Is Cree’s Stock Undervalued?

October 11th, 2019 by Trefis Team
+382.27%
Upside
12.94
Market
62.38
Trefis
CREE: Cree logo
CREE
Cree

Cree (NASDAQ: CREE) designs and produces semiconductor products for power and radio-frequency (RF) applications and lighting-class light-emitting diode (LED) products, used across a whole variety of applications.

A] Estimating Total Revenue

  • Cree’s Total Revenue has grown from $770 million in 2017, to $1.08 billion in 2019, on the back of strong growth in Wolfspeed segment revenues.
  • The Wolfspeed segment manufactures Power and RF products, used across a variety of applications such as transportation, inverters, and wireless communication systems.
  • We expect revenue from this segment to grow from $540 million in 2019 to $1.08 billion in 2021, a 2x increase, on the back of growing demand from the electric vehicle market and the advent of 5G communication.
  • We expect this growth to drive Total Revenue to $1.31 billion by 2020, and subsequently to $1.71 billion in 2021, which is a 58% jump from 2019 levels.

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You can view our interactive dashboard analysis – Cree Valuation: Expensive or Cheap?

B] Estimating Net Income

  • Net Loss has grown from $98.13 million in 2017 to $375.08 million in 2019, but we expect things to get better by 2021.
  • Of the $375 million loss in 2019, $317 million comes from discontinued operations. Similarly $263 million from the $280 million net loss in 2018, has come from discontinued operations.
  • Finally, with the divested lighting business sold to IDEAL industries, and the rapid growth in Wolfspeed revenue, we expect Cree to turn profitable by 2021.
  • We expect net income to rise to around $204 million by 2021, on the back of higher margins for Cree’s products.

C] Estimating Earnings Per Share

 

D] Estimating P/E Multiple

  • The forward P/E for the semiconductor industry stands at 26.87x.
  • However, with the divestment of the under-performing lighting products segment, and a rapid expected growth in revenue and margins driven by Wolfspeed, we have a slightly higher P/E estimate of 27.5x for Cree’s stock.

Trefis has a price estimate of $53.35 per share for Cree’s stock, about a 10% upside from its current market price of around $48 per share.

 

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