The Nexxus of the LED Universe

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 |  Includes: CLRK, CREE, RVLT
by: Wall Street Mayhem

Nexxus Lighting Inc. (NEXS) (formerly Super Vision International) designs, manufactures, and markets light-emitting diodes (LEDs) and fiber optic lighting products. Nexxus products are primarily used for commercial, architectural, and signage applications.

Recently, companies focusing on LED lighting have seen dramatic moves in their stock prices due to legislation banning the use of incandescent bulbs resulting in increased investor attention. Color Kinetics (CLRK) and Wall Street Mayhem pick Cree Inc. (NASDAQ:CREE) have seen their stock prices jump 30% and 15% respectively in the last two weeks. Although Nexxus is a more speculative pick than Cree or Color Kinetics, Nexxus should also benefit from the growing demand for LED lighting and the recent increased investor attention on the LED sector.

Nexxus manufactures and sells the Savi line of LED bulbs with True White Technology. The Savi line of LED bulbs reduce energy costs by about 75% and they last 15 to 25 times longer than traditional incandescent bulbs. Savi LED light bulbs are designed to last up to 5 years when operated continuously. Unlike fluorescent lighting, the Savi LEDs produce clean white light and they are environmentally friendly because they do not contain mercury and they require no special disposal procedures.

In December of 2006 Nexxus reached a comprehensive settlement with Color Kinetics over patent infringement issues. Nexxus agreed to pay Color Kinetics a settlement fee and Nexxus was granted a royalty bearing license allowing Nexxus to continue manufacturing and selling certain LED lighting systems including the Savi line of LED bulbs. As part of the settlement Nexxus also granted Color Kinetics a royalty free license to the LED patent #4,962,687 owned by Nexxus.

Although Nexxus had hoped to emerge from these court proceedings with a clean patent portfolio, the settlement allows Nexxus to continue manufacturing and selling the Savi LED line while paying reasonable royalty rates. In the first quarter, gross margin dropped from 43% to 41% after the company started paying royalties to Color Kinetics.

On March 31, Nexxus released financial results for the first quarter of 2007. Total revenue was down 10% from the first quarter of 2006, but revenues in the commercial lighting division were up 30% due to increased LED sales. The decrease in total quarterly revenue was due to a decrease in sales in the pool and spa market. However, sales of commercial LED lighting systems were strong and the company forecast continued rapid growth in this sector.

Although Nexxus is a small company that is currently not profitable, it is well positioned to benefit from increasing demand for LED lighting solutions. In late March, Nexxus moved to a larger more cost effective manufacturing facility and the Nexxus Savi line is one of the first complete lines of LED light bulbs that can be used in existing lighting systems as well as new construction.

Legislation banning incandescent light bulbs is picking up steam sending shares of Color Kinetics and Cree significantly higher. Although Color Kinetics and Cree are the obvious investment choices to take advantage of the growing demand for LED lighting, as investors continue to focus on environmentally friendly LED lighting solutions, shares of Nexxus have the potential to realize gains similar to those recently seen in Color Kinetics and Cree.

Nexxus is a risky investment, but the current media and investor attention focused on LEDs could propel shares higher. For investors that are new to LED companies, Cree and Color Kinetics are safer investments, but for those investors that have already profited from Cree and Color Kinetics, we recommend taking some profits on CREE and CLRK and moving the proceeds into Nexxus.

Suggested Trades:

BUY NEXS near $4.95

Full disclosure: Wall Street Mayhem is long NEXS, CREE, and CLRK

NEXS CREE CLRK 1-yr. chart:

NEXS CREE CLRK Chart

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