Strong Demand Revival Could Help Cree Stock Regain Recent Highs

by Trefis Team
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Cree
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Up almost 3x from its low in March 2020, at the current price of $93 per share, we believe Cree stock (NASDAQ: CREE) has further upside potential. Cree stock rose from $32 in March 2020 to $93 currently, much more than the S&P, which increased by around 90% from its lows. Further, the stock is up almost 2x from the level it was at before the pandemic. However, we believe that Cree stock could rise almost 40% to regain its 2021 high of $130, driven by expectations of steady, continuing demand growth and strong Q3 2021 results. Our dashboard What Factors Drove 119% Change In Cree Stock Between 2018 And Now? has the underlying numbers behind our thinking.

Cree’s stock price rise since 2018-end came despite a 2% drop in revenue from $925 million in FY 2018 to $904 million over the last 12 months (Cree’s fiscal year ends in June). Combined with a 14% rise in the outstanding share count, RPS (revenue-per-share) dropped from $9.30 to $8.40 over this period.

Meanwhile, Cree’s P/S (price-to-sales) multiple rose from 5x at 2018-end to 12x currently, as demand for the company’s products has risen. However, we believe that the company’s P/S ratio has the potential to increase more in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus, and the resulting lockdowns and quarantine had led to a drop in demand for computing devices initially. However, demand for Cree’s radio frequency products from the 5G space has since risen, and this is evident from Cree’s Q3 2021 earnings, where revenue came in at $137 million, up from $114 million in Q3 2020. However, a jump in COGS and other operating expenses saw operating loss increase from $48 million to $61 million. This led to EPS dropping from -$0.52 to -$0.59 over this period.

Further, with the lockdowns being lifted globally and semiconductor demand continuing to rise, especially from the 5G and electric vehicles sectors, we believe the company will continue seeing strong revenue growth in the medium term. Additionally, if Cree continues to successfully control expenses, profitability could rise in the near to medium term. This will raise investor expectations, driving up the company’s P/S multiple. We believe that Cree stock can rise almost 40% from current levels, to regain its early-2021 high of around $130.

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