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Cree, Cirrus Logic Lower After Bank of America Cuts to Underperform

Cree and Cirrus Logic fell after Bank of America cut its rating on the semiconductor makers to underperform from neutral.

Cree  (CREE) - Get Cree, Inc. Report and Cirrus Logic  (CRUS) - Get Cirrus Logic, Inc. Report shares fell, after Bank of America cut its rating on the semiconductor makers to underperform from neutral.

It kept its $93 price target on Cree. The stock recently traded at $85.24, down 3%.

“CREE holds a unique portfolio of silicon carbide and gallium nitride assets supporting high-growth opportunities in electric-vehicle and 5G base stations,” BofA analysts wrote.

“However, we remain concerned about:

“1. Gross-margin pressure as CREE is impacted by higher cost of old [fabrication plants] as new fabs ramp.

“2. A higher [capital-spending] burden, as CREE ramps new fabs, is a headwind to free cash flow.

“3. Rising competition from well established auto/industrial vendors like STMicroelectronics  (STM) - Get STMicroelectronics NV Report, Infineon  (IFNNY) , and ON  (ON) - Get ON Semiconductor Corporation Report, which have larger research and development budgets.”

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As for Cirrus, BofA kept its price target at $92. Cirrus recently traded at $84.60, down 4%. It’s up 6% over the past six months.

On the upside: “We are impressed with management’s ability to innovate organically and drive new content growth opportunity within and outside Apple  (AAPL) - Get Apple Inc. Report (about 80% of sales), and also flag recent stock buying,” BofA analysts said.

“But we believe the stock upside potential is limited.” The negative factors:

1. “CRUS is trading at 16 times 2022 earnings, above its historical 15.5 times median, and importantly above the multiple of smartphone exposed peers Skyworks  (SWKS) - Get Skyworks Solutions, Inc. Report, Qorvo  (QRVO) - Get Qorvo, Inc. Report and Qualcomm  (QCOM) - Get Qualcomm Inc Report. …

2. “CRUS is most exposed to customer concentration risk. …

3. “Pricing pressure. …

4. “Lower prospects for cash returns and mergers and acquisitions. …”