Has Cree Stock Peaked At $60?

Cree stock (NASDAQ: CREE) is up around 32% since the beginning of this year, and at the current price of around $61 per share, we believe Cree stock could see significant downside.
Why is that? The key is Cree stock is still 64% higher than it was at the beginning of 2018, a little over 2 years ago. Our dashboard What Factors Drove 63% Change In Cree Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of this rise over the past 2 years is justified by the roughly 40% growth seen in Cree revenue, and by the company seeing an improvement in profitability, with EPS rising from $-0.89 in 2017 to $-0.56 in 2019.

Further, revenue on a per share basis grew only 33%, due to an increase in the outstanding share count. To be precise, Cree’s share count grew 5% from 2017 to 2019.

Finally, Cree’s P/S ratio dropped marginally from about 4.7x at the end of 2017 to 4.4x by the end of 2019. However, due to rising investor expectations surrounding Cree’s Power & RF segment, its P/S multiple has since risen strongly and currently stands at 6x. However, given the volatility of the current situation, there is a significant possible downside for Cree’s multiple when compared to levels seen in the past years – P/S of around 4.5x at the end of 2017, 2018, and 2019.

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

The global spread of Coronavirus has meant there is much lower demand for electric vehicles and the global launch of 5G has also been pushed back. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe Cree’s Q4 results in August will confirm the hit to its revenue. It is also likely to accompany a lower 1H 2021 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from current level of 6x to around 4.5x, which combined with a reduction in revenues and margins could result in the stock price shrinking to a little over $40.

For more insights into how the Covid-19 crisis could affect Cree’s semiconductor peer Texas Instruments, view our interactive dashboard Texas Instruments Downside: How Low Can Texas Instruments Stock Go?.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here

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