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A Few Reasons Cree's Share Price Weakness Is A Buying Opportunity 

Summary

• Cree shares have dropped more than 40% this year, but the huge opportunity in LED lighting makes the company a good long-term buy.
• Cree is working on delivering more efficient products at a lower cost than rivals.
• Cree has ample cash to invest in the growth of its business.
• Cree has lined up a number of products for launch in the coming year, which should allow it to bring more customers into its fold.

Shares of LED lighting company Cree have declined more than 40% this year. Now, Cree is sitting on a big opportunity in the LED lighting market, and in my opinion, investors should use the drop as an opportunity to buy more shares due to a few simple reasons.

The market's prospects

First, the LED lighting market is expected to grow at a tremendous pace. As per a report on LinkedIn, the market is expected to grow at a rate of 45% a year till 2019. The key factor contributing to this growth will be the efficiency and longevity of LED lights. As the report points out:

LED lamps lower the overall cost of lighting. LED lighting costs are less than costs with incandescent lights. LED lamps offer up to 50,000 hours of illumination with a fraction of the energy used by traditional incandescent bulbs. LED bulbs generate 90% less heat than incandescent bulbs. LED bulbs extend time between bulb replacements. The bulbs are used to achieve a near zero-maintenance lighting system.

Hence, it is clear that companies such as Cree will need to focus on innovation in order to capture this growing market. Unsurprisingly, this is what Cree is focusing upon. Cree is continuously investing in LEDs such as its XLamp XP-L product, which lights 50% brighter as compared to the earlier generation.

Innovation and efficiency will drive growth

Looking forward, Cree is focused on raising the bar in LED technology to deliver higher powered and more efficient products. As a part of its new product portfolio, Cree has launched a number of new products into the market in recent times, while some are expected to be launched shortly, with initial shipments for production devices to start in the third quarter of fiscal 2015.

Recently, Cree launched the ZR greater efficiency troffer, which is the first commercially accessible 150 lumens per watt LED troffer available in the market. At the same time, Cree is working on deploying advanced customer LED bulbs that are expected to deliver much better light at competitive pricing. In fact, Cree is already delivering on this promise as it has made its LED bulb better. Its new LED bulb is available in both 40-watt and 60-watt options, and is tuned to deliver "460 lumens for the 40-watt replacement and 815 lumens for the 60-watt replacement in soft white (2700K) and daylight (5000K) color temperatures."

More importantly, these new bulbs have been designed to consume 85% less energy as compared to the earlier generation. As such, Cree is progressing on the right path of delivering more efficiency at a lower price, and this will help it attract more customers going forward.

In addition, Cree is also looking to expand its business with manufacturing partners for powering LED growth and enabling Cree's factories to deliver cutting-edge technologies that are still not available in the market.

As a result, Cree has entered into an agreement with Lextar for supplying mid-power LEDs. This agreement will help Cree tap the mid-power lighting market, thereby expanding its portfolio as it is already well-positioned in the high-power market. Moreover, since Cree will be able to cross-license technology from Lextar, it will be able to improve its technology portfolio.

Fighting the competition efficiently

More importantly, the companies focus on developing more efficient products will help it compete better with more established rivals such as General Electric, which has launched low-cost LED bulbs at Wal-Mart .

Now, Wal-Mart and GE have launched 26 types of LED bulbs. These include "a non-dimmable 60-watt equivalent LED that will retail for $8.88; a Great Value dimmable 60-watt equivalent LED for $9.88; a Great Value Indoor flood non-dimmable 65-watt equivalent LED for $14.88; and a Great Value indoor flood Dimmable 65-watt equivalent for $15.88."

Cree has prepared itself for this challenge with its own LED bulb mentioned earlier. Cree's LED bulb is available at its retail partner, Home Depot for as little as $7.97, which costs less than the cheapest GE bulb. In addition, the Cree bulb is dimmable, while the cheapest GE bulb is non-dimmable. Hence, Cree is offering a better bulb at a lower price.

Conclusion

All in all, Cree is making a number of impressive moves to grow its business and fight the competition. The good thing is that the company can continue investing in its business without any hiccups as it has a strong cash position of $1.1 billion, while debt is just $45 million. Also, it is expected that Cree's earnings will grow at a CAGR of 18.3% in the next five years, which is way better than the annual drop of 3.6% seen in the previous five years. As a result, Cree's share price drop this year looks like an opportunity that investors should consider