What’s Driving The Rally In Cree’s Stock?

by Trefis Team
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Cree (NYSE:CREE) has seen its stock price rise by about 25% over the last month, significantly outperforming the technology sector and semiconductor stocks, which appear to have entered a bear market. There are likely to be multiple trends driving the surge, including the company’s stronger-than-expected Q1 results, published in October, and its pivot away from the commoditized lighting business to higher-margin businesses such as power and RF products. The company is also expected to return to reasonably strong revenue growth after multiple years of declines. Between FY’18 and FY’20, sales could grow by about 25%, per Reuters consensus estimates.

Our interactive dashboard analysis on what’s the outlook like for Cree details our forecasts and estimates for the company, as well as our valuation estimate. You can modify any of the key drivers to gauge the impact of changes on the company’s results and valuation.

Cree Reducing Exposure To The Lighting Business

Cree has been steadily reducing its reliance on the competitive and commoditized lighting space, which was once its bread-and-butter business. During FY’18, lighting sales accounted for just 38% of total revenue, down from about 55% two years ago. Cree has also been focusing on improving the profitability of its lighting business. Over Q1’19, the company saw gross margins rise by almost 200 bps year-over-year to 23.2%, driven by product mix improvements, cost reductions and improvements in operational efficiencies.

Wolfspeed Can Drive Strong Growth

The Wolfspeed segment, which makes power and RF products, is playing a growing role in the company’s business. Cree is looking to make Wolfspeed its largest business segment, quadrupling sales to about $850 million by 2022. The segment’s products – which include silicon carbide material, power switching devices, and RF components – cater to high-growth markets including electric vehicles, military and aerospace applications. Cree has also been a leader in commercializing silicon carbide products, which are used in high-voltage applications, helping to improve efficiency and cut costs.

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