Yesterday morning, shares of LED lighting specialist Cree (Nasdaq: CREE ) jumped as much as 4.9% on an analyst report that General Electric (NYSE: GE ) would use Cree's technology in an upcoming product line. The air escaped from Cree's balloon when GE denied Canaccord Genuity's report, saying, "There is no basis for this rumor. We have not made a decision."
It's all fun and games until someone loses an eye. The good news for Cree investors is that this development really doesn't matter. The analyst report even said so to begin with.
Canaccord analyst Jed Dorsheimer goes to great lengths to explain how even a substantial win with GE doesn't change his "hold" rating on Cree's stock.
- A deal such as a supplier contract for GE's 60-watt LED bulbs is helpful in the long term, but it'll take two or three years to see significant shipment volumes, and GE probably wants "aggressive" prices on Cree's components.
- Cree's business model is still hampered by high costs and an overloaded inventory.
- That inventory problem is industrywide and causes pricing pressures of its own.
And you can actually go even further to dispel the importance of a single contract: The global market for LED-based light bulb replacements is totally dominated by Siemens (NYSE: SI ) subsidiary Osram, GE, and Philips (NYSE: PHG ) -- and Cree already counts the other two as customers.
There are other LED component providers in the market, including divisions of Osram and Philips, but Cree is likely to grab its fair share as the market develops. We're talking about a pioneer and technology leader with a very defensible patent portfolio.
So today's big non-news turns out to be a non-event. In the long run, Cree will get its contracts, but must focus on tuning up its operations. The the real competition down the line may come from Universal Display (Nasdaq: PANL ) and its allies in the OLED camp.
Cree ended up the day's roller coaster almost exactly at Canaccord's $41 target price, which is less than 10% from 52-week lows. The company's long-term promise is undeniable, but it'll take some elbow grease to make the model shine. The best way to gauge how Cree's management is exploiting the opportunities and handling the challenges is to keep a close eye on company news. Our new My Watchlist feature helps you do exactly that. Click here to add Cree -- or any other company -- to your very own watchlist.