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Cree Is a Solid Long-Term Bet

April 14, 2014 | About:



With LED replacing the conventional incandescent light, various LED light manufacturing companies are persistent in acquiring a larger market share of LED lights. Cree (CREE) is one such company that has been rigorously working on innovative light solutions in LEDs. The company has acquired a global footprint and is a leader in LED lights and fixtures market. The stock price might be slipping but it is still worthy to have this stock in your portfolio.

The company is enriched with a vertical product portfolio broadly categorized as LED light, LED components, LED chips and RF components. This also enables Cree to provide total solutions pertaining to LED lights, which are more cost effective as compared to its competitors like Philips and General Electric. Although some Chinese manufacturers offer tough price competition to Cree, this again does not affect Cree much since the cost to quality ratio is much better compared to Chinese LED light manufacturers.

The company reported it second quarter 2014 results earlier this year. It posted revenue of $415.1 million, growth of 19.9% year over year and 6.2% sequentially. EPS of $0.34 also surpassed the consensus estimate which was $0.31. Sequential growth in cash balance makes the company further cash rich, as it recorded $1.18 billion. Margins of the company were affected which resulted from higher operating expense of $120.4 million, up by 11.1% from the year-ago quarter. Heavy expense in research and development projects led to higher operating expense.

The company’s guidance for third quarter 2014 remains flat or a slight decline which is seasonal. Cree generated around 35% of its revenue from China and the Chinese New Year festival could have an impact. But with LED penetration increasing, it can offset the seasonal decline.

Price War

Price has always been an important factor for LED lighting, mainly in the home lighting arena. Cree has been successful in delivering low cost LED bulbs.

Cree was the first one among the leading players to slash the price of its 40-watt equivalent (5 watt) LED bulb to below the $10 barrier.


Furthermore the energy star certification helps Cree provide LED lights with rebates as announced by the U.S. government under this program. This also enables Cree to offer a stern price war with Chinese manufacturers that are looking to establish a market in the U.S. Officials at CREE proudly quote, "We expect to be qualified, but we're proud to offer the bulb at a price point that makes sense and pays for itself even without rebates." With the rebate, the LED lights are available below $5 and it has witnessed a tremendous response at Home Depot.

Cree is one of the first companies to comply with regulatory standards set by California regulators which were to resemble LED light to incandescent bulbs. True white light series of CREE comply with these standards and comes almost at par with the light delivered by a 60-watt incandescent bulb. These LED bulbs are available in a price range of $18 to $20 with CRI (color rendering Index) hitting 93 (score of 100 is closest to natural light). The true light series consumes 78% less energy and has a life which is 25% greater as compared to conventional incandescent bulbs.


The company, with a cash balance of $1.2 billion, zero debt and a strong balance sheet can always instigate an investor to bet on Cree. Looking at the LED market penetration and various rebate schemes announced, the future of Cree looks very strong.

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