Cree Adds New LED Arrays To Its Portfolio

Cree ( CREE ) added a newchip-on-board ( COB ) LED to its industry leading CXA LED array family. TheCXA2 LED arrays utilizes elements of Cree'sSC5 technology platform (introduced last quarter), which enables lighting designers to drastically lower system costs (by up to 60%) in the next generation of industry-leading lighting products.With the new CXA2 LED arrays, lighting manufacturers can achieve the same or better performance with a smaller LED compared to earlier products, enabling them torapidly deliver more innovative solutions for applications such as track, downlight and outdoor lighting.

Cree is a market-leading innovator of lighting-class LEDs and LED lighting.Lower LED demand and margin pressure are two keys trends which have impacted Cree's growth prospects in the last few quarters. However, the company continues to see strong growth in its lighting segment, and it does not foresee any change in the trend as the segment still remains a largely untapped opportunity.

The LED lighting market is expected to grow 45% per year through 2019, driven by declining price points and rising interest on the part of the channel in pushing LEDs to consumers. LED lighting isexpected to account for 80% of the entire lighting market by 2020, creating a market that will be as big as $94 billion.

Cree isconfident that it is well positioned to continue to win in LED lighting.The company has a fully integrated vertical business model and is the market leader inboth 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. Though the company has made significant progress, growingboth the volume and product base of itslighting business over the last several years, it believes that there is still a lot ofuntapped potential in terms of both revenue and profitability. It has a strong product pipeline and is building good sales momentum for the same.

Though the LED landscape remains highly competitive, Cree believes that its highpower LED technology positions the company for long term success in high performance LED lighting applications. The companyclosed 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.Though the company is optimistic about its long-term prospects in the LED lighting segment, it admits that it will take time towork through the new products design cycles and current market conditions.

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 companyachieve economies of scale if itchooses to create LEDs on a vast scale in the future. GE sells its LED bulbs throughWal-Mart, whichhas a hugenetwork of 11,000 stores spread across 27 countries. In comparison,Cree's retail partner Home Depot has around 2,300 stores.(( Why Investing In Cree Looks Like A Bad Idea , Seeking Alpha, December 3, 2014))

The rising competition can limit Cree's long-term growth potential, and the company clearly needs tofocus on innovation in order to capture the growing market. We expect CREE to continue growing, but project the growth rate to slow down over our review period. Cree is part of an industry that is still at a nascent stage of growth and a continuous focus on bringing new low-cost and more efficient product in the market can help it expand its revenue base in the future.

Our price estimate of $37 for CREE is almost in line with the current market price, and translates into market cap of $4.3 billion. We estimate the company will report revenue and net income of $1.95 billion and $120 million, respectively, for calendar year 2015. For fiscal year 2015 (fiscal year ends in June) we forecast non-GAAP EPS of $1.72.

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Cree Adds New LED Arrays To Its Portfolio