Cree (NASDAQ: CREE) Loses Its Shine

With its biggest two day drop since March shaving 15% off the share price, the weekend can’t come fast enough for investors of Cree (NASDAQ: CREE). It had all been going so well for them over the summer which is what makes this week all the more bitter.

Wall Street can be quick to forget past potential if current results don’t justify it and that’s the reality that Cree investors are dealing with right now. Shares of the silicon carbide product maker have had a stunning summer with a 170% rally from Q1’s low up to fresh all time highs last week but this fast coming undone. After Tuesday’s session ended, the company released their fiscal Q4 earnings report and even though the numbers beat expectations, they still made for grim reading.

Tough Numbers

With revenue contracting by more than 18% year on year and with EPS firmly in the red, investors were left to ask themselves if it’s reasonable for shares to be trading higher than ever before? The subsequent drop in share price we’ve seen since is certainly one way to answer that.

Despite this, CEO Gregg Lowe struck a bullish tone when he said “our performance in the fourth quarter demonstrates solid execution despite the unprecedented challenges presented by the ongoing pandemic and geopolitical concerns. Fiscal 2020 marked a transition year in our journey to become a global semiconductor powerhouse and we remain firmly committed to our capacity expansion plans to capitalize on what we believe to be a multi-decade growth opportunity for silicon carbide.”

Still, Wall Street wasn’t buying it and already we’ve seen some bulls walk away. On Wednesday morning, JMP Securities cut their rating on Cree stock from Market Outperform to Market Perform and removed their $74 price target. For them, the latest earnings report paints a tough hill for the company to climb in the coming quarters and it may be mid-2021 before revenue has fully recovered.

This mirrors a move by Goldman in June, who downgraded Cree from Buy to Neutral. While at the time they noted the “appealing” growth story in the long term, there was too much uncertainty in the short term to justify the elevated valuation.

Long Term Potential

This was a message that had echoes on Wednesday with the likes of Canaccord Genuity noting that while productivity remains sub-optimal, their “sales pipeline continues to grow”. One example of this is Cree’s partnership with Delphi Technologies, a company that produces combustion systems and electrification products and software for vehicles.

Delphi won a few awards last month and their growth will support Cree’s continued push into the silicon carbide space. At the same time though, it will be at least 12-18 months if not longer before there’s any material benefit from this.

So while the long term potential is there, it feels as though shares got a little ahead of themselves recently and Wall Street is trying to figure out what’s a new fair value. This is likely going to result in increased volatility in the short term, as investors who held through the recent rally look to lock in gains before there’s much more of a retracement.

There is some decent support around the $58 mark which offers a good entry point for those thinking of getting involved. The consensus is that in the long term, Cree is onto a winner but short term headwinds make the current valuation a little frothy. This is all the more pertinent right now as eyebrows continue to be raised at some lofty valuations in the tech space. Were a risk-off sentiment to creep back in, even temporarily, the short term risks would be all the more pronounced.