Competition is heating up in the light-emitting diode (LED) business, and it could be lights out for Cree (CREE). It seems that all the major LED makers are getting aggressive about taking market share, and Cree could be in the crosshairs.
Specifically, I keep hearing about competitive pressure coming from Koninklijke Philips (PHG). Philips is undergoing a major worldwide restructuring, and all divisions are getting serious about growth. Philips has laid off more than 3,700 employees year to date and has managed to increase earnings five quarters in a row.
Philips is waking up its sleepy Dutch corporate culture and has set aggressive financial goals for 2013. In lighting, for example, Philips' objective is to return the division to profitability and drive returns on invested capital to between 12% and 14%. To get there, the lighting division has to start pulling its own weight.
North America contributes about 31% of Philips' 22.7 billion euros in revenue. Lighting makes up 37% of global revenue. Philips sells more than 80,000 lighting products and services worldwide. LEDs are a major focus of the company. About 25% of Philips' lighting portfolio is LEDs. LEDs make up 23% of lighting revenue, and LED sales grew 38% in the first quarter. Since 75% of lighting sales come from commercial accounts, Philips has a very large sales force. (Worldwide, more than 49,000 people work in the lighting division.)
LEDs are expected to make up 45% of Philips' lighting business by 2015, which is estimated to be a 75 billion to 80 billion euro business, growing between 5% and 7%. Philips is No. 1 in lighting worldwide, and it has no desire to lose that position.
While it's hard to exactly quantify, I believe Cree's revenue growth is about to slow dramatically. Right now, I'm thinking Cree's revenue growth will be cut in half. In fiscal 2013, revenue is poised to grow between 18% and 19%. (Cree reports fourth-quarter and year-end results in August.) If I'm right, Cree will be lucky to increase revenue by 9% in 2014. Right now, the consensus estimate for fiscal 2014 is $1.66 billion in revenue and $1.85 in earnings. If I'm right, Cree will cut guidance when it reports in August.
Since Cree's shares are up 78% year to date, a cut to 2014 guidance could be news to a lot of folks. It could be lights out for Cree investors.