Why We Increased Our Price Estimate For Cree

by Trefis Team
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We are increasing our price estimate for Cree (NASDAQ:CREE) from about $47 per share to about $60 per share, driven by the company’s pivot away from the commoditized lighting business to higher-margin businesses such as power and RF products, and stronger-than-expected results over the first three-quarters of this fiscal year. That said, our price estimate remains slightly below the current market price. Below, we outline the rationale for the price increase.

View our interactive dashboard analysis on What’s driving our price estimate for Cree? 

Divestment of the lighting business is a positive step

  • Cree will exit the competitive and commoditized lighting business, which was once its bread-and-butter, selling the unit to Ideal Industries for ~$310 million by Q4 FY’19.
  • The business has been underperforming, with revenues declining at a CAGR of 14% over the last 3 years and adjusted gross margins below company average (18.5% vs 28% company average in FY’18).
  • Lighting accounted for ~$570 million in FY’18 revenues (about 38% of total sales).
  • The move should enable the company to focus its resources on the more lucrative and faster-growing power and RF business.

Wolfspeed business will drive Cree’s future growth

  • The Wolfspeed segment– which manufactures Power and RF products – is Cree’s fastest-growing unit (38% CAGR over last 3 years).
  • We expect revenues from this segment to grow to over $1 billion from just about $330 million in FY’18.
  • The business will benefit from stronger adoption of silicon carbide (SiC) and gallium nitride products, which are seeing strong interest from electric vehicle manufacturers. (related: Why The Silicon Carbide Business Could Be A Big Growth Driver For Cree).
  • Cree had a pipeline in excess of $1 billion for various applications associated with EVs, including silicon carbide MOSFETs, diodes, and power modules.
  • Gross margins for the segment are significantly higher (adjusted gross margins of ~48% vs 28% company average in FY’18) implying that a growing mix of Wolfspeed revenue should bode well for Cree’s earnings.

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