Does innovation in a industry dating back to the 1800’s pay?
Cree, Inc. (NASDAQ:CREE) certainly hopes so. It is betting on technology it has refined over the last quarter century to replace something that has been around since before the automobile–the incandescent light bulb.
The company recently announced a breakthrough in its line up of light emitting diode (LED) bulbs, which allows the 40W model to be purchased for less than $10. Higher wattage bulbs cost a bit more.
Bright lights
It may seem like a lot of money to pay for a simple item. However, according to the company its product will last 25 times longer than the typical incandescent version, which on average lasts for about a year, assuming 3 hours of usage a day. In addition, LED technology uses around 80% less electricity. A “40W” bulb actually consumes only 9W of power. This will result in significant savings on utility bills.
How will this help Cree, Inc. (NASDAQ:CREE)? There is a lot of potential for growth as the estimated annual market for new light bulbs in the U.S. is $3.6 billion. If Cree, Inc. (NASDAQ:CREE) can increase market share because of its innovation it could result in higher sales and profits. The company reported revenue of about $1.1 billion over the last 12 months, and that has been rising at a compounded rate of 20% per year since 2007. The stock price has soared 150% over the same period, handily beating the overall market by a 5:1 margin. This was in spite of a tumble in 2011 when earnings declined at the company. Luckily growth is back in the black now.
Home improvement
Another company is hoping LED bulbs take off. Cree, Inc. (NASDAQ:CREE) bulbs are sold at The Home Depot, Inc. (NYSE:HD) stores, which means that the home improvement leader can piggyback off the LED success and reap some gains.
The Home Depot, Inc. (NYSE:HD) is also banking on continued good news in the housing market, which is finally coming out of the doldrums after the bubble burst a few years ago. The company is probably watching things closely over at the Fed. If the U.S. central bank allows interest rates to rise by cutting back on its bond buying frenzy it could put a stop to the rise in home purchases and result in less building activity and renovations. It could mean less light bulbs too.
If the bond buying continues and the housing market keeps expanding, expect The Home Depot, Inc. (NYSE:HD) to keep growing as it has over the last several years. The stock price has jumped thanks to solid earnings increases in the recent past.
Bulb competition
Cree is in competition with a heavy hitter in American industry that has been in existence for almost as long as the light bulb. The industrial giant General Electric Company (NYSE:GE). is also a fixture in bulbs. In addition to several types of incandescents which it has been selling for many decades, it has a line-up of LED bulbs, which also can be found at Home Depot and other stores.
However, I’m sure that General Electric Company (NYSE:GE) is concerned about other things besides light bulbs.
The company wants to downsize its finance division, which acted as a drag during the 2008 – 2009 financial crisis. General Electric Company (NYSE:GE) Capital is selling off $800 million worth of its U.S. real estate portfolio and the Canadian car leasing business it owns.
The company is also expanding its stake in the energy industry by developing a drilling services business. The goal there is to take advantage of the ongoing boom in shale gas and tight oil production.
Conclusion
So Cree, Inc. (NASDAQ:CREE) is poised to grow because of an innovative product it has developed if things go well and it can penetrate further into a century-old market. Expect greater sales of LED bulbs and a higher stock price down the road.
GE may be too busy fixing other parts of its business, which may allow Cree, Inc. (NASDAQ:CREE) to burn brighter in the future.
The article Will this Company Burn Bright? originally appeared on Fool.com and is written by Mark Morelli.
Mark Morelli has no position in any stocks mentioned. The Motley Fool recommends Home Depot. The Motley Fool owns shares of General Electric Company. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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