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Investment Overview for Cree (NYSE:CREE)
- Rising Competition Can Reduce Cree's Market Share: 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. 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. Cree is looking to improve its brand positioning in both the commercial and consumer markets. However, rising competition from bigger players, such as Nichia Corporation, GE and Philips, can limit Cree’s growth potential in the future. Further, a tough competition from Chinese players can make it challenging for Cree to make a good profit margin and at the same time retain its market share. We forecast Cree’s Lighting market share to decline marginally over our review period. However, if Cree manages to increase its market share to 15%, there will be a more than 10% upside in our price estimate for the company.
- Failure To Increase Gross Margins Close To The Historic Levels: Cree's Lighting products gross margin has declined from 38% in 2011 to 28% in 2016, on account of declining LED prices, increasing competition, and the company’s decision to restructure the business to reduce excess capacity and overhead. We expect Cree's LED gross profit margins to remain around the current level, as the competition in the industry is fierce and any increase in prices can lead to an erosion in the company's market share.
However, if Cree's gross margins decline to 20% then there will be an approximate 10% downside in our valuation for the company.
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 Chips & Components
LED Chips & components segment accounts for 36% of Cree's value. Cree has been experiencing a downturn in this segment due to significant decline in LED prices.
Power & RF products
Cree's Power & RF segment contributes around 30% to Cree's value. This is due to a incremental growth of revenues and high gross margins of Power & RF segment as compared to the LED segment. In 2015, Cree sold its Power and RF business to Infineon for $850 million, a move that allows the company to focus individually on its LED and lighting business sectors as well as its power and RF businesses. Till the sale is complete (expected to close in 2017), we consider the Power and RF business (renamed Wolfspeed) as part of Cree's operating segments.
the LED Lighting segment accounts for around 13% of Cree's overall value but around 50% of the company's total revenues. Cree is a strong competitor in high power LED Lighting market, and we expect it to deliver strong performing products in the 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. The penetration of LEDs as a percentage of general illumination is expected to reach 36% and 74% by 2020 and 2030, respectively. (Link)
LEDs 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 30-35% 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.
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