It looks like a name change, from the earlier Nexxus Lighting, in late 2012 worked wonders for Revolution Lighting Technologies (NASDAQ:RVLT). The LED lighting solutions maker had a super-bright 2013, with its shares soaring 407% year to date.
Getting a foothold in a highly competitive industry that has well-established players like Cree (NASDAQ:CREE) and Acuity Brands (NYSE:AYI) isn't easy. Revolution Lighting is still a tiny player, with a market cap of under $300 million, compared to the more than $4 billion market cap that the other two companies boast of. So what did Revolution achieve in 2013 that sent its shares into space even as Cree and Acuity Brands are closing the year with just 79% and 61% gains, respectively? More importantly, has Revolution stock's rally peaked already? Let's dig deeper.
The big deal is paying off
Revolution started 2013 on a hopeful note, having acquired California-based LED solutions provider, Seesmart Technologies for $20 million in December last year. Revolution banked on Seesmart's distributor count of more than 50 and potential project value exceeding $1 billion. While that billion-dollar figure looks fanciful for a company with such a tiny market cap, the acquisition has undoubtedly added excellent value to Revolution's business.
For instance, New York's largest commercial property company, SL Green Realty (NYSE:SLG) now counts as one of the company's key customers. After purchasing 17,000 Seesmart LEDs in 2012, SL Green awarded two orders this year – an order for 1,000 LEDs for a Times Square commercial property in March followed by an 8,000 LEDs order in December.
The Seesmart subsidiary is also taking Revolution beyond the U.S. shores. In March, Seesmart bagged a project to light up 11 gas stations in Mexico. The good news is that the station owner plans to extend the contract to 55 stations. But bagging an order for 17,000 Seesmart two- and four-foot LED tube lamps from the U.S. Navy's Military Sealift Command this month counts among Revolution Lighting's most notable achievements for the year.
Revolution also pursued growth opportunities aggressively in 2013. It went on an acquisition spree during the latter half, taking over these companies:
- Relume Technologies, an outdoor lighting specialist, for $15 million
- CMG Energy Solutions, an indoor-specialist LED solutions company
- Tri-State LED, a leading Seesmart distributor, which also provided the 8,000 LEDs to SL Green
Sreesmart and these acquisitions boosted Revolution Lighting's top line significantly – revenue jumped a staggering 443% year over year to $19 million over the nine months ended Sept. 30, 2013. Losses turned into a gross profit of $7.6 million, translating into a solid gross margin of 40%.
Unfortunately, the acquisition and restructuring expenses dented Revolution's bottom line, leaving the company with losses of $13.5 million over the nine-month period. Worse yet, these losses have nearly doubled year over year. The company is burning cash at a fast pace – its cash from operations for the nine months was a negative $5.2 million.
Aside from the losses and cash crunch, which are reasonable concerns, Revolution faces several headwinds for 2014 that could stem its growth.
Too hot to handle?
As I mentioned earlier, the LED lighting market is hugely competitive. Aside from Cree and Acuity Brands, OSRAM, Koninklijke Philips, and GE Lighting are some of the other well-known brands that are fighting for market share. While growth potential is huge – a recent Edison Investment Research report projects the LED market to grow at 45% clip through 2016 – too many players could result in oversupply and hurt profitability.
The Edison report further projects Asia to be the biggest LED market by 2020, but Revolution hasn't forayed into the region yet. That's a yellow flag, considering that the company already has an uphill task to attract customers in the domestic market, especially with Cree joining up with Home Depot to exclusively distribute its LED products.
More importantly, as one of the smallest players in the industry, Revolution could fall victim to a price war, if one were to erupt. In fact, signs of one are already visible, with both Cree and Philips launching sub-$10 LED lamps this year. As prices fall, Revolution will have no option but to follow suit, which will directly hit its currently strong gross margin.
The Foolish bottom line
With awareness about energy efficiency ever-growing in nations across the globe, an LED lamp certainly has great prospects. As a pure-LED player, Revolution may be well poised to tap the opportunity, but challenges are aplenty. With nil profits and cash flows, shareholders can't even rule out the possibility that the company will raise additional equity issue to raise capital for funding growth. That's the last thing investors would want to see.
Simply put, there wasn't much to justify Revolution Lighting stock's crazy run up this year, and I won't be surprised if the stock takes a breather in 2014. Prudent Fools should stay away, at least until the company turns in a profit.