CREE: High-Tech Lights

03/05/2004 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

"Light-emitting diodes (LEDs) are all over the place from the brake lights of your car to the backlighting of your cell phone and many other liquid-crystal displays," notes technology expert Michael Murphy. His latest buy recommendation is Cree, a leading player in this market.

"Management at Cree (CREE NASDAQ) has the lofty goal of eventually replacing the light bulb. Now, I know that sounds like a bit of hype, and we're definitely not buying the stock for that reason, but they have already done that in limited applications. For example, here in California as well as in several other US states, Cree's LEDs have replaced the traditional traffic lights. The LED versions use less power and have a longer life than traditional light bulbs, resulting in lower operating and maintenance costs. The company also recently replaced the neon lights on Piccadilly Circus in London, and it showcased an office that was completely lit by LEDs at its annual general meeting of shareholders. What would Thomas Edison say?

"Another very exciting area in which Cree is a leader is the development of ultraviolet (UV) lasers-also called blue lasers- which will be used in mass storage devices and the next generation of CDs. The benefit of blue lasers over the current generation red lasers is shorter wavelength, which enables significantly higher storage capacity on the same surface area. This is a coming trend, as both Dell and Hewlett-Packard recently announced that they will support the blue-ray storage standard. Widespread use of these applications is still a couple of years away, but Cree aims to have its first 30-milliwatt blue laser ready for customer sampling this year.

"I've followed Cree for years. Through the end of last year, the stock did not participate in the broad-based technology rally. And for good reason. One of the founding brothers sued both the other brother (Eric Hunter, the current chairman) and the company, alleging securities fraud and unfair trade practices. That's why we stayed away. The company then established a special committee to investigate the allegations, and it found no evidence of wrongdoing. Later, the lawsuit was withdrawn, and the brother agreed not to file any similar suits in the future.

"Following strong second-quarter results and an ensuing short squeeze, CREE skyrocketed to a 52-week high ($29 intraday) on January 22. It's been sliding since, and I wanted you to get it under $23 because that means we're getting it below the growth rate. I expect revenue to grow at a compound annual rate of 24% over the next five years, including the current year's first two quarters' growth of 35% and 28% respectively. That will be driven primarily by rapid growth in the applications for LEDs as Cree takes them up the power curve. Buy CREE under $23. Be patient; do not chase it. I look for the stock to hit $30 by the end of the year, with more to come in 2005."

Related Articles on