LED lighting must be a bumpy industry to deal in. Just ask Cree (CREE).
At one point in 2013, Cree stock was up more than 215% from the previous year on strong performance and news that its affordable new LED bulb was going to be stocked nationally by Home Depot (HD). But the shine has been off somewhat in 2014, with CREE down nearly 40% from those lofty heights.
And now? Well, Cree might be ready to start bouncing again, as it recently announced a new product that has the potential to revive its fortunes.
The T8: Cree’s New Hope
Earlier this month, Cree delivered news that it would be releasing the T8, an LED bulb that replaces those fluorescent light tubes you often find in the ceilings of commercial buildings, government offices, schools and some homes.
Fluorescent light tubes have been the standard for energy-efficient commercial lighting for decades, but those long T8 tubes — also known as linear fluorescent bulbs — have significant disadvantages compared to LED bulbs:
- Their lifespan is shorter (most commercial fluorescent T8 tubes are rated for anywhere from 5,000 to 20,000 hours of use).
- They require special light fixtures with a ballast, and the lighting tends to look unnatural.
- According to a report on the U.S. Lighting Market by the U.S. Department of Energy (PDF), the average commercial linear fluorescent bulb in use is rated at 37 watts.
- And according to the DOE report, those fluorescent tubes are eating up 42% of all the electricity used in the U.S. for lighting.
Compare these stats to the new Cree LED bulb. It fits in more than 90% of those existing fixtures, so in the majority of cases, there’s no rewiring or installation of new fixtures required. The Cree T8 uses 21 watts of power (although Cree is only claiming a 30% energy savings since the most widely available T8 fluorescent bulbs are 32-watt models), provides more natural looking lighting, turns on instantly with no flicker, is rated for 50,000 hours of use and comes with a five-year warranty.
Cheaper to operate (by 30% or more) and fewer replacement cycles — a hidden cost that can add up when those banks of light fixture are often placed out of reach? This looks like a big win for Cree stock and investors.
What Could Go Wrong?
The downside is price. The MSRP of $30 seems incredibly cheap considering that household-use LED bulbs were regularly selling for $50 or more just a few years ago, but the Cree T8 LED bulb is going up against fluorescent tubes that can sell in bulk for under $2 each.
CNET’s Ry Crist thinks that the price differential will be problematic, with a decade required to make up the cost premium.
I’m inclined to disagree.
I think there’s a huge market for an LED bulb that can replace a linear fluorescent tube, even with the price differential.
First, at $30 vs. $2, we’re comparing retail to bulk pricing. Not all businesses buy in those quantities, and maybe Cree will be able to offer volume discounts too.
Second, the cost of electricity is not fixed, and it sure isn’t going down. According to U.S. Energy Information Administration statistics, the average price for electricity across the country rose nearly 6% in the past year alone — and close to 8% for commercial customers. Don’t discount the time and effort spent changing bulbs (often involving ladders, fixture cover removal and sometimes power lifts), which is cut at least in half by the longer lifespan. Burnt-out bulbs don’t have the mercury pollution factor and disposal cost associated with fluorescent tubes.
Finally, virtually every state offers incentives and rebates for investing in energy-efficient lighting, helping to offset the cost of an LED bulb.
Companies are taking notice of LED bulbs as they strive to cut operational costs. In LEDs Magazine, Maury Wright profiles a move by Walmart (WMT) to roll out LED bulbs in its supercenters to reduce its energy costs (lighting the sales floor accounts for 90% of the electricity use in a typical Walmart store).
In fact, the biggest spoiler for the Cree party isn’t cheap fluorescents — it’s LED competition.
Philips (PHG) is one of the world’s biggest lighting manufacturers, and it too has a T8 LED bulb on the market. And it’s cheaper than the Cree version — at least in bulk. I saw a 10-pack on Amazon (AMZN) for $249.99, and that pressure to lower prices will cut into margins unless Cree can bring production costs down. Expect other lighting giants like General Electric (GE) to move quickly to protect their commercial lighting business as well.
Cree isn’t exactly in dire straits. In its last quarterly results, Cree posted revenue of $405.3 million, showing growth of 16% year-over-year, while profits jumped 27%. CREE stock dropped 12% in response, sure, but merely because expectations were for even better results for that.
With lighting accounting for a growing chunk of Cree revenue, there is real potential for the T8 LED bulb to make a big difference to Cree’s bottom line. According to figures released by Philips, there are some 12 billion fixtures globally wired for T8 fluorescent bulbs.
That is a massive install base just waiting for a plug-and-play solution that’s more energy efficient and less costly to maintain. Combine the bulb prices with the potential market opportunity, and you’ll see that capturing even a small fraction of those customers with its new T8 LED bulb could help propel Cree stock once again.
Me? I can’t wait to pick up a few of these Cree LED bulbs to replace the buzzing, flickering, prone-to-shattering fluorescent tubes currently in my basement.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.