You can’t sleep when driving. Even for a second. In the case of Cree, did we fall asleep? I hate to use those words. We never stopped worrying about cyclical dislocation especially re potential for revenue reset. But we have been trying to stay uniquely focused on what we see as a long-term opportunity. Cree’s future is greater than its past. Among semi stocks, we think CREE stands out as a potential big winner of the next cycle, with their highest margin revenue group set to 2x from Sep-Q levels over the next ~3 years, or more, if CEO Lowe keeps the pedal to the metal with more M&A to boost Cree’s ownership of this new category. The bear case on Lighting continues to deteriorate as margins reflate. The bear case on LED is strong but will deflate as LED source material gets increasingly diverted into Wolfspeed wafers. And the presence of a winning CEO who is galvanizing the employee base and changing the productivity spectre of the company…but you have heard all that from us before. And it doesn’t excuse a cyclical revenue reset which happens tonight. We will have to wait and see where estimates fall out before we can declare if the reset is complete or has one more step. The LONG thesis remains strong and we are keeping our focus on the long term.
SALIENT POINTS FROM THE QUARTER:
- Reaffirming the $1B WS current pipeline opportunity
- Already starting to feel the impact of the September 24th tariffs affecting Lighting products and resulting in the incrementally higher impact to future quarters’ EPS (3 cents per share in Q2 and 5 cents per share in Q3)
- New effective tax rate target of 18% (above previously guided 17%)
- Addressed the minimal dilution risk present with the convert and the movement from a position of quarterly net interest expense to quarterly net interest income
- G-LOWE’s “teasing” closing remark re future supply agreements: “And so I think it's working well for us right now and we've now announced 2 agreements, the Infineon one 6 or so months ago and this one today. We're hoping to have some more in the future. We anticipate we'll have some more in the future. And I'll just say, just stay tuned.”
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
