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Why Is Cree Stock Falling Today?

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Aug. 21 2019, Published 2:32 p.m. ET

Cree (CREE) shares have fallen close to 9% today.

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Why is Cree stock falling?

The company announced its earnings for the fourth quarter of fiscal 2019 after market hours on Tuesday. Cree reported sales of $251.2 million in the fourth quarter—a fall of 5% YoY (year-over-year). The company’s adjusted EPS fell 21.4% YoY to $0.11 in the fourth quarter.

Cree reported sales of $265.8 million and an EPS of $0.11 in the fourth quarter of 2018. Analysts expected the company to post revenues of $248.9 million and an EPS of $0.10 in the fourth quarter of 2019. So, why did Cree stock fall despite an earnings beat?

Guidance didn’t meet analysts’ estimates

Cree expects revenues between $237 million and $243 million in the first quarter of fiscal 2020. The EPS will likely be between -$0.07 and -$0.03. The expectations are lower than analysts’ estimates. Analysts expected sales of $259.2 million and an EPS of $0.15.

Cree reported sales of $408.27 million and an EPS of $0.22 in the first quarter of 2019. So, the company expects its sales to fall 41% YoY, which will impact the bottom line.

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Cree said that the ban on Huawei and softness in the LED market will impact its sales in the short term. Cree’s CEO, Gregg Lowe, said, “We are pleased with our performance in the quarter as non-GAAP earnings per share was within the top end of our updated range despite the challenging operating environment. While the Huawei ban and softness in the LED market will continue to impact the sector in the short-term, our long-term outlook remains unchanged – there is a significant opportunity to help customers make the shift from silicon to silicon carbide solutions for their next generation applications.”

Is Cree undervalued after the pullback?

Cree stock is trading at a forward PE ratio of 63.2x—high compared to its earnings growth estimates of 15% in 2020. The semiconductor weakness will likely continue for a while. Trade war concerns continue to impact stocks. The slowdown in China’s economy will also hurt the company’s sales. China accounts for 26% of Cree’s total revenues.

Investors need to tread cautiously with Cree and keep an eye on the stock. The stock will be a good pick after the downturn ends. Before the company’s fourth-quarter results, analysts had an average target price of $65.88. The estimates will be lower due to the company’s weak outlook.

Although the stock has gained 23% year-to-date, it’s still trading 23% below its 52-week high of $69.21.

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