Cree Inc.: A Shining Example of LED Industry Efficiency 16 comments
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I believe that LED’s are going to transform the lighting industry and that the ‘lighting revolution’ will occur faster and with greater demand than expected. I have chosen to write about Cree Inc. (CREE) because it has the industry lead in efficiency which is one of the driving factors in this revolution. Cree has achieved more than 100 Lumens per watt which allows LED’s to economically replace traditional lighting as for example the traditional 60 watt bulb. Cree has a plant in China called COTCO that produces “Xlamps.” Cree is one of the market leaders in the production of LED lighting, and competes with other companies such as Nichia, Osram, and Philips (PHG). Nichia and Osram are not traded on the US exchanges.
Lets begin with some of the advantages of LED lighting. The efficiency of LED’s exceeds that of other forms of lighting. This can save businesses, municipalities, and homes money as it reduces energy consumption. Estimated payback time is about 3 years, and this does not include some of the other benefits LED’s bring such as the cost of disposing of fluorescent lights with mercury. LED’s can be used to replace most if not all forms of non LED lighting products. These statements are measured against existing technology that is now in the process of bringing products to the market. Other advantages include a much better quality of light, no flicker on startup (flicker is immensely annoying if you think about it), varied lighting as in infinite color variations, dimming, and LED’s last longer. The advantages of LED lighting will accelerate the ‘Lighting Revolution’ more rapidly than expected. The pace of the revolution will be limited only by the ability of companies to vertically integrate and execute. Margins, at first, will be high and the only limitation on revenues will be the ability to supply demand.
Cree estimates their market ‘opportunity’ as increasing from roughly 400 million to 3.5 billion in the next four years. I do not consider this an overestimation, it will not be a question of the ‘opportunity’, but the ability of Cree to vertically align and execute. Again, CREE is the leader in lumens per watt which is a measure of efficiency and is related to energy savings. This is Cree’s market advantage and a good one to have in a market place that will be like an infinite opportunity.
Before I write an article that is too one sided let me express some concerns about Cree. As an investor I am most concerned about their ability to vertically align, execute, and compete with some larger companies. Cree makes the LED lights, but these need to be integrated in a fixture and made available to consumers. They might have the advantage in efficiency for a while, but other companies like Nichia and Philips are not far behind. The other companies may show more success at creating an actual product and putting it in front of the consumer. This is an area where Cree seems to have some unsettling weaknesses.
Now that I have discussed concerns let me mention some recent successes that Cree has had in marketing. LED lighting from Cree is being used by the city of Ann Arbor, and the Olympic swimming venue. Cree has formed a collaboration with Duke Energy (DUK) (no small utility), which may lead to customer incentives to purchase LED lights. Cree has a production facility in China called COTCO. COTCO will increase manufacturing capacity and help Cree enter what will be a huge Chinese market. They also have a ‘solutions provider’ network of companies that can vend the final product. However, I did not notice any of the major lighting companies on that list.
Finally, I have to mention the ever present takeover speculation. I think this is unfortunate as it creates a rocky ride for shareholders as people enter on rumors and then the shorts depress prices (maybe its naked shorting by institutional investors that are given special privilege by corrupt authorities to short virtual shares that ordinary investors don’t have.) Anyway this can then lead to sharp rallies as they cover on yet more rumors. Personally I would prefer to see the company grow, on its’ own, and not be taken over. I think this ultimately would offer shareholders the best reward, a reward better than say a 40% increase in price as a result of a takeover. I wish the people buying on rumors and the shorts both would stay away. I would like to sit back and just watch a smooth exponential go up.
Disclosure: I am long CREE.
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This article has 16 comments:
Piper Jaffray upgrades Cree, Inc. (Nasdaq: CREE) from Neutral to Buy and raises its price target from $25 to $30.
The firm said Cree will see several catalysts that will drive earnings growth in 2008:
First, Piper Jaffray said it expects demand to improve for high-brightness LED products in conjunction with backlighting of notebook computers. The firm said LED backlighting with Cree's high-brightness LED's could hit the mass market by 2009.
Next, the firm also said the Olympics in Beijing will likely drive growth as the Chinese government will attempt to "promote its environmental credentials...""
store.lsgc.com/
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The lights seem still a bit pricey for say Wall Mart around 20 - 70. But I say this is getting really close as new homes (I don't think any new homes built recently) but anyway most likely anything new will just start with LED's since thats the most economical starting point.