Cree: A Bright Light?
11/05/2004 12:00 am EST
Toby Smith always uncovers fascinating emerging markets, and his latest recommendation is no exception. Here, he looks at a leader in LED technology, which is not only poised to benefit from growth in digital cell phones, but may also revolutionize the standard light bulb.
"I have been a fan of Cree (CREE NASDAQ) for more than a year and have been waiting patiently for their transformational technology to get close enough to market so we could recommend the company without execution risk. We are there now. The near-term wave that Cree is riding is the transformation of the cell phone into a digital communications handset. The roll-out of broadband to the hand (aka 3G wireless systems) is now a reality, and it's gaining real steam in Europe and Asia, with the States falling in line next year. Cree is the leader in both market share and patents in the gizmo that makes your new cell phone bright and colorful – the light-emitting diode (LED). Think of an LED as an incandescent bulb, but without a filament. Because LEDs use low voltage, they can be used in many applications that need a low-power, low-light source. The cell phone handset is a natural, but they are used in everything from digital clocks to car dashboards.
"LEDs accounted for 86% of Cree's sales in fiscal 2004. But the LED story is only one part of the bigger picture. Now they have introduced the ‘light bulb killer,’ using white light LEDs to replace your light bulbs. This is a $15 billion worldwide market. The Xlamp is being marketed as a superior alternative to conventional lighting used in homes and businesses. The XLamp is designed to provide longer life, lower maintenance cost and energy consumption, as well as smaller space requirements over incandescent bulbs and other conventional lighting products. So the race to replace the headlight and light bulb is on. Sales from the new electric light bulb have not even hit the revenue line, but at the current valuation we are getting that business opportunity for free.
"Another positive for the company is that the markets that Cree has dominant share and a strong competitive position in are still in the beginning of their growth waves. In addition to cell phones, look at the technology in new cars like advanced navigation and lighting systems that appear to be popping up everywhere these days as well as application for the space program. So far Cree has capitalized mostly on the widespread adoption of LEDs in cell phones from companies like Nokia, Motorola, Samsung, LG and Sony Ericsson. But the future for Cree is so bright, and management has been so disciplined about getting to that future in a profitable way, that Cree should be on our buy list for a very long time."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...