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Investment Overview for Cree (NYSE:CREE)
- LED products market size: The LED market size is based on our assumptions of the penetration of LED into the general lighting market as well as the growth in the use of LEDs for backlighting purposes. However, if LEDs do not become cost effective for consumers, the market penetration in lighting segment might lag and hence the market size for LED products will be smaller. We currently estimate the global LED market to cross $30 billion by 2020. However, if the market size increases to only 20 billion, there would be a 20% downside to our price estimate. On the other hand, if the LED adoption increases faster than expected and the LED market reaches $40 billion, there would be a similar upside to our current price estimate.
- LED products gross margin: We forecast the LED products gross margins to increase to 44% by 2020. However, with big electronic manufacturers like Samsung entering the market, there is an increase in competition. This might result in lower selling prices for products and hence lower gross margins. If the gross margins were around 36%, there would be a 15% downside to our price estimate. With an improving demand supply situation in the market, the gross margins could increase to 50%, in which scenario there would be a more than 10% upside in our current price estimate.
Cree, Inc. is a leading innovator of lighting-class light emitting diodes (LEDs), LED lighting and semiconductor solutions for wireless and power applications. Its products are used in applications such as general illumination, video displays, automotive, electronic signs and signals, variable-speed motors and wireless systems.
Its LED products consist of LED components, LED chips, LED lighting products and SiC wafers. As it develops and improves LED technology, and the market continues to focus on energy efficiency, the potential market for LED lighting will continue to expand.
LED products segment is the most valuable segment for Cree, accounting for around 70% of its overall value and over 90% of its revenues. Cree is a strong competitor in the LED market, and we expect it to deliver strong performing products in the market. It has set out to expand its manufacturing capacity, which can lead to an increase in its market share in the future.
Power & RF products
Despite contributing less than 10% to Cree's revenues, Power & RF segment contributes less than 5% to Cree's value. This is due to a slower growth rate of Power & RF revenues as compared to the LED market.
Lighting market is still unsaturated
With the demand from the backlight market nearing saturation, the expanding general lighting market is slated to drive LED sales in the future. Estimated to be worth US$10 billion in 2012, up almost 100% from US$5 billion in 2007, lighting is expected to generate significant growth for the LED industry in the future.
LED Inside estimated the LED lighting segment to increase from around $1.5 billion in 2012 to approximately $8 billion by 2015, a CAGR of over 70%.
LED's cost competitiveness is increasing
With major countries promoting LED lighting, LED lumen efficiency has been improving and the prices for LED lighting are estimated to drop by 20-30% every year. This means that soon LED lighting would be an affordable option for everyone, at which point the lighting market would witness a shift from traditional (incandescent and fluorescent) sources of light to LEDs.
Cree recently introduced a new game-changing series of LEDs. Available for as low as $10, Cree’s new LED bulbs consumes 84% less energy and provide similar level of brightness compared to traditional bulbs.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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