Cree will host its analyst day on Monday, February 26th. We are moving from Best Ideas Long to Bench Long. We like the long term opportunity, we like the near term direction of fundamentals, but we see a thesis check required on the medium term.
What has us thinking today? The analyst day is only 2hrs and 15 minutes. It seems an impossibly short amount of time to give enough detail on a turnaround plan for Cree. Will we get the appetizer but not the main course on Monday? G.LOWE is impressive. And it will be a breath of fresh air to see something planned and directed by him. But this week I find myself wondering along these lines:
- Our research led us early on to the conclusion that G.LOWE will transform CREE into an analog semiconductor company with a unique technology for the high voltage market. We see this as a 2-3 year bull case and continues to make us see this as a duration long. Based on our understanding, as CREE builds electronic device capability around the strong SiC substrate market position, the company's opportunity capture shifts from supply/demand company in materials science, to breakthrough electronic device company with unique technology, and FCF capture across the cycle, almost regardless of tight or loose supply conditions. It will take time but that is the direction. In the meantime, while the electronic device muscle is being built (think beyond MOSFET), the good news is that the latter will continue to ride a penetration curve on the substrate/MOSFET side in which a ~$300m total market today (for SiC) is penetrating a $4b+ market (high voltage analog, IGBT market). I wonder how much of that will be new to investors? This part, along with Greg himself, are the shiny objects.
- We are also 100% in the camp that CREE can improve margins in the problematic Lighting Division, which should create some options for monetization, either via sale of the division, or just thanks to turning a dilutive property into an accretive one. Either option is good, and will be well received.
- But what will we hear about the core LED chip business for lighting applications? Part of our thesis was that from a cyclical perspective, the business was doing better than people feared at the time. Our latest view continues to support this case, and we see favorable demand applications on the horizon (2019-2020) helping the entire LED market soak up excess capacity. Maybe we get a positive estimate nudge on this segment at the analyst day thanks to ongoing improvements in supply/demand? But the strategic puzzle is what I don’t know. How will the new CEO make this sound like a business we all want to own for the coming years? 2 hours and 15 minutes seems like an impossibly short period of time to highlight all of what is required. The medium term strategic direction of the core LED chip business is the thesis check for us which makes us want to pause before we pound the table from here and tell investors to be locked and loaded on this stock.
Translation: we see the Long term as very bullish. We are bullish on near term fundamentals with lighting margins improving, LED chip conditions cyclically improving, with continuing tightness/shortage in SiC. And we are bullish on management's ability to monetize the core innovation one way or another. So fundamentals are all going in the right direction. And, most intriguing, is a palpable turnaround in the culture of the company from one managed out of fear and an "old boys network," to a culture built for winning and success. We believe that kind of intangible change does show through to the bottom line either from greater productivity (profits) or greater innovation (revenue), or both. The uncertainty part today is just around the CEO's plan for the core LED chip business in the long run. CREE is late to microLED technology. Not impossibly late, but they need to get moving. Or, does Greg even want to go in that direction? Is there a pivot to IoT SoC that consumes the company’s efforts (more bullish, if he can articulate it)? The duration of the analyst day makes me think we won’t really get to the meat and potatoes, and all we get is an appetizer. If that is so, is that n-t a risk for the stock? Yes. Hence the thesis check.
