Rising Competition Can Reduce Cree’s LED Market Share, Lowering Its Valuation

-22.09%
Downside
80.07
Market
62.38
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CREE: Cree logo
CREE
Cree

Cree (NASDAQ:CREE) is one of the leading LED players committed to driving global LED adoption and closing  the price gap with conventional lighting through innovation. The company has a fully integrated vertical business model and is the market leader in both LEDs and LED lighting products. Product innovation over the last few years has opened new applications and improved LED returns, in turn driving demand for Cree’s products. Cree’s top line has grown at a CAGR of 10% in the last five years.

In late 2013, Cree hit a milestone in driving LED adoption by launching an LED bulb for as low as $10. Cree’s LED bulb is the best selling LED bulb in the U.S. and has helped establish the Cree brand as the leader in LED consumer lighting. [1] Cree’s share in the global LED market has increased from 6.9% in 2007 to over 8% in 2014, as per our estimate. We forecast Cree’s market share to reach close to 10% over our review period. However, rising competition from bigger players can limit Cree’s growth potential in the future. If Cree products loose their competitiveness in the market and the company’s market share declines to 7%, our valuation for Cree will decline by 20%.

Our price estimate of $37 for CREE is almost in line with the current market price.

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See Our Complete Analysis for Cree Here

Continuous Innovation Can Help CREE Leverage LED Growth

A general shift to LED lighting in the lighting market is expected to be the primary growth driver for the LED industry, as demand from the backlight market nears saturation. LED lighting market is anticipated to grow 45% per year through 2019, driven by the declining price points and the rising interest on the part of  the channel in pushing LEDs to consumers. LED lighting is expected to account for 80% of the entire lighting market by 2020, creating a market that will be as big as $94 billion. [2]

Cree is confident that it is well positioned to continue to win in LED lighting. Though the company has made significant progress growing both the volume and product base of its lighting business over the last several years, it believes that there is still a lot of untapped potential in terms of both revenue and profitability. The company claims that it continues to gain share in the commercial lighting market. It has a strong product pipeline and is building good sales momentum as well. Though the LED landscape remains highly competitive, Cree believes that its high power LED technology positions the company for long term success in high performance LED lighting applications.

Cree introduced the third generation Cree LED bulb in Q2 2014. The bulb offers superior light performance while looking even more like an incandescent light bulb. This new design provides the same cost savings and 25,000 hour lifetime that made the original Cree bulb America’s best-selling LED bulb. The bulb is now available at the Home Depot for $7.97, and it’s currently available for as low as $2.97 in certain markets with rebates. [3]

Cree is looking to improve its brand positioning in both the commercial and consumer markets. It is targeting the consumer market by adding new bulb products in the fall lighting season. Moreover, the company aims to expand its work with third-party manufacturers to accelerate growth in LEDs and lighting. These partners will allow Cree’s factories to develop the latest technologies that are new to the market. [4]

The company closed its Lextar investment in Q2 2015 and is working with the team to supply LED chips as well as testing some initial lighting products. The collaboration with Lextar can help Cree expand its presence in the mid-power segment.

Rising Competition From Bigger Players Can Limit Growth Potential

Osram, Philips and GE are some of Cree’s key competitors in the LED market. In terms of revenue, all these players are considerably larger than Cree. Philips and GE have been introducing a number of innovative products into the market at very low prices, although Cree bulbs are still one the cheapest available in the market. The sheer size of GE can help the company achieve economies of scale if it chooses to create LEDs on a vast scale in the future. GE sells its LED bulbs through Wal-Mart, which has a huge network of 11,000 stores spread across 27 countries. In comparison, Cree’s retail partner Home Depot has around 2,300 stores. [2]

Last year, Wal-Mart introduced its range of low-cost LED bulbs in association with General Electric. The energy-efficient LED technology provides the same quality and appearance of traditional lightbulbs, but LEDs are 80% more efficient, emit 40% less heat and last 25 times longer. By replacing all of the lightbulbs in their homes with energy-efficient LEDs, customers can save an average of $129 per year. GE’s new LED line retails between $8.88 to $15.88. ((Why Investing In Cree Looks Like A Bad Idea, Seeking Alpha, December 3, 2014))

Last year, Philips announced its plan to spin-off its Lumileds LED lighting unit and automotive lighting segment into a separate company by early 2015. Philips plans to spin-off the manufacturing side of the LED business, and will keep the higher margin integrated systems and services as part of its business. The move intensifies competition in the LED market.

Cree’s growth has slowed down in the last few quarters, and with rising competition there is a possibility that the company loses some market share gained in the last few years.

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Notes:
  1. Cree’s (CREE) CEO Chuck Swoboda on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, August 12, 2014 []
  2. Why Investing In Cree Looks Like A Bad Idea, Seeking Alpha, December 3, 2014 [] []
  3. Cree’s Q2’15 Earnings Call Transcript, Seeking Alpha, January 20, 2015 []
  4. Rising Competition Makes Cree A Risky Investment, Seeking Alpha, September 7, 2014 []