Can Cree Hurt General Electric's Multi-Billion Dollar Market Opportunity?

| About: Cree, Inc. (CREE)

Low energy consumption, long-lasting, and being economical have been the reasons behind the success of LEDs (light-emitting diodes). The LED lighting industry could command 80% of the lighting market by 2020, accounting for $94 billion revenue. Cree (NASDAQ:CREE) is one of those companies that are busy finding ways to benefit from the LED light market. The growth of LEDs is being driven by the replacement of high pressure sodium lamps, halogen lights, incandescent bulbs, CFL, and fluorescent lights. This shift in lighting has led companies like Cree and General Electric (NYSE:GE) to develop LED solutions as they move to make their presence felt in this market.

The new player

Cree is a gradually establishing itself as a leader in the LED market. The company provides an integration solution for LED lighting, components and LED chips. Integrated solutions help Cree in generating higher margins due to the low cost of manufacture of LED lighting solutions. The company possesses a strong product portfolio that includes LED bulbs & fixtures, colored LED chips, high-brightness LEDs, lighting-class power LEDs, power-switching devices and RF devices.

Cree's innovative vision is demonstrated by a series of new product launched by it for new generation LED lighting solutions. One such product is the XSPR LED, whose prime focus is on outdoor lighting. The market for the outdoor lighting (street lights, tunnel lights, flood lights, canopy lights, etc) is expected to grow at a CAGR of 26% from 2010 to 2015. Cree is aggressively looking to penetrate this market and XSPR has been developed for this purpose. Another product released by CRree is its UR series of LEDs, an upgrade kit that recovers its own cost in less than two years and can be implemented with ease.

Cree is doing well to benefit from this market and recorded revenue of $375 million in the fourth quarter, an impressive jump of 22% from the year-ago period. Another product that was launched recently is the XLamp XH Series LED, a high performance and reliable ceramic LED for the mid-power range. This new product release has helped Cree acquire a wider customer base and management is confident that this growth will continue in the future.

Also, the University of North Carolina has selected Cree to provide LED lighting solutions to reduce energy usage and the projected savings are expected to amount to around $25 million in seven years. This illustrates the efficiency of LEDs offered by Cree and is certainly some good publicity that could help the company land more contracts in the future.

However, in the LED bulb market, the Utilitech brand of LED bulbs sold at Lowe's seem to offer some competition to Cree. But Cree led bulbs have an economic advantage over Lowe's LED bulbs in terms of power consumption. The Utilitech 60 watt LED bulb used 13 watts of power while an equivalent 60 watt Cree LED bulb consumes 9.5 watts.

A price war

However, there is an impending price war in the LED lighting industry. Cree was the first company to retail its 40 watt equivalent LED light for below $10. Soon to join in was Philips, which started retailing its 60 watt equivalent LED light at $9.97 after utility rebates. Retail giant Wal-Mart also joined in and started selling 60 watt equivalent LED lights in its store, priced at $8.80. Ideally investors might think that price wars are bad for businesses. But in the LED lighting industry, this could be a positive. Lower prices will drive sales and as companies ramp up production of LED bulbs, cost of manufacturing will decline.

Wal-Mart has been making steady efforts to increase the sale of LED lights at its stores with new package designs. This new packaging strategy provides various information to a buyer related to savings and luminosity of the LED bulbs, making purchasing easy.

GE's position

GE is also selling 60-watt equivalent LED lights at Wal-Mart for a price tag of $11.

GE has been a turnkey lighting solution provider to various corporate institutions and governments. Not to forget, GE has been gaining global acceptance in outdoor lighting, mainly street lights. It has bagged various turnkey contracts for replacement of conventional street lights by LED lamps. The 2016 Summer Olympics have given the LED lighting project to GE. Such projects will open up avenues for GE to obtain various other lighting contracts at sports complexes globally, strengthening its already strong presence in the market.

General Electric is bolstering its product offerings with various LED lighting solutions. GE's LED segment has turned in robust results in the past. It recorded 24% growth in 2011, and an even more impressive 35% growth in 2012. GE is confident that this growth pattern will continue and considering the growth in the LED market, it isn't much difficult to see why the company expects so.

To further strengthen its LED lighting portfolio, GE acquired Albeo Technologies, which manufactures LED fixtures, in December last year. This acquisition helped GE offer a LED lighting solution to enterprise customers. GE has been deploying its LED lights in various industries. For instance, the company fitted frozen food retailer M&M Meat Shops' locations with its LED refrigerated display lighting solutions, enabling the retailer to save $600,000 in lighting costs every year.

GE has aggressively expanded its LED light offerings. Moreover, GE's size could turn out to be an advantage for it since the company enjoys economies of scale and hence, it could produce its LEDs at even lower costs when it ramps up production.


Investors looking for a pure play LED company to benefit from the rapid growth of LEDs should consider Cree for their portfolio. However, the more cautious ones might consider GE, but the conglomerate nature of GE's business doesn't allow investors to benefit from the expected growth of LEDs. So, my pick to benefit from LED growth would be Cree. What is your opinion?

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.

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