Cree, Inc. (NASDAQ:CREE) is a market leading innovator of lighting-class LEDs, LED lighting, and semiconductor solutions for wireless and power applications. In the first quarter of fiscal year 2013, the company’s revenues increased 17% year-on-year to a record $316 million. Its quarterly net income also increased 26% year-on-year to $16.1 million. The stock was trading around $25 during that time, but this phenomenal performance led to a sudden bull run.
Similar appreciation took place when the second quarter results of fiscal year 2013 were announced in January. These results were even more phenomenal with an increase of 14% in revenues over last year to $346 million and an increase of 69% in net income to $20.4 million. The stock has given a return of more than 100% since October 2012. But the stock has now reached a level where it can considered overvalued. Still, there is a reason for the investors to hold on to the stock: the expected boom in the world LED lighting market.
LED lighting market
According to McKinsey, the LED market will grow seven-fold to almost 65 billion euros by 2020, accounting for the bulk of global demand for lighting. It expects the market for replacement bulbs to reach its peak next year and then slow as LED bulbs lasts significantly longer than the other types of lamps.
According to Greg Sebasky, CEO of Philips’ North American unit, the market is expected to grow by 40 percent in 2013. Currently the LED bulbs account for only 1% of the total 5.6 billion bulbs used in residential homes. But they are expected to replace at least half of the world’s fluorescent bulbs in ten years. Though the costs of LED bulbs are much higher, they have been gaining acceptability because they are eighty percent more efficient and can last for over a decade.
Companies like Cree, Inc. (NASDAQ:CREE), Philips, Osram etc. have been trying to bring the cost down and their efforts have recently shown some results. Metal organic chemical vapor deposition (MOCVD) technology is expected to drive down the cost of LEDs and help spread LED technology into applications such as backlighting and general lighting.
Cree’s LED innovations
The company has announced a series of LED light bulbs that start at just $10. This gives consumers a reason to switch to LED lighting. These bulbs shine almost as brightly as the comparable incandescent bulbs, while saving 84 percent of the energy. The light throwing pattern is also homogeneous. They can be dimmed, placed upside down, don’t contain mercury, and are far more efficient than many incandescent. It has recently announced the next performance upgrade as well. Select versions of this new series will provide up to 20 percent additional energy savings and increased lumen output as compared to 15 percent in other versions. Cree, Inc. (NASDAQ:CREE) currently holds 7.7% of the total LED market share, but this is expected to rise in the next few years.
Chinese LED lighting market is expected to grow with a CAGR of 49%. Therefore Cree has expanded its manufacturing facilities in China over the years to make use of this opportunity. Cree acquired Rudd Lighting, one of the pioneers in LED lighting, in August 2011. This will further increase the company’s product range to both indoor and outdoor lighting and therefore will help it in capturing more market share.
Koninklijke Philips Electronics NV (ADR) (NYSE:PHG) has been emerging as a major competitor for Cree in the LED segment over the last few years. It recently announced that it has developed an LED tube-light that will be more efficient than the best fluorescents in the market. The company describes it as the ‘world’s most energy-efficient LED light.’ The prototype is expected to hit the market by 2015. Philips has also made LED bulbs whose brightness and color can be controlled from a smartphone application. Though Philips is a much diversified company, its lighting business can impact Cree’s revenue in the time to come.
Microchip Technology Inc. (NASDAQ:MCHP)
manufactures specialized semiconductor products for a range of embedded control applications. Its forward P/E multiple is relatively low compared to its industry peers. Its stock has been in an upward trend since December last year. The company’s debt is on the higher side, but its dividend payout ratio is phenomenal.