Are LED Lights Just Too Good for Consumers?

Cree Inc. (NASDAQ: CREE) is one of the leaders of the LED lighting revolution. You just wouldn’t know it if you looked at the company’s earnings reaction and the commentary about challenging market conditions.

Cree’s adjusted quarterly earnings of $0.19 per share was shy of expectations, and the revenue of $388.4 million was up 2% from a year earlier and 6% higher sequentially. Cree’s guidance of $0.10 to $0.16 in earnings per share was well short of estimates at $0.20. Revenue guidance of $310 million to $330 million was also about $70 million short of expectations, but there may be some comparison issues due to a sale and due to adjustments.

While the company did talk about growth and talked up the sale of a unit, there is one thing that most LED light buyers might be unable to not think about if they put on an investor’s hat. Is it possible that the LED lights that we can all buy today are just too good and last too long? If so, it is great for consumers. Unfortunately, that may be horrible for the companies that need recurring revenues from product sales.

Cree’s annualized revenue was actually down 1% from 2015. CEO and Chairman Chuck Swoboda said:

Fiscal 2016 was a year of progress towards our goal to build a more focused and valuable LED lighting technology company. We successfully restructured the LED business, improved commercial lighting fundamentals, refocused our consumer business on premium LED bulbs, and unlocked significant value with the agreement to sell Wolfspeed.

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This means that no word was mentioned initially about what is driving sales to underperforming levels. Other comments from the conference call offered more detail.

The company said that LED products continued to execute well but that it is a challenging competitive environment. Also noted was that first-quarter lighting revenue is targeted to be approximately 5% to 10% lower sequentially as the company rebuilds its commercial project pipeline after a disruption in prior quarters. Its LED revenue was targeted to be in a similar range, excluding upfront license fees recognized in the last quarter.

Swoboda further discussed Cree’s LED expectations, projecting that the LED commercial lighting market will expand in fiscal 2017. The company is targeting LED bulb and LED component growth in a similar revenue range as the markets are expected to remain highly competitive. He expects that growth will come from expanding product lines and also from some incremental lighting M&A next year.

Cree’s markets have been rather choppy of late, and the company’s more intense focus on LED lighting comes with upside. That said, it still is a wonder if the LED lights are just so good that they almost never have to be replaced.

Cree shares were down 13.7% at $23.71 on Wednesday, with some 6 million shares traded in less than two hours (almost seven times normal day’s volume). Cree’s 52-week trading range is $22.10 to $32.92. One amazing issue will be that the company will have close to or over $1 billion after the Wolfspeed business sale is finished — versus a $2.36 billion market cap.

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And these are the analyst calls that have been seen so far:

• Merrill Lynch has a Neutral rating but it cut the price objective to $30 from $31.
• Canaccord Genuity has a Hold rating and it lowered the price target to $22 from $24.
• Goldman Sachs has a Sell rating but lowered its target to $18 from $20.
• S&P Global maintained its Hold rating and $26 target price.
• UBS downgraded it to Sell from Neutral and the price target was cut to $21 from $24.50.