, this only applies if the underwriters exercise their option to purchase the 3.75 million shares in full, which will be exercisable for 30 days after 18 January. The group estimates that the net proceeds from this IPO will be approximately $253.9m–$274.5m if the underwriters exercise their option in full. This is based on the midpoint of $11 of the range as offered, as well as after deducting estimated underwriting discounts, commissions and estimated offering expenses. It is expected that each Credo Technology (CRDO) stock will be offered in the range of $10–$12. The Nasdaq IPO calendar shows Credo Technology’s shares will be available for trading on 27 January, with 1.62 million of the ordinary shares on offer to be sold by existing shareholders. The group will not receive any proceeds from the sale of these shares. Several cornerstone investors have indicated an interest in purchasing up to an aggregate of $120m of shares in this IPO, though these indications are not binding agreements. Credo Technology plans to use the net proceeds from this IPO for working capital and other general corporate purposes. It may also use a portion of the net proceeds for acquisitions or strategic transactions. The Credo technology valuation is expected at around $1.6bn if the offered shares (including its underwriters’ option) were sold at the midpoint of the offered stock price range. The IPO review and analysis provider IPO Market Watch gave the deal a valuation score of 3.5/5. According to the analyst, Credo’s stock value could rise because of the growth in the data infrastructure market: “If it goes public at $10, I will buy… the industry it is in has lots of growth; it will have lots of opportunities for Credo to improve on its financials.” Ahead of the Credo Technology group IPO date, let’s analyse the company’s business model, revenue, growth strategy and risk factors to help you navigate the IPO launch. Credo Technology Group Holding IPO: what you need to know [Please, design: Credo Technology Group key information] Source: Credo Technology Group SEC filing Stock symbol CRDO Stock market exchange Nasdaq Stock Exchange Listing date 27 January 2022 Number of shares on offer 23,383,800 ordinary shares Price-per-share range $10–$12 Major underwriters: Goldman Sachs, BOFA Securities, Cowen, Mizuho Securities, Needham & Company, Stifel, Craig-Hallum, Roth Capital Partners Group / product overview Credo Technology is a ‘fabless’ manufacturer (meaning that the company designs and sells the hardware devices, semiconductor chips but does not manufacture the silicon wafers or chips used in its products but instead outsources the fabrication to a manufacturing plant or foundry). Credo’s connectivity solutions are optimised for optical and electrical Ethernet applications. Its family of products includes integrated circuits (ICs), active electrical cables (AECs) and SerDes Chiplets. Its intellectual property (IP) solutions are primarily SerDes IP licensing. According to Credo, its products are used in data infrastructure as “innovative, secure, high-speed connectivity solutions that deliver improved power and cost efficiency”. It claims its products “ease system bandwidth bottlenecks while simultaneously improving on power, security and reliability”. Credo Technology also claims that its proprietary SerDes and digital signal processing (DSP) technologies enable it to disrupt competition in existing markets and create new market opportunities. As a result, the group believes it is “at the forefront of the high-performance connectivity market”. “While many others in the data-infrastructure industry struggle to meet customers’ increasing performance and energy-efficiency requirements, we continue to innovate to deliver groundbreaking solutions,” said the group. Credo Technology supplied its HiWire Switch AEC and collaborated with software and cloud infrastructure provider Microsoft in an open-source implementation. The HiWire Switch AEC is a new category of plug-and-play interconnect designed to create affordable operations with faster speeds. The company has stated its solutions help Microsoft overcome “complex and slow legacy-enterprise approaches, simplifying deployment and improving connection reliability in the datacentre”. Credo Technology management team According to Credo Technology’s website, the group was “founded in 2008 by a seasoned team of analogue, digital and mixed-signal experts as a fabless semiconductor company”. The founders were Job Lam and Lawrence Cheng, now respectively the group’s chief operating officer (COO) and chief technical officer (CTO). Since 2008, Cheng has designed the Analogue Frontend for Credo’s 28G and 56G SerDes in various process nodes. The president and CEO of Credo is Bill Brennan, who joined the group in 2013 and “has led the organisation to greater than 90% compound annual growth rate (CAGR) revenue growth since 2014 while achieving profitability for five consecutive years”, according to his biography on the group’s website. On 4 January 2022, Credo announced it had appointed Lip-Bu Tan as chairman, as well as two new board members, Sylvia Acevedo and Manpreet Khaira. Group strategy and market opportunities Credo Technology serves the multibillion-dollar data-infrastructure market, which is driven largely by hyperscale data centres (hyperscalers), high-performance computing (HPC) and 5G infrastructure. Within the data-infrastructure ecosystem, the group targets the wired connectivity market that relates to communication electronics. According to forecasts from research consultancy Gartner, this sector will grow from $12bn in 2020 to $17bn in 2025. [Please design: Projected wired connectivity market for communication electronics] Source: Gartner, Credo Technology Group SEC filing “With the continued exponential growth of data traffic, we expect rising demand for our products as speed requirements increase over time. Additionally, we intend to continue to develop new offerings that will expand the capabilities of our portfolio and address a broader section of the total wired connectivity market,” said Credo. Citing 650 Group forecasts, Credo said hyperscalers will be one of the primary drivers of growth for connectivity solutions. Hyperscalers provide cloud, networking and internet services at scale, which could respond to fluctuating data demands. Within this market, higher-speed 400G and 800G ethernet ports in the datacentre in particular will grow at a 49% CAGR from 2020–2025. Credo estimates that the market for high-speed connectivity products will grow from $2bn in 2022 to $5bn in 2025. [Please design: Projected market for high-speed connectivity products] Source: Credo Technology Group SEC filing “We believe our market opportunity will continue to grow as the technical challenges of delivering higher speeds create increasingly challenging technical or cost hurdles for incumbent providers,” said Credo. Credo remains in loss despite rising revenue Credo incurred a net loss of $16.7m from May to October 2021, despite rising revenue as the group invested heavily in research and development (R&D), leading to a surge in the cost of revenue. Revenue increased by 85% to $16m year-on-year. The net loss was also attributed to increased operating expenses, including share-based compensation. [Please design: Credo Technology’s financial result snapshot (in $ thousands)] Source: Credo Technology Group SEC filing Six months ended 31 October 2020 2021 Total revenue 25,489 37,151 Cost of revenue 8,646 16,017 Gross profit 16,843 21,134 Total operating expenses 35,373 36,318 Net (loss) income (19,308) (16,677) Risk factors Below are some of the risk factors highlighted by Credo Technology. As a result of the recurring losses, Credo warned that the group may not “generate sufficient revenue to offset the cost of growing its business in the future.” In addition, Credo’s “revenue or revenue growth rate may decline in the future because of a variety of factors, including increased competition and the maturation of our business”. Credo expects its costs to increase in future as it continues to expend substantial financial and other resources on research and development, expansion into new markets, marketing and general administration (including expenses related to being a public company). These investments may not result in increased revenue or growth in Credo’s business. The group also depends on a limited number of customers for a substantial portion of its revenue. Hence, Credo warned that any loss or significant reduction in sales from one or more of its major customers could negatively impact the group’s revenue and operating results. Credo also does not have long-term purchase commitments from its customers. Any cancellations or changes in purchase orders from Credo’s customers could impact the group’s revenue and operating results. Credo said it is “subject to order and shipment uncertainties, and differences between its estimates of customer demand and product mix and actual results could negatively affect its business, financial condition and results of operations”. Please note, when considering whether to invest in the company’s stock, you should always do your own research, considering both the outlook and relevant market conditions. A number of factors can dictate whether stock prices will rise or fall, including the company’s fundamentals and broader macroeconomic factors. There are no guarantees. Markets are volatile. You should conduct your own analysis, taking into consideration such things as the environment in which it trades and your risk tolerance. And never invest money you cannot afford to lose.

 Group / product overview

Credo Technology is a ‘fabless’ manufacturer (meaning that the company designs and sells the hardware devices, semiconductor chips but does not manufacture the silicon wafers or chips used in its products but instead outsources the fabrication to a manufacturing plant or foundry).

Credo’s connectivity solutions are optimised for optical and electrical Ethernet applications. Its family of products includes integrated circuits (ICs), active electrical cables (AECs) and SerDes Chiplets. Its intellectual property (IP) solutions are primarily SerDes IP licensing. 

According to Credo, its products are used in data infrastructure as “innovative, secure, high-speed connectivity solutions that deliver improved power and cost efficiency”. It claims its products “ease system bandwidth bottlenecks while simultaneously improving on power, security and reliability”.

Credo Technology also claims that its proprietary SerDes and digital signal processing (DSP) technologies enable it to disrupt competition in existing markets and create new market opportunities. As a result, the group believes it is “at the forefront of the high-performance connectivity market”.

“While many others in the data-infrastructure industry struggle to meet customers’ increasing performance and energy-efficiency requirements, we continue to innovate to deliver groundbreaking solutions,” said the group.

Credo Technology supplied its HiWire Switch AEC and collaborated with software and cloud infrastructure provider Microsoft in an open-source implementation. The HiWire Switch AEC is a new category of plug-and-play interconnect designed to create affordable operations with faster speeds.

The company has stated its solutions help Microsoft overcome “complex and slow legacy-enterprise approaches, simplifying deployment and improving connection reliability in the datacentre”.

Credo Technology management team

According to Credo Technology’s website, the group was “founded in 2008 by a seasoned team of analogue, digital and mixed-signal experts as a fabless semiconductor company”. 

The founders were Job Lam and Lawrence Cheng, now respectively the group’s chief operating officer (COO) and chief technical officer (CTO). Since 2008, Cheng has designed the Analogue Frontend for Credo’s 28G and 56G SerDes in various process nodes. 

The president and CEO of Credo is Bill Brennan, who joined the group in 2013 and “has led the organisation to greater than 90% compound annual growth rate (CAGR) revenue growth since 2014 while achieving profitability for five consecutive years”, according to his biography on the group’s website.

On 4 January 2022, Credo announced it had appointed Lip-Bu Tan as chairman, as well as  two new board members, Sylvia Acevedo and Manpreet Khaira. 

Group strategy and market opportunities

Credo Technology serves the multibillion-dollar data-infrastructure market, which is driven largely by hyperscale data centres (hyperscalers), high-performance computing (HPC) and 5G infrastructure.

Within the data-infrastructure ecosystem, the group targets the wired connectivity market that relates to communication electronics. According to forecasts from research consultancy Gartner, this sector will grow from $12bn in 2020 to $17bn in 2025. 

Projected wired connectivity market for communication electronics

“With the continued exponential growth of data traffic, we expect rising demand for our products as speed requirements increase over time. Additionally, we intend to continue to develop new offerings that will expand the capabilities of our portfolio and address a broader section of the total wired connectivity market,” said Credo.

Citing 650 Group forecasts, Credo said hyperscalers will be one of the primary drivers of growth for connectivity solutions. Hyperscalers provide cloud, networking and internet services at scale, which could respond to fluctuating data demands. 

Within this market, higher-speed 400G and 800G ethernet ports in the datacentre in particular will grow at a 49% CAGR from 2020–2025. Credo estimates that the market for high-speed connectivity products will grow from $2bn in 2022 to $5bn in 2025.

Projected market for high-speed connectivity products

“We believe our market opportunity will continue to grow as the technical challenges of delivering higher speeds create increasingly challenging technical or cost hurdles for incumbent providers,” said Credo.

Credo remains in loss despite rising revenue

Credo incurred a net loss of $16.7m from May to October 2021, despite rising revenue as the group invested heavily in research and development (R&D), leading to a surge in the cost of revenue. Revenue increased by 85% to $16m year-on-year.  

The net loss was also attributed to increased operating expenses, including share-based compensation.

Credo Technology’s financial result snapshot (in $ thousands)

Risk factors

Below are some of the risk factors highlighted by Credo Technology.

As a result of the recurring losses, Credo warned that the group may not “generate sufficient revenue to offset the cost of growing its business in the future.” In addition, Credo’s “revenue or revenue growth rate may decline in the future because of a variety of factors, including increased competition and the maturation of our business”.

Credo expects its costs to increase in future as it continues to expend substantial financial and other resources on research and development, expansion into new markets, marketing and general administration (including expenses related to being a public company). These investments may not result in increased revenue or growth in Credo’s business.

The group also depends on a limited number of customers for a substantial portion of its revenue. Hence, Credo warned that any loss or significant reduction in sales from one or more of its major customers could negatively impact the group’s revenue and operating results.

Credo also does not have long-term purchase commitments from its customers. Any cancellations or changes in purchase orders from Credo’s customers could impact the group’s revenue and operating results.

Credo said it is “subject to order and shipment uncertainties, and differences between its estimates of customer demand and product mix and actual results could negatively affect its business, financial condition and results of operations”.

Please note, when considering whether to invest in the company’s stock, you should always do your own research, considering both the outlook and relevant market conditions. 

A number of factors can dictate whether stock prices will rise or fall, including the company’s fundamentals and broader macroeconomic factors. There are no guarantees. Markets are volatile. You should conduct your own analysis, taking into consideration such things as the environment in which it trades and your risk tolerance. And never invest money you cannot afford to lose.

Read more: Deliveroo share price forecast: Is ROO a buy or sell?

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