Cree’s Prospects Remain Bright As LED Adoption Rises

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CREE: Cree logo
CREE
Cree

In line with expectations Cree (NASDAQ:CREE) reported revenues of $391 million in Q1 2014, a 4% sequential and 24% annual increase. Additionally, backed by higher lighting demand, benefits from LED bulb cost reductions and higher fixture sales the company witnessed a 1% q-o-q and a 1.8% y-o-y growth in gross margins. Its net income climbed by 89% annually.

Despite meeting its expectation for the quarter, Cree’s stock price declined by over 10% in after-hours trading yesterday as its Q2 2014 guidance (mentioned below) was below the market consensus estimate. Nevertheless, we continue to believe in Cree’s long-term growth potential. LED penetration is expected to increase in the future and being one of the leading global LED manufacturers, we think Cree will benefit from the trend. Ending Q1 2014 with $1.1 billion in cash, no debt, the company has a strong balance sheet which gives it the ability to invest in growing its business and respond to new market opportunities.

We are in the process of updating our price estimate of $63 which is at a 15% discount to the current market price of $74.

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See Our Complete Analysis for Cree Here

Four Point Strategy To Drive Growth In Fiscal 2014

In its Q1 2014 earnings call, Cree highlighted four strategies with which its aims to drive growth in fiscal 2014.

1. Lead with innovation across its product portfolio and drive cost parity with conventional technologies. The Cree LED bulb available for $10 and below is a case in point.

2. Build the Cree brand in commercial as well as consumer lighting segments by expanding its product offerings and investing in marketing the value of its LED bulb and LED lighting products to consumers the end users.

3. Focus on select market segments where it can upgrade existing lighting products.

4. Build on its product momentum gained in fiscal 2013 and continue to increase revenues and profits.

Global Shift To LED Lighting; Cree Is A Leader In Lighting Products

A growing global shift towards LED lighting helped fuel Cree’s top line growth in Q1 2014. The company saw an 11% sequential rise in its lighting sales driven by growth in LED fixtures and marked a slight increase in LED sales. Cree has a fully integrated vertical lighting model and is the market leader in both LEDs and LED lighting products which places it in a strong position to leverage growth in LED adoption. Product innovation in the last few quarters has opened new applications and improved LED payback, in turn driving demand for Cree’s products.

Cree’s primary goal is to take market share from traditional technologies by driving LED demand via new product innovation. With LED lighting accounting for only 1% of all U.S. sockets, LEDs remain a largely untapped opportunity. [1] In the long run, the company aims to drive mass LED adoption and achieve 100% upgrade to LED lighting by its customers.

Below are some recent product launches and developments that reiterate our belief of Cree’s market share rising in the future –

Cree LED Bulb: Cree hit a milestone in driving LED adoption earlier this year by launching a LED bulb for as low as $10. Cree’s new LED bulb consumes 84% less energy and provides similar levels of brightness compared to traditional bulbs. It claims that its LED bulb is the biggest announcement in the lighting industry in the last few years and is seeing tremendous success at the Home Depot stores.

Energy Star Label: Earlier this month, the Cree LED bulb earned the ENERGY STAR label which means these bulbs now qualify for incentive rebates through certain local utilities. With the rebate the Cree LED bulbs will be available for under $5. Cree expects these rebates to contribute to higher LED bulb sales in the current quarter.

– True White Series: Cree became the first company to comply with the recent voluntary standard set by California regulators to make bulbs more closely resemble the warm white light from traditional incandescents. The company launched a new LED bulb, the TrueWhite series, which comes close to the quality of light from a 60-watt incandescent. Available in the range of $18-$20, the Cree LED bulb has a color rendering index (CRI) of 93 and a score of 100 is the closest to natural light that a bulb can get. The True Light bulb uses 78% less energy and lasts 25 times longer compared to traditional incandescent light bulbs.

– $99 Street Light: Cree’s XSPR Series Street light is the first $99 LED streetlight that is designed to compete head-on with low-cost, high-pressure sodium streetlights in residential applications, while delivering 65% energy savings and a significant upgrade in light quality.

LEDs offer energy savings of 50%-60%, leading to lower greenhouse gas emissions and a much higher lifespan compared to conventional technologies. The shrinking price gap between LEDs and incandescent bulbs will accelerate LED demand in the future. With increased sales of lighting products, higher gross margins and improved operating leverage across its business, Cree is confident of improving its top-line as well as bottom-line in the future.

Q2 2014 Outlook

– Revenue in the range of $400 million to $420 million, primarily led by strong demand in lighting.

– GAAP and non-GAAP gross margin to be 37.8% and 38.5%, respectively.

– Operating expense to increase by $5.5 million.

– GAAP and non-GAAP net income to be between $26 – $32 million and $44 – $50 million, respectively.

– GAAP and non-GAAP EPS in the range of $0.21 – $0.26 and $0.36 – $0.41 per diluted share, respectively.

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Notes:
  1. Cree Management Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, October 22, 2013 []