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Investing in LED Companies

Written By Brian Hicks

Posted April 1, 2008

Since our January 8th discussion of LED market growth, shares of featured company Cree Inc. jetted from a near $23 low to more than $35, before pulling back. It’s a move that helped Pure Energy Traders realize a 310% gain at one point with Cree June 2008 25 call options, and a 52% gain on the underlying stock.

20080401 cree chart

But my purpose isn’t to show off Pure Energy gains. It’s to prove that LED growth is and will continue to be explosive with Cree-like companies. Sure, the nay sayers would have you believe the LED market run is over. But we’re talking about a market with 388% growth potential; a market expected to far exceed $1 billion by 2011, dwarfing the 2005 market value of $205 million.

We weren’t the only ones to see the investing potential in LED companies.

As we’ve highlighted in the past:

  • Walt Disney World has changed over to LED, wiring Cinderella’s Castle with more than 20,000 LEDs and saving thousands of dollars.
  • The Times Square ball was lit with LED lighting, making it twice as bright and using half the energy.
  • The city of Boulder, Colorado, has switched to LEDs for its Downtown Pearl Street Mall.
  • Royal Philips Electronics is aware of the potential, announcing it was buying Genlyte for $2.7 billion as part of its LED company buying spree as it strengthens is energy-efficient lighting business.
  • London has launched an attempt to "become the first city in the world to be lit by LEDs . . . the city aims to install LEDs in all its streets within five years."

Even a January 2008 survey, taken at the 2007 Hong Kong International Lighting Fair, makes LED growth irresistible.

It found that:

  • 72% of respondents saw a growth rate of more than 20% for LED lighting applications in their businesses over the past six months.
  • About 63% believe LED lighting will comprise more than 50% of 2009 sales or installations.
  • And future LED market growth is expected to come from a mix of sources: (20% use in street/parking; 17% in residential indoor; and 15% in office use).

Even venture capitalists are lining up. Says the Wall Street Journal, "Many venture capitalists are touting the energy efficiencies of next-generation lighting, including start-ups using light-emitting diode, or LED, technology. LEDs, though more expensive than incandescent bulbs or fluorescent tubes, draw much less power, last for many years and contain few materials that are harmful to the environment."

The growth is there, as we’ve already seen with Cree. You just have to know where to look. So when I learned that LED backlighting was expected to grow more than 20% this year, I went hunting.

Investing in Rubicon Technology (RBCN:NASDAQ)

With so many shelved, sputtering or failed IPOs, many companies are wishing they never went public.

There are the exceptions, though. Rubicon Technology is one of them. Since opening at $14 in mid-November, it’s steadily climbed to $30 in four months… and for good reason. It’s part of LED market growth. These are the guys that make sapphire materials, wafers, and products for light-emitting diodes (LED) with quite a reception. 

20080401 rbcan chart

And thanks to that LED involvement, the company narrowed its losses by nine percent to $2 million, or $1.82 a share, as compared to a $2.2 million loss in 2006. Sales were up 55.7% to $9.5 million from $6.1 million.

But what’ll fuel future growth are the company’s wafers made out of sapphire, or the product that forms the substrate of the semiconductor diodes used to create LEDs, and its "special technique," referred to as the ES2 advanced Kyropoulos method (a "secret" only known by the cogs of the RBCN machine).

For more on that ES2 secret, Investor’s Business Daily explains:

"(The ES2 method) adds to the yield of the LED manufacturer because the uniformity across the wafer is greater," said analyst Jonathan Dorsheimer of Canaccord Adams. "When you produce a chip on a wafer, every chip is not the same. (But) if you get more chips that are the same, the yield is higher."

Rubicon has been continuing to grow this market by offering larger wafers. Traditionally it sold 2-inch wafers, on which an LED maker could grow about 2,000 chips. But as LEDs migrate to bigger and brighter applications, the chips are getting bigger. Now Rubicon is phasing out its 2-inch line and focusing on 3- and 4-inch wafers.

A push into even bigger wafers is opening up a new market: radio frequency integrated circuits. These create the transceivers in mobile phones, TV boxes, satellites and military gear. These chips are bigger yet: Rubicon’s current wafers for this market are 6 inches across, and it’s working on an 8-inch model. Parvez says 12-inch wafers are already in use.

These chips are quite large because they are replacing four traditional chips. The insulating properties of sapphire virtually eliminate the "cross talk" problem that plagues mobile phones, Parvez says. The marginal benefits to Rubicon are clear: A 2-inch wafer goes for $20, but a 6-inch wafer can sell for up to $500.

Rubicon is also investing in infrastructure. Last month it opened a new facility near its home base in suburban Chicago, which the firm says will boost crystal growth capacity by 30% to 40% this year and ultimately double it. So far, the strategy seems to be working. In the fourth quarter, profit blew past analyst estimates to 10 cents a share. Sales gained 58% to $9.6 million.

Analysts polled by Thomson Financial expect profit to jump 142% this year, to 46 cents a share. Over the next two years, they see profit continuing to grow in the mid-30% range.

Still, [Joe Foresi of Janney Montgomery] believes that Rubicon has to prove itself against a number of challenges. For one, customer concentration. The top three clients account for more than half of revenue, and three-quarters of all sales go to Asia.

[CEO Raja] Parvez thinks that’s not a bug, it’s a feature. Rubicon sells mainly to wafer polishers who themselves sell to a variety of clients. And their numbers have been reduced in the last few years as the weaker players have been weeded out. Parvez also points out that a new application for sapphire has recently emerged: the laser diodes in Sony’s Blu-ray Disc. Those diodes are made exclusively with sapphire. And now that Blu-ray has won the format war, Rubicon could have a much-bigger end market."

However, positive press and explosive earnings potential aside, don’t rush out to buy RBCN just yet. Yes, the company expects to be profitable for the first time, and is set to more than double capacity, but after putting in a triple-digit move to the upside, wait to buy on pullbacks.