LED lighting expert Cree (Nasdaq: CREE) could use a light.

The company's third quarter disappointed analysts and investors alike. Revenue fell 6% year-over-year to $219 million while non-GAAP earnings took a 58% haircut to $0.27 per share. Both figures were below Street estimates, and the fourth-quarter outlook also fell short of expectations.

Cree's shares fell as much as 7.3% on Wednesday before recovering to a less fatalistic 2.8% loss for the day. The stock has lost 40% of its value year-to-date, and nearly 25% of the float was still sold short at the end of March. It's not a pretty picture.

Management pins the weak sales on surprisingly slow demand for LED chips and "a very aggressive pricing environment." Yup -- price wars tend to kick off when demand is slow, if only to keep the factories running and to stay prepared just in case things turn around all of a sudden. Cree says that its troubles reflect trends across the LED industry, so the company may not be losing market share. Still, it's a serious spot of trouble.

Just look at the damage multi-year price wars dealt to the memory chip industry: Sector giant Micron Technology (Nasdaq: MU) had to sell chips at prices below the cost of making them, and its stock dropped from the mid-teens to about $6 per share over a two-year period. A rash of bankruptcies and consolidation swept across the industry, which was fundamentally changed by these events.

Of course, the LED sector isn't as packed with mid-sized competitors as the memory industry circa 2006 was. Other than pure-play operator Cree, the competition consists of either financially rock-solid giants including General Electric (NYSE: GE), Siemens, and Philips Electronics (NYSE: PHG) -- or a rash of privately held upstarts, directly or indirectly descended from that list of titans. In more niche component areas you might find smaller competitors like Avago Technologies (Nasdaq: AVGO) competing with Cree's XLamp line or RF Micro Devices (Nasdaq: RFMD) competing with Cree in RF devices, but these companies can always turn to components for smartphones and whatnot if their LED ambitions falter.

I find it ironic that a lighting specialist finds its business visibility "limited" due to short order lead times, but Mr. Market takes these things seriously. If these are early signs of a protracted price war in the LED industry, Cree and its investors are in for a world of hurt until it ends.

The company has plenty of cash and no debt to speak of, and should survive a couple of years of nasty price-slashing. But the time to buy Cree stock would be toward the bottom of that trough, whenever that might come. And there's always the off-chance that Universal Display (Nasdaq: PANL) and its OLED partners will have stolen LED's thunder by then with their own low-cost, low-power lighting panels. For now, I'd be loath to poke Cree's stock with a sharp dollar bill.

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