Could Cree Stock Drop To $80?

by Trefis Team
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Cree stock (NASDAQ: CREE) is up around 2.3x since the beginning of this year, and at the current price around $106 per share, we believe that Cree stock has over 20% potential downside.

Why is that? Our belief stems from the fact that Cree, a power and radio frequency product manufacturer, has seen its stock rise more than 3.5x from its low in March this year, while the S&P has moved a little over 65% in comparison. Further, with demand struggling to rise to pre-Covid levels, we believe Cree stock could head lower. Our dashboard What Factors Drove 147% Change In Cree Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Cree’s price rise since 2018 came despite a 2% drop in revenue from 2018 to 2020 (Cree’s fiscal year ends in June), which combined with an 8% rise in the outstanding share count, led to revenue-per-share (RPS) dropping around 10%.

Further, Cree’s P/S (price-to-sales) ratio dropped from 4.6x in 2018 to 4.4x in 2019, but has since jumped to 12.6x, riding the rally in technology stocks. Given that industrial demand is still not back up to pre-Covid levels, we believe there is a possible downside risk for the P/S multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus has meant there is much lower demand for Cree’s Power and RF products from the industrial and automotive sectors. Cree’s Q1 2021 results confirmed this, with revenue coming in at $217 million vs $243 million for the same period last year. A rise across all operating expense heads saw operating loss more than quadruple from $39 million to $170 million. This saw EPS drop to -$1.68 vs -$0.35 for the same period last year.

Going forward, we expect revenues to stay weak in the near to medium term, and if the company is not able to control expenses, we believe the stock will see its P/S multiple decline from the current level of 12.6x to around 10x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $80, a downside of over 20% from the current price near $106.

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