Over the past decades, we have witnessed the rapid development and production of telecommunication devices. With the dynamic digitalisation of many business lines, the demand for microchips, routers, adapters, cables, and other components has demonstrated stable growth.

Therefore, the stock of the companies involved in manufacturing such equipment is in great demand among investors. For the same reason, it's no surprise that IPOs of this sector's representatives are very popular with underwriters.

Credo Technology Group Holding Ltd – one of the leading suppliers of digital infrastructure equipment – is planning to go public on 26 January 2022 by listing on the NASDAQ under the "CRDO" ticker symbol. Let's find out if this company's stock would be attractive to investors.

The business of Credo Technology Group

Credo Technology Group Holding Ltd was established in 2008 with headquarters in San Jose, California. William Brennan has been running the company since 2013. Brennan has served as the vice president of Vital Connect – a leader in wearable biosensor technology. Credo Technology Group currently employs 350 people, and its major investors are Celesta Capital and a group of individuals.

Credo Technology Group team
Credo Technology Group team

The issuer offers cutting-edge technological solutions in the area of IT and communication services. Credo Technology Group is an innovator in providing secure, high-speed connectivity solutions that deliver improved power and cost efficiency.

Credo Technology Group’s product line includes:

  • Serialiser/ deserialisers
  • Signal processors
  • Integrated circuits
  • Electric cables
  • Chiplets

The company also offers intellectual property services. Credo Technology Group's clients are major distribution centres and cloud providers.

In addition, the company cooperates with data centres and 5G wireless network providers. Credo is trying to expand its target market and diversify its business as much as possible.

The market and competitors of Credo Technology Group

Credo Technology Group Holding Ltd operates on a number of information technology infrastructure markets. According to Grand View Research, the global corporate network market (one of the company's target markets) is expected to reach $64.6 billion by 2024.

Gartner reported that the wired network market would amount to $17 billion in 2025. Credo Technology Group believes that the broadband internet network segment will grow from two to five billion USD by 2025.

Wired network market development forecast from Gartner
Wired network market development forecast from Gartner

The company’s key competitors are:

  • Broadcom
  • Marvell Technology
  • Synopsys
  • Cadence Design Systems
  • Alphawave IP Group

Financial performance

Credo Technology is a loss-making company; we will therefore focus on analysing its revenue. According to Credo Technology's financial statement, as of 30 April 2021, its sales over the previous 12 months were $58.7 million, which indicates a 9.05% growth over the same period of 2020. In the last 12 months, the revenue amounted to $70.4 million.

Financial performance of Credo Technology Group in the 2021 fiscal year
Financial performance of Credo Technology Group in the 2021 fiscal year

In the six-month period that ended on 30 October 2021, the company's sales were $37.2 million – this is a 45.88% increase in comparison with the same period of 2020. As we can see, the revenue growth rate is increasing quite significantly.

As for Credo Technology Group's net loss, over the six months that ended on 30 October 2021, it was $16.7 million – this is a 13.47% decrease compared to the same period of 2020, which demonstrates improvement of the company's business model effectiveness.

The company's total liabilities are $26 million, and the cash equivalents on its balance sheet are $71.05 million.

The issuer’s financial health this fiscal year can be characterised by:

  • Strong revenue growth
  • Decline in gross profits
  • Net loss reduction.
  • Operating expenses growth
  • Low debt load

Strong and weak sides of Credo Technology Group

Now let's identify the strengths and weaknesses of Credo Technology Group. Its strengths are:

  • Financial solvency
  • Prospective target market
  • Highly diversified business
  • Sound management

Among the investment risks, we would name:

  • The company is loss-making and doesn't pay dividends
  • Strong competition
  • Growing operating expenses

IPO details and estimation of Credo Technology Group capitalisation

The underwriters of the IPO are Roth Capital Partners, LLC, Craig-Hallum Capital Group LLC, Stifel, Nicolaus & Company, Incorporated, Needham & Company, LLC, Mizuho Securities USA LLC, Cowen and Company, LLC, BofA Securities, Inc., Cathay Securities Corporation Offshore Securities Unit, and Goldman Sachs & Co. LLC.

During the IPO, Credo is planning to sell 25 million common shares at the price of $10-12 per share. The IPO volume will be $275 million, and the company's market capitalisation could amount to $1.6 billion. Credo Technology Group may yet increase the IPO volume and the highest price of this range.

To assess loss-making companies, we use a multiplier – the Price-to-Sales ratio (P/S ratio). A P/S value for the technological sector with such a rapidly-growing target market could be 15.0 during the lock-up period.

The issuer's P/S is 22.66, which indicates that the company is filing for a quite expensive IPO. However, Credo Technology Group has exhibited high revenue growth, which may be attractive to investors because the company operates in many market segments, and even leads some of them.

Taking all these factors into consideration, an investment in this company could well be of a venture nature. The stock could be interesting to investors who are ready to take risks.

Material is prepared by

Vadim has a higher education in finance and economics. He started becoming familiar with financial markets in 2012, and now specialises in analysing IPOs and portfolio investments.