NEWS ANALYSIS
Cree: Fading out?
As Cree builds business for the long-term, shares fall as investors lose faith. What’s next for the LED lighting heavyweight? Rebecca Pool investigates.
DESPITE POSTING an increase in sales and rising revenues in its latest financial quarter, Cree’s overall lower-than-expected earnings saw shares suddenly plummet by 11 percent, slipping another 9 percent in the days that have followed.
Coming in at $405 million, quarterly revenue just missed analyst’s estimates of $407 million. And with chief executive Chuck Swoboda pointing out how his company’s already squeezed gross margins will continue to fall throughout the fiscal year, some investors have jumped ship.
“Cree is focused on building a long-term viable business which often comes with short term difficult decisions,” says Jed Dorsheimer, managing director of equity research firm, Canaccord Genuity. “But investor expectations have been too high and now we are seeing the pull-back.”
Indeed, Cree’s long-term views have seen near-term operating expenditure rise, and as Dorsheimer puts it: “Investors aren’t getting the gross margin expansion or the operating margin expansion, which is calling into question its earning power, so stock has been sold off.”
But the drop in shares represents new opportunities for new investors and Dorsheimer believes the coming year holds great promise for Cree. “Our thesis is that 2014 will represent a transition year [for LED lighting] as we move from an early adopter phase into the growth phase and mass adoption in 2015,” he says. “All evidence I have seen supports this.”
Critically for Cree, wider LED lighting adoption should ease pricing pressures on its components, boost LED replacement bulb and lighting systems sales, leading to margin expansion. And tumbling shares aside, Cree’s focus on technology, cost and branding has delivered positive results.
20
www.compoundsemiconductor.net June 2014
Shares may be falling but Cree’s cash-rich balance sheet makes industry acquisitions a very real option for the LED maker
Innovation-wise, the company’s success is doubtless. In just over a year the company has released five versions of its LED light bulb. Then last month, it demonstrated a 303 lumen per Watt, high power LED; the first LED component to exceed 300 lumen per Watt ever.
Amid dogged development, the company has also pushed the price of the light bulb lower and lower. Its 60 W equivalent soft white LED bulb now costs only $6.97 at the Home Depot, down $3 in price in the last month. Meanwhile Philips’ SlimStyle version currently costs $8.97.
As Swoboda said in his post-earnings call: “We continue to work with the Home Depot to test the price to consumers... The lower retail price points... have already increased sales and confirm there are significantly more opportunities to drive LED adoption.”
Dorsheimer expects replacement bulb prices will continue to decrease until mass adoption takes place. But not so rapidly. “We will probably see an updated version of its bulb... with a
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