Cree, Inc.: Both a 5G Stock and an EV Play

Killing Two Birds with One Stone?

At first glance, Cree, Inc. (NASDAQ:CREE) doesn’t seem to be anything particularly exciting. The Durham, North Carolina-based company has been around since 1987, now making power and radio frequency (RF) semiconductors and lighting class LEDs.

However, if you were to take a deeper look at Cree’s business, you’d see that the company could be on the verge of enormous growth.

Let me explain…

Cree, Inc. is known for using silicon carbide materials in its semiconductor products. Without getting into the technical details, let’s just say that silicon carbide does not occur in nature without otherworldly help, and it is very difficult to produce synthetically.

As it turns out, Cree is the leading producer of silicon carbide, responsible for supplying approximately 62% of the material in the world. (Source: “Cree Investors Day,” Cree, Inc., last accessed August 20, 2020.)

Why do we care about this material?

Well, silicon carbide can be a critical factor in driving inverter loss reduction, which is something that electric vehicle (EV) manufacturers have been working on.

For instance, the new drive units from Tesla Inc (NASDAQ:TSLA) already use silicon carbide power electronics. Ford Motor Company (NYSE:F) once conducted a test of inverter losses during city and highway cycles using Cree’s technology. It found that, compared to silicon, silicon carbide reduced inverter losses by around 78% in electric-only drive mode.

In an era where EV manufacturers are trying to extend the range of their battery-powered cars, Cree’s products could come in very handy.

At the same time, Cree is also well-positioned to capitalize on the 5G boom. In particular, the company’s gallium nitride radio-frequency (RF) devices could see increasing adoption in communications infrastructure. This is because gallium nitride-based 5G systems are more compact, offer increased frequency bandwidth, and provide lower cost/bit/second for the operator.

If you’ve been following the markets, you’d know that 5G stocks and EV stocks are some of the hottest names right now. And even though Cree, Inc. does not sell anything to the end consumer, it did get noticed by market participants. Year to date, CREE stock is up more than 30%.

Cree, Inc. (NASDAQ:CREE) Stock Chart

Chart courtesy of StockCharts.com

Looking at the chart, you’ll notice that CREE stock slipped recently. And that was largely due to its latest earnings report.

On August 18, Cree, Inc. reported financial results for the fourth quarter of its fiscal year 2020, which ended June 28. For the quarter, the company generated $205.7 million in revenue, which represented an 18% decrease year-over-year.

Adjusted net loss came in at $0.18 per share, wider than the adjusted net loss of $0.11 per share incurred in the year-ago period. (Source: “Cree Reports Financial Results for the Fourth Quarter of Fiscal Year 2020,” Cree, Inc., August 18, 2020.)

However, while the COVID-19 pandemic has caused a lot of disruption around the world, the company still sees 5G as a major catalyst.

In the latest earnings conference call, Cree’s chief executive officer Gregg Lowe said, “In 5G, we continue to believe this is a multi-year expansion, with major traction coming. There have been a number of recent announcements coming out of Asia pointing towards growing 5G momentum in that region. While the global pandemic has further delayed some rollouts in other regions, we continue to be well positioned to support this global expansion.” (Source: “Cree, Inc. (CREE) CEO Gregg Lowe on Q4 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 18, 2020.)

Analyst Take

At the end of the day, I wouldn’t call CREE stock a slam dunk. The latest economic downturn has led to a slowdown in auto sales, which may impact the development of electric cars. Meanwhile, the company’s negative bottom line number may keep conservative investors on the sidelines.

Still, in the longer run, I have no doubt that we’ll be using 5G networks and our roads will be filled with a lot more electric cars. If you are looking for 5G stocks or EV stocks, Cree, Inc. deserves to be added to the watch list.