LED lighting expert Cree
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
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
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
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