Cree Lights Up With Profits

"Maybe it just sags
like a heavy load.

Or does it explode?"
-- From "A Dream Deferred," by Langston Hughes, 1951

The Cree (Nasdaq: CREE) dream is on hold for a while. Share prices for the LED lighting guru have tripled over the last year, but last night's third-quarter earnings report turned out the lights. Cree is down by more than 7% today after issuing strong revenue guidance but disappointing earnings projections.

That brings the stock back to levels not seen since all of three weeks ago. In other words, today's slack is not a terrible calamity for Cree shareholders.

The sell-off seems to come from somewhat disappointing forward guidance, because there was absolutely nothing wrong with the third quarter. Sales gained 78% year over year to land at $234 million, while non-GAAP earnings more than tripled to $0.47 per share. For those of you keeping score at home, $51.3 million in net income works out to a very impressive net margin of 22%. It's been four years since the company coasted at this level with any regularity. All of that happened with Cree's revenue being less than half of what it is now, so the company has never enjoyed profits of this magnitude.

Cree easily beat its own guidance and Wall Street estimates, and fourth-quarter sales will balloon again as Cree has more orders than it can fill, and it is working feverishly to expand manufacturing capacity. The company will triple its production of power LED components from last New Year's to the next, and keeps beating revenue estimates because the fresh facilities are ramping up ahead of schedule.

It's no surprise that demand for Cree's LED lights is strong. Incandescent light bulbs are terribly inefficient and outdated, and LED is a front-runner in the race to replace them all. We're talking about a lighting product market of more than $20 billion annually -- plus at least another $20 for the fixtures in which you mount them. Cree participates in both of these markets -- and unlike competitors like Siemens (NYSE: SI), Philips (NYSE: PHG), and General Electric (NYSE: GE), Cree won't cannibalize an existing light bulb business as LED sales hit the mainstream: LED is all this company does. LED lighting is further ahead in its commercialization than the OLED variety espoused by Universal Display (Nasdaq: PANL) and others, and a first-mover advantage is always valuable.

Given the massive opportunity ahead of Cree, I would not be surprised to see its stock chart resume the steady climb we've seen lately. Did I miss anything important in this deferred growth story? Let me know in the comments below.