Last week, LED lighting specialist Cree (NASDAQ:CREE) was identified as one of 2014's 50 Smartest Companies in MIT Technology Review's annual list of the world's most innovative technology companies. The company has been growing via breakthrough innovations and improving gross margin, however, the stock price has been inconsistent. Cree's earnings have climbed 54% in each of the last two quarters, but the stock price hasn't reflected this growth and is down almost 23% since August 2013. The drop may be frustrating for Cree investors, but the company's prospects look very strong.
The company released its quarterly report in January. The numbers were impressive as the company easily beat the Wall Street's estimates. Non-GAAP earnings came in at $0.46 per share, up 54% y-o-y, way above the analysts' estimate of $0.39. Top-line also rose 20% over the year-ago period and came in at $415 million, ahead of the consensus of $412 million. But the shares didn't pop as the company's guidance fell short of the consensus estimates. However, investors shouldn't worry as Cree has always been a tad bit conservative with its guidance and its long-term prospects look great.
The Bulb Ban And The Opportunity
The standard incandescent light bulb as we know it is now a thing of the past. As per the 2007 Energy Independence and Security Act, it is no longer legal to produce or import 40-watt and 60-watt incandescent bulbs in the U.S. The 100-watt and 75-watt variants were phased out in 2012 and 2013, and the latest ban has completely knocked out the incandescent bulbs. Incandescent bulbs have not changed much since Thomas Edison first invented them. These bulbs have a very low efficiency and convert only about 10% of their energy into light.
The ban bodes well for the LED industry, which has been growing at a fast pace in the previous years. The ban clearly indicates that the LED market is not going to run out of fuel anytime soon and will grow considerably in the coming years. Presently, LED accounts for merely 1% of the U.S. lighting market, signifying that it has a lot of room to grow. Digitimes expects the LED market to grow 25% to $5.7 billion in 2014, while Lux Research's report implies that it will grow 12-folds to $25 billion by 2023.
Details from the report include:
· Cost of LED packages will drop more than 80% thanks to improved efficiency and increased manufacturing yields.
· The recessed modular market will increase from $1.5 billion in 2013 to $14.5 billion in 2023, by replacing incumbent products like fluorescents.
· The secondary optics market will rise to $6.9 billion in 2023.
Growing Via innovations
While General Electric and Koninklijke Philips are diversified companies, Cree is a pure-play LED company. This is the primary reason why I think investors should prefer Cree over its peers. Being a pure-play LED company gives Cree the chance to focus on innovations, which in turn will benefit the company in the long run. Cree's inventive vision is demonstrated by a series of new product launches over the last few months. In August of 2013, Cree launched the first $99 street light, called the XSPR, as a direct replacement for residential street lights. The XSPR delivers better lighting while consuming 65% less power, and the company claims that it is an ideal replacement for the outdated HID luminaries currently installed in North America.
The company further extended its outdoor lighting portfolio by adding the advanced XSP Series Area and the XSPW Wall Pack LED luminaries to its XSP series. These LEDs are not only 65% more efficient, but also nearly eliminate maintenance costs. The company says: "These new luminaires provide high performance, nearly maintenance-free lighting for up to 100,000 hours, ending the need for compromised metal halide alternatives."
The market for the outdoor lighting is expected to grow at a CAGR of 26% from 2010 to 2015 and Cree's initiatives will help it to make the most of this opportunity. The company's partnership with Home Depot (NYSE:HD) has been fruitful until now and the company has continued to reinvest the profits from the operations into further enhancing its product portfolio.
The company recently added the 75-watt replacement bulb to its product line. This new bulb is expected to last 25 times longer and consume 82% less energy. In addition, Cree also introduced the SmartCast technology this month. This is the first self-programming wireless lighting control system that decreases energy consumption by more than 70% at less than 50% of the cost of traditional lighting controls.
Norbert Hiller, Cree's executive VP of lighting, said:
"Commercial lighting customers have resisted installing traditional lighting controls because of excess cost and complexity, and the majority of those who have installed controls stop using them as intended after the first year because they're difficult to maintain. Cree SmartCast™ Technology eliminates these barriers to adoption and delivers the enormous benefit of significantly greater energy cost savings, allowing customers to finally realize the promise of lighting controls."
This is the company's first foray into the lighting controls market, which is estimated to grow 200% to $5.3 billion by 2020.
Going forward, Cree will continue focusing on developing new products, which is why it is a good bet for investors who are looking to benefit from the growth of LED market.
General Electric's Position
General Electric was the leading producer of incandescent light bulbs and the ban will certainly have a negative effect on the company. GE, however, also manufactures CLFs and LEDs and is more than capable of offsetting any loss it bears due to the death of the incandescent bulb market.
General Electric's LED segment has been growing very nicely. The company recorded a 35% jump in sales in 2013 and is looking to sustain its run in 2014 as well. General Electric enhanced its LED portfolio by acquiring Albeo Technologies in 2012, which exposed the company to the enterprise sphere. GE is now looking to build upon this acquisition. The company is so confident about growth that it has shifted the Boulder, Colorado-based team to a much bigger site in nearby Longmont. GE has been deploying its LED lights in various industries and will ramp up its production in order to make the most of this acquisition. In addition, the company is also providing custom lighting solutions and implementing turnkey projects.
General Electric does possess an advantage over Cree. It's certain that the increasing competition in the LED market will give rise to a price war, and GE being the bigger company could produce its LEDs at a lower price when it increases production.
Just to be clear, this is not an anti-General Electric article. The LED market is growing rapidly and both Cree and General Electric have taken the right measures to capitalize on this growth. GE's LED market share may continue to grow in 2014; however that doesn't mean its share price will go up as well. Since GE is a big company, it might incur losses in other segments, which can offset its gains of the LED market. Again, I'm not implying that it will incur losses, but since GE's share price depends on multiple segments, I think investors looking to benefit from the LED market should prefer Cree.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.