Needham & Company LED Lighting Industry Initiation: Crossing the Chasm = Facing Some Growing Pains

Needham & Company LED Lighting Industry Initiation: Crossing the Chasm = Facing Some Growing Pains

Needham analyst, Y. Edwin Mok. said, "We are initiating coverage on the LED industry. While the LED industry continues to experience meaningful unit growth driven by a number of fundamental long-term drivers, overinvestment and slower than expected demand have resulted in faster than anticipated pricing decline. We believe near-term weakness of the sector will persist into 1H12, as growth in backlighting slows while general lighting has not accelerated fast enough to absorb the incremental capacity."

"Conversely, we believe the LED general lighting market opportunity is likely bigger than some investors anticipate. We believe the market could experience the turn as early as 2H12 and into 2013, driven by adoption of LED lighting in the commercial and the public segments. Going beyond 2013, we believe growing acceptance and prices falling to the tipping point of $10 per bulb will drive consumer adoption. Among LED companies, we favor vertically integrated LED players with multiple ways to lower costs and access to the downstream market. We believe consensus earnings estimate reductions in MOCVD are not over, and we expect more cuts to limit those stocks in 2012. We believe the sapphire industry could recover quicker than other parts of the value chain, and we expect better industry dynamics in the second half of 2012. Finally, we believe the desire for improved yields in other parts of the LED supply chain could open new opportunities for various equipment and material suppliers."

"We are initiating coverage of Cree, Inc. (Nasdaq: CREE) with a Buy rating, Aixtron SE (Nasdaq: AIXG) with a Hold rating, and Veeco Instruments, Inc. (Nasdaq: VECO) with a Hold rating. As a leader in LED technology with a strong position in the LED lighting market, CREE is a marquee name for investors looking to add exposure to this growing area. On the other hand, we are concerned that the overcapacity of MOCVD will persist for the next 12-18 months, resulting in lower revenue/bookings for both AIXG and VECO."

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