Steer Clear of These 2 Recently Downgraded Tech Stocks

Steer Clear of These 2 Recently Downgraded Tech Stocks

Posted On May 5, 2021 10:29 pm

The technology sector has been the prime beneficiary of the COVID-19 pandemic because the crisis drove unprecedented demand for connectivity, remote financial transactions, collaborations, and communication-related services. However, rapid progress on the vaccination front around the  globe has subdued the performance of the tech sector so far this year as the world returns to the “old normal.”

Consequently, major tech players have been witnessing a correction as investors shift their investments into quality non-tech stocks that are expected to thrive as the economy recovers this year.

Amid the current market environment,  Cree, Inc. (CREE – Get Rating) and Fastly, Inc. (FSLY – Get Rating) have been downgraded by analysts. So, we think it could be wise to avoid these stocks now.

Cree, Inc. (CREE – Get Rating)

CREE is a semiconductor major that is involved in the manufacturing of Wolfspeed power and radio frequency (RF) semiconductors. The company’s product-line includes silicon carbide (SiC) materials, power-switching devices and RF devices targeted for applications that include electric vehicles (EVs), fast charging inverters, power supplies, telecom and military and aerospace.

Shares of CREE  lost 12.6% intraday on April 29, after investment banking firm, JPMorgan Chase (JPM) downgraded CREE from “Neutral” to “Underweight” in response to  the company’s  results for its fiscal third quarter, ended March 28. The firm noted that CREE’s loss per share widened  during the quarter despite a modest rise in revenues. In fact, JPM believes that this could be attributed to an increased investment by CREE “ahead of ramping demand for SiC materials and power electronics with the accelerating adoption of EVs in 2023-2024.”

In the third quarter, CREE reported a $137.3 million top-line, increasing 20.5% year-over-year, driven by robust consumer demand for SiC. Its gross profit margins were  32% for the quarter, shrinking from the year-ago 36% margin. CREE completed the sale of its LED Products segment during the quarter to shift its focus to making more traditional semiconductors used in technology products. However, the company reported a $0.59 per share loss, compared to the year-ago $0.52 loss per share.

CREE’s management aims to deliver a stronger top line performance because  the company has exited the LED lighting business to become a pure-play semiconductor powerhouse by expanding its manufacturing capacity. However, JPM analyst has indicated that its gross margins could remain depressed this year and that the delayed margin improvement could “weigh on the stock near term given the elevated multiples at which the stock trades.” In fact, CREE’s management expects its net loss per share to widen and lie between $0.59 – $0.63 per share in the fourth quarter.

CREE’s POWR Ratings reflect this bleak outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an overall F rating, which translates to Strong Sell in our proprietary rating system. CREE has an F grade for Growth, Sentiment and Quality also. It is ranked #97 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry.

In total, we rate CREE on eight different levels. To see additional POWR Ratings for Value, Momentum and Stability, click here.

Click here to checkout our Semiconductor Industry Report for 2021

Fastly, Inc. (FSLY – Get Rating)

FSLY is a real-time content delivery network (CDN) company. The company provides services in the areas of delivery, security, streaming media, e-commerce and private CDN. With FSLY, users can manage traffic spikes and mitigate security threats. It operates an edge cloud platform for its primary business services and works with Alphabet’s (GOOGL) Google Cloud Platform to extend infrastructure and application logic to its users.

Analysts at Raymond James downgraded FSLY last week to “market perform” from “outperform.” As a result, the company’s stock has lost 16.2% over the last five trading sessions. FSLY is scheduled to release its  financial results for the first quarter (ended March 31, 2021) after market closes today. Raymond James notes that…

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