Does innovation in a industry dating back to the 1800’s pay?
Cree, Inc. (NASDAQ:CREE) certainly hopes so. It is betting on technology it has refined over the last quarter century to replace something that has been around since before the automobile–the incandescent light bulb.
The company recently announced a breakthrough in its line up of light emitting diode (LED) bulbs, which allows the 40W model to be purchased for less than $10. Higher wattage bulbs cost a bit more.
It may seem like a lot of money to pay for a simple item. However, according to the company its product will last 25 times longer than the typical incandescent version, which on average lasts for about a year, assuming 3 hours of usage a day. In addition, LED technology uses around 80% less electricity. A “40W” bulb actually consumes only 9W of power. This will result in significant savings on utility bills.
How will this help Cree, Inc. (NASDAQ:CREE)? There is a lot of potential for growth as the estimated annual market for new light bulbs in the U.S. is $3.6 billion. If Cree, Inc. (NASDAQ:CREE) can increase market share because of its innovation it could result in higher sales and profits. The company reported revenue of about $1.1 billion over the last 12 months, and that has been rising at a compounded rate of 20% per year since 2007. The stock price has soared 150% over the same period, handily beating the overall market by a 5:1 margin. This was in spite of a tumble in 2011 when earnings declined at the company. Luckily growth is back in the black now.
Another company is hoping LED bulbs take off. Cree, Inc. (NASDAQ:CREE) bulbs are sold at The Home Depot, Inc. (NYSE:HD) stores, which means that the home improvement leader can piggyback off the LED success and reap some gains.
The Home Depot, Inc. (NYSE:HD) is also banking on continued good news in the housing market, which is finally coming out of the doldrums after the bubble burst a few years ago. The company is probably watching things closely over at the Fed. If the U.S. central bank allows interest rates to rise by cutting back on its bond buying frenzy it could put a stop to the rise in home purchases and result in less building activity and renovations. It could mean less light bulbs too.
If the bond buying continues and the housing market keeps expanding, expect The Home Depot, Inc. (NYSE:HD) to keep growing as it has over the last several years. The stock price has jumped thanks to solid earnings increases in the recent past.