A leader in LED lighting, Cree's (Nasdaq: CREE) stock has been bouncing up and down as investors weigh the massive growth opportunities against the commoditized nature of the field. Thus far, Cree has been able to beat out the field of high-profile competitors looking to carve their own niche in the light-emitting diode field, but aggressive pricing in LED lighting is starting to take a toll.

Today, we'll take a look at not only the key opportunities investors should be watching at Cree, but also the key threats that could send the company's stock collapsing.

What to watch for: the good
LED lighting as a technology is in a stage of adoption that puts Cree in a great position. Adopting LED comes at relatively high initial cost, but over the lifespan of the bulbs the technology proves itself in costs -- and that's a sell to companies with a long-term focus (like Wal-Mart). For consumers, the up-front cost inhibits adoption at the scale of the commercial sector. However, the efficiency movement is strengthened by government mandates for more efficient light bulbs (specifically in the U.S., but mirrored by most of the developed world), a burden the LED can shoulder easily.

  • Product diversity? Check. LED lighting is used for way more than lighting a room: mobile device screens, street lights, barcode readers, and household appliances all get touched by LED technology. Cree has some of the most advanced technology in LEDs, which gives it an advantage against competitors looking to take market share.
  • The stock has slightly rebounded after precipitously falling throughout the early months of the year amid speculation that Cree's aforementioned market position had been compromised after it lowered third-quarter revenue guidance last week. While the company traded at a nosebleed level P/E of around 65 this summer, its shares now only trade for about 25 times earnings. That's still a high multiple, but even with high competitive pressures, Cree still operates in an industry seeing exploding demand.

What to watch for: the bad
High-profile competitors want their share of the LED market, and General Electric (NYSE: GE),Philips (NYSE: PHG), Samsung, and LG all pose a threat to Cree. Cree's biggest advantage so far has been its pricing power over constrained supplies, but an increasing presence from larger competitors has weakened this pricing power. Aggressive pricing by competitors was largely cited as the cause behind Cree's steeply reduced guidance.

  • Investors who are bullish on long-term LED supply but are unsure of Cree's ability to dominate the field might be better off looking at other areas of the LED supply chain. Large competitors such as GE and Samsung are too diversified to be a pure play on the trend. However, several semiconductor equipment firms have more direct exposure to LED. For example, Veeco Instruments (Nasdaq: VECO) is a key supplier to not only Cree but also competitors like LG and Philips and trades for a mere eight times earnings. While larger and more diversified, Applied Materials (Nasdaq: AMAT) also sells fabrication equipment to the LED industry. The company announced last July that it was putting a "primary emphasis" on LED and solar technology.
  • Even though LED is widely regarded as the lighting technology of the future, it does face threats from rival technologies. Universal Display (Nasdaq: PANL) has seen its stock price soar as OLED has taken off. The technology is a direct threat to areas such as mobile device screens and is even being tested in general lighting applications by Siemens (NYSE: SI).

Final thoughts
Cree is suffering from recent setbacks that have investors reconsidering its place in the LED landscape. Being a leader in a field isn't as impressive when a cadre of resource-rich rivals are ramping up LED supplies and slashing prices. The best way to stay ahead of these challenges is to be aware of the pressures facing the company, and keep up with the news surrounding Cree. The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up-to-date news on companies such as Cree or any of its competitors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.