Will Credo Maintain Strong Margins Despite Higher R&D Spending in FY27?

Credo Technology Group Holding Ltd CRDO has entered fiscal 2027 with strong revenue momentum and a continued focus on investing in new product development. In fiscal 2026, revenue reached a record $1.3 billion, up 206% year over year, while gross margin increased 310 basis points to 68.1%. The company also delivered significant operating leverage, with operating margin improving 21.44% as operating expenses rose considerably more slowly than revenue. In the fourth quarter, non-GAAP gross margin was 68.3%, while non-GAAP operating margin totaled 49.6% and non-GAAP net margin reached 51.9%.

For fiscal 2027, Credo expects to maintain its strong margin profile even as it increases investment in research and development. Management expects non-GAAP gross margin to remain broadly consistent with fiscal 2026 levels. At the same time, non-GAAP operating expenses are expected to increase approximately 50% year over year, well below the expected revenue growth rate, as the company continues investing in R&D to support new product development and address growth opportunities. As a result, Credo expects its non-GAAP net margin to remain in the vicinity of 50%.

Credo expects fiscal 2027 revenue to grow more than 80% year over year, with mid-single-digit sequential growth in the first half and an inflection beginning in the second half. This acceleration is expected to be supported by more than $600 million in optical revenue, with ZeroFlap optics, silicon photonics PICs and optical DSPs each expected to contribute more than $100 million. On the last earnings call, management stated that about half of the expected absolute dollar revenue growth in fiscal 2027 should come from the optical portfolio and about half from the existing copper portfolio, predominantly AECs and retimers.

The near-term outlook also points to continued strong profitability. For the first quarter of fiscal 2027, Credo expects revenue between $465 million and $475 million, non-GAAP gross margin of 67% to 69%, and non-GAAP operating expenses of $86 million to $90 million. With revenue growth expected to remain substantially ahead of operating expense growth, the company expects to continue supporting higher R&D investment while maintaining non-GAAP net margins near 50%.

Taking a Look at CRDO’s Competitors

Broadcom AVGO continues to benefit from strong AI semiconductor demand and operating leverage, supporting its margin profile. In the second quarter of fiscal 2026, free cash flow reached $10.26 billion, representing 46% of revenues, while cash flow from operations was $10.49 billion. However, the company operates in highly competitive markets where pricing pressure can weigh on margins, while higher integration costs, acquisition complexity and elevated commitments could also create profitability risks. Broadcom’s infrastructure software business continues to provide support, with second-quarter revenue increasing 9% year over year to $7.18 billion and annual recurring revenue rising 17%. Management expects infrastructure software revenue of approximately $8.9 billion in the third quarter, up 31% year over year. Strong AI demand and recurring software revenue support Broadcom’s margin profile, although competition and execution risks remain important constraints.

Marvell Technology’s MRVL margin profile remains supported by strong AI-driven growth and operating discipline. In the first quarter of fiscal 2027, non-GAAP gross margin was 58.9%, slightly below 59% in the fourth quarter, while non-GAAP operating margin was 35% compared with 35.7% previously. As custom silicon, interconnect and optics businesses scale, strong data center growth could support operating leverage. However, profitability remains sensitive to product mix, competitive pricing and ramp-related costs. Marvell’s restructuring efforts are expected to support cost discipline, while its fabless model helps maintain capital efficiency. Overall, AI-driven growth provides margin support, although mix shifts and pricing pressure could create volatility.

CRDO’s Price Performance, Valuation and Estimates

Shares of CRDO have gained 22.6% compared with the Electronics-Semiconductors industry’s growth of 5.4% in the past month.

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In terms of the forward 12-month price/sales ratio, CRDO is trading at 18.09, higher than the industry’s multiple of 5.36.

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The Zacks Consensus Estimate for CRDO’s earnings for fiscal 2027 has been revised marginally upward over the past 60 days.

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CRDO currently sports a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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