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) and Fastly, Inc. (FSLY) have been downgraded by analysts. So, we think it could be wise to avoid these stocks now.

Cree, Inc. (CREE)

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)

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 the demand for FSLY’s services could be flat after the first quarter of 2021, and management could issue conservative second-quarter guidance.

Revenues for the fiscal year ended December 31, 2020 improved 45% year-over-year to $291 million, driven by robust demand for its edge platform and enterprise customer growth. In fact, its total customer count increased to 2,084 from 2,047 at the end of third quarter of 2020. However, its net retention rate during the fourth quarter declined to 115% versus 122% in the prior quarter. Furthermore, FSLY reported $96 million net loss  for the full-year 2020, widening from the year-ago $52 million loss.

FSLY has recently expanded its investments in the Web Assembly ecosystem, reinforcing its belief that this emerging technology facilitates a more  secure and flexible future for delivering websites and applications. Notably, even though  web-usage across the globe is on a rise, lower-than-expected usage from its largest customer, TikTok, last year was a major headwind for the company. A pullback in the  remote-working environment coupled with its lost traffic is certainly raising doubts about  the demand for FSLY’s services.

FSLY’s poor prospects are also apparent in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system. FSLY has an F grade for Value, Sentiment and Quality also. In the 89-stock Technology – Services industry, it is ranked #75.

To access additional POWR Ratings of FSLY for Growth, Momentum and Stability, click here.

CREE shares were trading at $94.09 per share on Wednesday afternoon, down $0.16 (-0.17%). Year-to-date, CREE has declined -11.15%, versus a 11.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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