Historically, Cree Inc. (CREE) has operated in volatile markets, as has been clear over the past couple of years. In 2012, a surplus in the LED market, a consequent decline in prices and downward pressure on margins were the key trends that plagued the LED industry. Though Cree, a leading innovator of LEDs, closed its FY (ending June) 2012 with an 18% increase in revenue, it registered a 70% decline in net income on account of higher R&D spending to support new product development, increasing price competition and an industry shift in product mix toward lower margin fixtures.
The LED market’s dynamics have improved considerably over the past year, primarily driven by the launch of new innovative products and the closing price gap with traditional lighting. Backed by strengthening demand across business segments – LEDs, Lighting & Power and RF – Cree reported $1.4 billion in revenue for fiscal 2013 (19% annual increase). In addition to strong sales, the improving operational efficiency increased gross margins by 2.6% in fiscal 2013. The company closed fiscal 2013 with more than $1 billion in cash and no debt. The strong balance sheet gives it the ability both to invest in growing its business and to respond to new opportunities in the market. In sum, strong growth of lighting products in the revenue mix has reduced volatility over the several quarters.
Our price estimate of $61 for Cree stock is in line with the current market price. In this article we explain why we believe that Cree will retain its growth momentum in 2014.
Accelerating Shift To LED Lighting
With widespread awareness about their economic and environmental benefits, LED adoption is on the rise. LEDs offer energy savings of 50%-60% over incandescent alternatives, leading to lower greenhouse gas emissions and a much higher lifespan compared to conventional technologies. LEDs offer a cost effective option to lower global electricity consumption, especially as economies of scale allow for lower average selling prices. As countries around the world aim for greater economic and social development, LED adoption should accelerate in coming years.
The general lighting market is expected to be the primary growth driver for the LED industry as demand from the backlight market nears saturation. LED lighting accounts for 15%-20% of the global lighting market at present, and the LED market share is expected to rise at a rapid pace over the next decade. Improving economic conditions, innovative new products (such as the LED bulb available for $10), and the narrowing price gap between LEDs and conventional technologies, are all key factors driving LED adoption.
Cree’s Leadership In Lighting Products To Increase Its Market Share
Cree has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. Its product innovation has opened new applications and improved LED payback, in turn driving demand for its products. The company remains committed to driving LED adoption and closing down the gap with conventional lighting through innovation. In the long run, it aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers.
Because LED lighting accounts for only 1% of all U.S. lighting sockets at present, LEDs remain a largely untapped opportunity. Cree’s primary goal is to take market share from traditional technologies by driving LED demand through new product innovation.
Listed below are some product launches and development in 2013 that support our belief about Cree’s market share increasing next year and beyond:
Cree’s low-cost LED Bulb: Cree hit a milestone in driving LED adoption earlier this year by launching a LED bulb for as low as $10. The new bulb consumes 84% less energy and provides similar levels of brightness compared to traditional incandescent bulbs. The company claims that its LED bulb is the biggest industry innovation in years and that it is seeing tremendous success at Home Depot (HD) stores. This month, Cree expanded its LED bulb portfolio with a new 75-watt replacement bulb which looks and lights like a traditional incandescent bulb but uses 82% less energy and is designed to last 25 times longer.
Energy Star Label: Last month, the Cree LED bulb earned the ENERGY STAR label, which means these bulbs now qualify for incentive rebates through certain local utilities. With the rebate, the Cree LED bulbs will be available for under $5. Cree expects these rebates to contribute to higher LED bulb sales in the current quarter.
True White Series: Cree became the first company to comply with the recent voluntary standard set by California regulators to make bulbs more closely resemble the warm white light from traditional incandescent bulbs. The company launched a new LED bulb, the TrueWhite series, which comes close to the quality of light from a 60-watt incandescent. Available in the range of $18-$20, the Cree LED bulb has a color rendering index (CRI) of 93 and a score of 100 is the closest to natural light that a bulb can get. The True Light bulb uses 78% less energy and lasts 25 times longer compared to traditional incandescent light bulbs.
$99 Street Light: Cree’s XSPR Series Street light is the first $99 LED streetlight designed to compete head-on with low-cost, high-pressure sodium streetlights in residential applications while delivering 65% energy savings and a significant upgrade in light quality.
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