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Why Cree Stock Just Popped 10%

By Rich Smith – May 20, 2020 at 12:37PM

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Despite the LED lighting company's obvious overvaluation, J.P. Morgan likes the stock.

What happened

Shares of LED lighting specialist Cree (WOLF 0.33%) were up 9.8% as of 11:40 a.m. EDT Wednesday in response to an upgrade from JP Morgan.

The investment bank upgraded shares of Cree from underweight to neutral, and assigned the stock a $60 price target that implies about 10% further upside after Wednesday's bump.

LED light lighting string light bulbs

Image source: Getty Images.

So what

Because the company has been unprofitable over the past 12 months, Cree shares can't be assigned a P/E ratio. And it's expected to earn so little next year that its forward P/E ratio is an exceptionally high 232, according to Yahoo! Finance data.

Acknowledging that "CREE is trading at massive multiples of 2020 and 2021 P/E and EV/EBITDA multiples," JP nonetheless asserted in a note covered by StreetInsider.com that the stock is "under-valued taking a longer-term view of the company's earnings power and discounting back to the current day." 

Because Cree is "leading the transition to [silicon carbide] based power electronics, which we view as an essential enabling platform for next generation EVs, 5G Wireless and grid infrastructure," JP Morgan believes the company has a bright future despite its sky-high stock valuation.

Now what

JP Morgan may be right about that. Still, before jumping on this bandwagon and buying Cree stock, I'd urge investors to consider two things.

First, Cree has a history of losing money -- five straight years of negative earnings, according to data from S&P Global Market Intelligence, and it's on its way to making it six.

Second, while JP Morgan's analysts might be optimistic about Cree, most other analysts are not. In fact, the consensus of analysts on Wall Street is that Cree will continue losing money this year -- and then for two years more after that -- before finally turning GAAP-positive in 2023. By that time, Cree will have lost money for eight years straight.

Before investing in Cree, therefore, you need to ask yourself: After eight years of bottom-line losses, what is it that makes you think year nine will be any different? Indeed, what is it that makes you think Cree will even remain in business long enough to see year nine?

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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