Cree Stock To Drop More Than 20%?

Cree stock (NASDAQ: CREE) is up 54% since the beginning of this year, and at the current price of around $71 per share, we believe that Cree stock has more than 20% potential downside.

Why is that? Our belief stems from the fact that Cree stock is still up over 65% from the low seen at the end of 2018, almost 2 years ago. Further, after posting weak Q4 2020 numbers, and with industrial demand still not up to pre-Covid levels, we believe Cree’s stock could drift lower. Our dashboard What Factors Drove 67% Change In Cree Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Cree stock’s rise since late 2018 came despite a 2% drop in revenues, which combined with a 5% rise in the outstanding share count, led to a 7% decrease in revenue per share (RPS).

In addition, Cree’s P/S (price-to-sales) ratio dropped from 4.6x in 2018 to 4.3x in 2019, but has since jumped to 8.2x currently, as demand for electric vehicles has soared, leading to a rise in demand for Cree’s power products. However, given Cree’s dismal Q4 ’20 numbers and the delay in the global roll-out of 5G, there is possible downside risk for Cree’s multiple, especially when compared with previous years: P/E of 4.6x at the end of 2018 and 4.3x as recently as 2019.

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

The global spread of Coronavirus and the resulting lockdowns have hampered demand for Cree’s Power & RF products across a variety of industries. This is evident from Cree’s Q4 and full-year 2020 earnings, where revenue came in at $904 million, down substantially from $1.08 billion in 2019. Further, a rise in operating expenses meant that net loss more than tripled from $58 million to $191 million. EPS came in at -$1.78 vs -$0.56 in 2019, and with the global roll-out of 5G delayed further, demand for Cree’s RF (radio frequency) products will remain low.

Regardless, if there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/S multiple decline from the current level of 8.2x to around 6.4x (the average of current P/E and 2018 P/E), which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $55, a downside of more than 20% from the current price of $71.

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