Record Revenue Fails to Mask a Margin Squeeze in Connectivity

The setup The market is aggressively rewarding artificial intelligence adoption but harshly punishing the costs required to sustain it. As major software multiples contracted despite strong enterprise demand, connectivity provider Credo Technology Group took the hardest hit of Wednesday's session. The selloff proved that even triple-digit revenue growth cannot protect a hardware stock when margins slip.

What's moving

Nvidia ($NVDA) is continuing to push AI hardware demand beyond the core hyperscalers. The chipmaker struck a new data center partnership with Equinix ($EQIX) and Together AI to support open-model inference (per CNBC) in enterprise colocation environments. This signals a broadening of the customer base for AI silicon. The compute is moving closer to edge and corporate networks.

Broadcom ($AVGO) delivered a divided quarter that tested investor patience. The networking giant issued a disappointing revenue forecast for the current period, even as the chief executive touted a robust earnings outlook reaching into fiscal 2028 (per CNBC). The stock fell as the market refused to look past the near-term weakness.

Snowflake ($SNOW) proved that enterprise data consumption is finally translating into software revenue. The data cloud provider gained +22% after posting robust growth, driven specifically by the adoption of its new AI agent for writing code (per CNBC). The print validates the thesis that companies are actively building tools on top of their proprietary data.

Energy scarcity is forcing hyperscalers to secure alternative power directly. Alphabet's Google ($GOOGL) purchased 400 megawatts of enhanced geothermal power from Fervo for a Utah data center (per TechCrunch). The deal underscores the reality that clean baseload power is becoming the defining constraint on AI infrastructure expansion.

The legal framework around artificial intelligence training just gained high-level support. The United States government formally sided with OpenAI in its copyright dispute over large language models (per TechCrunch), arguing the country has a strong interest in setting global standards for the practice. The filing signals that federal regulators view AI development as a national priority. Traditional intellectual property boundaries may now come second.

Featured: Credo Technology Group Holding ($CRDO)

The move Shares of the high-speed connectivity provider dropped -20.04% to close at $165.22. The selloff was decisive, trading 29.9 million shares, which is 5.2 times the normal 30-day volume. The decline pulled the stock -45.4% below its 52-week high of $302.52 and dragged it beneath its 50-day moving average of $234.26 and its 200-day moving average of $175.13. Despite a one-year return of +32.4%, the recent trajectory is breaking down. It has now lost -30.6% in the last month.

What drove it The market rejected an otherwise robust top-line beat because the cost to deliver it is rising too fast. According to financial coverage (per Yahoo Finance), Credo's fiscal first-quarter revenue jumped +114.7% year-over-year to $479 million, and non-GAAP earnings per share reached $1.20. Those figures easily exceeded estimates.

The problem was in the profitability trends. GAAP gross margin declined 290 bps to 64.5%, down from 67.4% a year earlier. Operating expenses more than doubled to $188.4 million. The company's guidance for the second quarter compounded the issue. While Credo projects revenue between $525 million and $535 million, it expects GAAP gross margin to compress further to a range of 62.9% to 64.9%, alongside another increase in operating expenses. Investors decided that rapid sales growth is not worth a structural deterioration in operating leverage. The valuation simply left no room for error. Coming into the print, Credo traded at a demanding 27.8 times trailing sales.

The bigger picture Credo sits at a critical but difficult juncture in the hardware supply chain. As data centers scale up their graphics processing clusters, the optical transceivers, retimers, and active electrical cables that link them together become indispensable. The absolute volume of demand is clearly there. The challenge lies in pricing power.

Our dashboard reads hyperscaler aggregate capital expenditure running +97.7% above last year, signalling that the AI infrastructure cycle has reached saturation. When cloud providers commit this much capital, their procurement teams begin aggressively negotiating component costs to protect their own returns. Connectivity suppliers like Credo are caught in the middle. They must invest heavily in research and development to deliver next-generation bandwidth, but they face immense pressure to lower per-unit prices as volumes scale. When gross margins contract during a period of triple-digit revenue expansion, it suggests the company is trading profitability for market share. The hardware upgrade cycle remains robust. Retaining the value it creates is proving much harder.

Across the tape

Software multiples compressed sharply. The software sector ETF ($IGV) dropped -2.60%, led down by severe declines in highly valued data and security names. MongoDB ($MDB) sank -13.54%, Palo Alto Networks ($PANW) fell -9.28%, Datadog ($DDOG) lost -6.53%, Bandwidth ($BAND) shed -6.38%, and Palantir Technologies ($PLTR) retreated -5.81%. Much of this pressure stems from macro conditions rather than fundamental deterioration. The 10-year Treasury yield held at a demanding 4.80%, supported by New York Fed President John Williams noting that higher yields reflect strong economic prospects (per CNBC).

Against this backdrop, the broader market sentiment remains guarded. A few individual names bucked the trend, including Varonis Systems ($VRNS), GitLab ($GTLB), and Magnite ($MGNI), which gained +10.41%, +9.98%, and +8.69% respectively. The semiconductor ETF ($SMH) managed a +0.96% gain. Beneath the surface, component returns were widely dispersed.

What to watch

• Credo's next print: The company reports earnings again on November 30. The sole metric that matters is whether GAAP gross margin can hold the 62.9% floor outlined in the guidance.
• Broadcom's near-term execution: The networking giant needs to prove its current-quarter revenue forecast is a timing issue rather than a structural loss of market share in AI connectivity.
• The software valuation reset: With the 10-year yield entrenched at 4.80%, watch whether the recent selloff in high-multiple names like MongoDB and Palantir attracts institutional buying, or if the multiple compression has further to run.
• Data center power procurement: The Fervo-Google agreement sets a precedent. Watch for other hyperscalers to bypass the traditional grid and fund novel generation directly.