Analysts Say Cree Needs More Mid-Market LED Exposure

Cree (NASDAQ: CREE) fell more than nine percent on a weaker-than-expected sales of light-emitting diode products and a narrowing margin.

Uncertainty over gross margin in upcoming quarters led UBS' Stephen Chin to maintain a Neutral rating on the shares, although he said the margin may stabilize if the company can shift sales to more mid-power LEDS.

The company currently dominates the lower-margin market for high-power diodes and Chin cut his target to $50 from $55.

But Susquehanna's Medhi Hosseini said while the mid-power demand grows at the fastest rate in the industry, "Cree is unable to add any mid-power manufacturing capacity" which lowers the value of its shares.

Hosseini cut his target to $42 from $55 and maintained a Neutral rating.

Likewise Deutsche Bank's Vish Shah cut his target to $47 from $56 and maintained a Hold. Although Shah expects double-digit sales growth "the shares will remain range-bound" until momentum in the high-power segment improves.

D.A. Davidson's Avinash Kant maintained a Buy rating and $70 target and said, "We expect strong top-line growth for Cree over the next five years as adoption of LEDs grows."

With Cree shares falling Wednesday, UBS' Chin noted a similar scenario unfolded following the company's release of March quarter's results and shares pulled back.

Cree, which currently has $200 million remaining in its buyback authorization, jumped in last March with a 2.1 million-share buyback, stabilizing the share price.

Cree traded recently at $45.07, down 8.3 percent.