LED lights should be a perfect fit for a world that thinks in green and stretches every watt to the max. But from the recent stock charts of LED wrangler Cree (Nasdaq: CREE ) and LED-making equipment builder Veeco Instruments (Nasdaq: VECO ) , you'd think that somebody forgot to tell consumers.
Both Cree and Veeco have trailed the S&P 500 index over the last year, dramatically so in Cree's case. Last week, Cree foresaw a price war brewing in the LED industry, as production capacity across the sector outstrips demand.
Last night, Veeco partly countermanded that report with its own first-quarter results. Whereas Cree has low visibility because of short lead times on incoming orders, Veeco has nearly two quarters' worth of unfilled orders on its backlog, and it still sees a healthy dose of fresh orders.
There are two ways to read the conflicting data:
- Cree could have unique problems that complicate its ability to sell its LED elements at strong profit margins when competing against giants such as Philips (NYSE: PHG ) and General Electric (NYSE: GE ) .
- Alternately, Veeco is happily feeding the oversupply beast. In that case, its strong results now will segue into severe order drought when the LED industry at large starts to wise up.
Either way, a major player in the LED industry is setting itself up for a terrible fall here. You just have to pick your fall guy.
In the long run, I have no doubt that LED lights will largely replace today's inefficient incandescent bulbs and -- to a lesser degree -- mercury-tainted fluorescent tubes. The market will be split between fluorescents, LEDs, the OLED panels championed by Universal Display (Nasdaq: PANL ) and others, and lesser lights (pun intended) such as ESL bulbs. The golden age will come, but perhaps not until 2014, when incandescent bulbs no longer meet stricter efficiency specifications.
For now, investors are better off waiting for the sector to finish cooling off before it can heat up again. You don't really expect Mr. Market to look at this industry over a three-year horizon, do you?
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