No. of Recommendations: 35
CREE KARB Analysis

See this post for NEW KARB criteria:
http://boards.fool.com/Message.asp?mid=13444144

A. Top dog, first mover, in an important, emerging industry that is currently in the Tornado (hypergrowth), or is in the early stages of Tornado/hypergrowth growth. (Most of the signs of Tornado formation/growth as laid out in the Gorilla Game FAQ must be met; refer to item #12 in this post:
http://boards.fool.com/Message.asp?id=1360002000838000


CREE is involved in a number of technology markets that are entering tornadoes.
They are leaders in SiC wafer production and LED diode lighting products (such as those used to backlight cell phone screens and PDA screens), they produce equipment for wireless (radio frequency) and power industries. CREE is early in the tornado phase with amny of its products, for the most part they can't meet demand and that indicates that the only thing stopping CREE now is constrained manufacturing capacity.
See this post on the Future of CREE Part III:
http://boards.fool.com/Message.asp?mid=12773094

Top Dog:
From Yahoo! Profile:
http://biz.yahoo.com/p/c/cree.html
CREE is the world leader in developing and manufacturing compound semiconductor materials and electronic devices made from SiC. SiC-based devices offer significant advantages over competing products made from silicon, gallium arsenide, sapphire and other materials for certain electronic applications. The Company uses its compound semiconductor technology to make enabling products such as blue and green light emitting diodes, or LEDs. The Company sells its LEDs to customers who package them for use in applications such as backlighting for automotive dashboards and automotive interior lighting, wireless handsets and other consumer products. Other applications for its LEDs include indoor and outdoor full color displays, such as video boards in indoor arenas and outdoor stadiums or billboards and message signs.

First Mover:
CREE is very hard to categorize because it is involved in so many early industries, but it is clearly the first mover in SiC materials/semiconductors and also in LED diode lighting.

From the Daily Double Feature on 2/24/00
http://www.fool.com/ddouble/2000/ddouble000224.htm
Cree was started in 1987 by a group of scientists from North Carolina State University who were interested in the use of silicon carbide (SiC) as a semiconductor material. The research into SiC has paid off, and now the company makes a wide variety of chips and diodes that work at higher temperatures and voltages than typical semiconductors. Cree is today's world leader in SiC semiconductor production.

The company also makes blue LEDs, which round out the LED color spectrum and are more intense than the red or green LEDs that have been around for years. Cree's LEDs are beginning to be used as a light source in everything from car dashboards to wireless phones to large, full color displays, like those found in sports arenas.

Cree is also putting significant research efforts into the commercial development of blue lasers. Blue lasers have a shorter wavelength than red lasers, which means they can potentially increase to a large degree the amount of data that can be stored in optical disk systems.

CREE as a Gorilla:
See this CREE Gorilla summary by TinkerShaw
http://boards.fool.com/Message.asp?id=1380180000384000
Also see this CREE report by Eric Johnsa in www.tsrec.com:
http://www.tsrec.com/sicompany.html


B. Sustainable advantage gained through business momentum, patents, visionary leadership, high barriers to entry, and high switching costs.

CREE has more than 70 patents on its technology, it is way ahead of any other competitor in SiC materials and in developing blue LED diodes.
Recent press release on new Blue-green diodes:
http://www.cree.com/about/news082.htm
Business momentum: CREE has increased their earnings sequentially for the last 16 quarters.
From 10-K highlights:
http://boards.fool.com/Message.asp?mid=13279367
PATENTS
At June 25, 2000 Cree owned or held exclusive rights licensed under a total of 70 issued U.S. patents, subject in some cases to nonexclusive license rights held by third parties. Included in the patent licenses we hold is an exclusive license granted by North Carolina State University, or N.C. State, to 10 U.S. patents, and to corresponding foreign patents and applications, that relate to SiC materials and device technology, including a process to grow single crystal SiC. Cree has been notified from time to time of assertions that their products or processes may be infringing patents or other intellectual property rights of others. They state that they have investigated such claims and determined the assertions were without merit or have taken steps to obtain a license or avoid the infringement.

"C. Excellent Growth Metrics"

RELATIVE STRENGTH:
CREE's Relative Strength in the past 12 months, according to www.moneycentral.com, is 94. Makes it past this hurdle.

2 points.

Madmarv has an awesome spreadsheet with all kinds of CREE financials in it:
http://boards.fool.com/Message.asp?mid=13476824
also with FY200 numbers:
http://boards.fool.com/Message.asp?mid=13106806

SALES GROWTH:
YoY:
June 1999 - June 2000: $108,562
June 1998 - June 1999: $62,401

That's a growth of 76.6%.

QoQ (TTM):
Sep 2000: $125,343
Sep 1999: $ 70,983

This is a growth of 76.6%.

QoQ (3 mo):
Sep 2000: $37,642
Sep 1999: $20,861

This is growth of 80.4%

1 point.

Sequential (TTM):
June 2000: $108,562
Sep 2000: $125,343

That's a sequential quarterly growth of 12.8%.

2 points.

"D. Clear signs of solid execution by a strong management team; Value chain in place or shows clear signs of developing (eg. alliances, joint ventures, partnerships, signing up distributors, third party developers, and VAR's)"

See the latest CC notes,
By Marimba
http://boards.fool.com/Message.asp?mid=13475315
and mikegavone
http://boards.fool.com/Message.asp?mid=13486920
Also see TMFOrangeblood's article on CREE's latest earnings report/CC:
http://www.fool.com/news/2000/cree001013.htm

The biggest news of the conference call was mentioned almost in passing. Hunter announced Cree had landed the services of Shuji Nakamura, who has attained legendary status in the optoelectronics field. Nakamura's brilliant research eventually generated hundreds of millions in sales for a small Japanese company, Nichia Corp. Nakamura will join Cree in a research capacity.

Of his many accomplishments, one of Nakamura's biggest was the development of the blue-violet semiconductor laser. Red lasers are currently used to read the information stored on CDs and DVDs, but because a blue laser has a shorter wavelength, much more information can be packed on these discs once the product becomes commercially viable. Nakamura gave his company a head start on the blue laser, and then surprised the industry by leaving Nichia to accept a faculty position at the University of California at Santa Barbara.

Once news of his departure spread, Nakamura was offered high-paying jobs by several U.S. companies. Because Nichia held patents on all his work, however, he feared his former company could sue him if he continued to build on his ideas while working for a competitor. So, he landed in the world of academics.

Exactly what Cree offered Nakamura to pull him back into the commercial world isn't clear. In the conference call, Hunter went out of his way to explain to one questioner that Nakamura's work with Cree would be done without violating any Nichia patents or non-disclosure agreements. Even with those restrictions, Nakamura's work could help Cree lead the way in an industry where great research can pay huge dividends.


"E. Company products and brand name are well recognized and respected by its customers, peers, competitors and partners in the relevant industry."

CREE's products will never brand well since it supplies infrastructure, but you'll see CREE components in wireless/PDA handsets, outdoor lighting and many other uses.

Form TinkerShaw's GG report:
http://boards.fool.com/Message.asp?id=1380180000384000
VALUE CHAIN: CREEs proprietary technology is the production of SiC. Something no one has been able to do on a mass scale other than CREE. CREE's production techniques are covered by over 70 patents and according to CREE management is at least 6 years ahead of their closest competitors and growing. SiC production is therefore the proprietary and open architecture that CREE provides. Entire industries will be revolutionized by use of SiC and come to depend on SiC. CREE may also develop patents around products like power switches, blue laser, etc.

Second, CREE is the only producer in the world which can commercially mass product SiC to commercial quality. All future competitors in the field will either (1) have to license CREE production techniques or (2) produce at a much higher cost given CREEs tremendous head start.

In fact competitors will actually aid CREE because more SiC production is needed to meet demand and to increase demand going forward. I don't know if CREE will ever be able to catch up to the demand on its own.


"F. Valuation metrics: "

http://biz.yahoo.com/p/c/cree.html

MktCap: $3.2 B
P/E: 87.36
P/S: 26.41

Also see this post by GorillaGorilla for valuing CREE:
http://boards.fool.com/Message.asp?mid=13404796

SUMMARY:

CREE is a very young company, leading in some very exciting infrastructure markets. SiC has a number of advantages for microprocessors that resist high heat, and also in the production of blue LED diodes and lasers, these in turn will be used in a number of high tech devices/displays. I believe CREE will emerge as a Gorilla or at least a very strong King in a number of markets. As far as I'm concerned, it is a Rule Breaking stock and deserves to be included in KARB.

-xerohype

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Absolutely excellent layout and analysis. Thank you for your work. This one goes to the hard drive.

Hanson

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Hey xerohype (Erick),

Great analysis on CREE. I had no idea that CREE had such great hypergrowth potential.
What are some possible risk factors with CREE?

Thx.
Cheers,
Albert
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Hello Albert (Phileo):

Very nice analysis on AVNX. Let me try to answer you question:
What are some possible risk factors with CREE?

Most of the risks of CREE boil down to execution. CREE needs to execute by improving their manufacturing of SiC (they are already the leader, but by making the material cheaper and better they will open up new markets).

CREE also relies on a small number of clients and a small number of supliers for raw materials, unforseen events could disrupt their supply chain or disrupt their revenue stream.

Their last 10-K (8/00) has a large section on business risks, here are some from the 10-K (partially listed below, see the 10-K for complete detailed list).

As I see it, CREE faces most of the business risks of any semiconductor company in a booming market. CREE has been executing very well, and I expect them to meet their potential. There is risk, but measured against the $3.2 Billion price tag, I think that the risk is one I can bear with such a big potential possible.

Erick
(xerohype)

CERTAIN BUSINESS RISKS AND UNCERTAINTIES
----------------------------------------

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND WE MAY NOT BE ABLE
TO MAINTAIN OUR EXISTING GROWTH RATE.

Our operating results will depend on many factors, including the following:

o our ability to develop, manufacture and deliver products in a timely and
cost-effective manner;
o whether we encounter low levels of usable product produced during each
manufacturing step (our "yield");
o our ability to expand our production of SiC wafers and devices;
o our ability to produce higher brightness products;
o demand for our products or our customers' products;
o competition; and
o general industry and global economic conditions.

IF WE EXPERIENCE POOR PRODUCTION YIELDS, OUR OPERATING RESULTS MAY SUFFER.

The number of usable crystals, wafers and devices that result from our
production processes can fluctuate as a result of many factors, including but
not limited to the following:

o impurities in the materials used;
o contamination of the manufacturing environment;
o equipment failure, power outages or variations in the manufacturing
process;
o losses from broken wafers or other human error; and
o defects in packaging.

Because many of our manufacturing costs are fixed, if our yields decrease our
operating results would be adversely affected. For this reason, we are
constantly trying to improve our yields. In the past, we have experienced
difficulties in achieving acceptable yields on new products, which has adversely
affected our operating results. We may experience similar problems in the future
and we cannot predict when they may occur or their severity. These problems
could significantly affect our future operating results.

THERE ARE LIMITATIONS ON OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY.
IF WE ARE UNABLE TO PRODUCE ADEQUATE QUANTITIES OF OUR HIGH BRIGHTNESS LEDs, OUR
OPERATING RESULTS MAY SUFFER.

OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON THE DEVELOPMENT OF NEW
PRODUCTS BASED ON OUR CORE SIC TECHNOLOGY.
WE DEPEND ON A FEW LARGE CUSTOMERS.

For example,
for fiscal 2000 our top five customers accounted for 82% of our total revenue.

WE FACE CHALLENGES RELATING TO EXPANSION OF OUR PRODUCTION AND MANUFACTURING
FACILITY.

THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.

The market for our products is highly competitive. Our competitors currently
sell blue and green LEDs made from sapphire wafers that are brighter than the
high brightness LEDs we currently produce. In addition, new firms have begun
offering or announced plans to offer blue and green LEDs. The market for SiC
wafers is also becoming competitive as other firms have in recent years begun
offering SiC wafer products or announced plans to do so. We also expect
significant competition for products we are currently developing, such as those
for use in microwave communications.

We expect competition to increase. This could mean lower prices for our
products, reduced demand for our products and a corresponding reduction in our
ability to recover development, engineering and manufacturing costs. Any of
these developments could have an adverse effect on our business, results of
operations and financial condition.

WE FACE SIGNIFICANT CHALLENGES MANAGING OUR GROWTH.

OUR OPERATING RESULTS COULD BE ADVERSELY AFFECTED IF WE ENCOUNTER PROBLEMS
TRANSITIONING LED PRODUCTION TO A LARGER WAFER SIZE.

Beginning in fiscal 2001, we plan to begin shifting LED production from two-inch
wafers to three-inch wafers. We must first qualify our production processes on
systems designed to accommodate the larger wafer size, and some of our existing
production equipment must be refitted for the larger wafer size. Delays in this
process could have an adverse effect on our business. In addition, in the past
we have experienced lower yields for a period of time following a transition to
a larger wafer size until use of the larger wafer is fully integrated in
production and we begin to achieve production efficiency. We anticipate that we
will experience similar temporary yield reductions during the transition to the
three-inch wafers, and we have factored this into our plan for production
capacity. If this transition phase takes longer than we expect or if we are
unable to attain expected yield improvements, our operating results may be
adversely affected.

WE RELY ON A FEW KEY SUPPLIERS.

We depend on a limited number of suppliers for certain raw materials, components
and equipment used in manufacturing our SiC products, including key materials
and equipment used in critical stages of our manufacturing processes. We
generally purchase these limited source items with purchase orders, and we have
no guaranteed supply arrangements with such suppliers. If we were to lose such
key suppliers, our manufacturing efforts could be hampered significantly.
Although we believe our relationship with our suppliers is good, we cannot
assure you that we will continue to maintain good relationships with such
suppliers or that such suppliers will continue to exist.

IF GOVERNMENT AGENCIES OR OTHER CUSTOMERS DISCONTINUE THEIR FUNDING FOR OUR
RESEARCH AND DEVELOPMENT OF SIC TECHNOLOGY, OUR BUSINESS MAY SUFFER.

In the past, government agencies and other customers have funded a significant
portion of our research and development activities. If this support is
discontinued or reduced, our ability to develop or enhance products could be
limited and our business, results of operations and financial condition could be
adversely affected.

OUR OPERATIONS COULD INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.


IF AN ADVERSE JUDGEMENT IS ENTERED IN THE PENDING PATENT LITIGATION, OUR
BUSINESS MAY SUFFER.

Our distributor in Japan is currently a party to patent litigation in Japan,
brought by Nichia, in which Nichia claims that our LED products infringe two
Japanese patents it owns. The complaints in the proceedings seek injunctive
relief that would prohibit our distributor from further sales of our LED
products in Japan. A result adverse to the distributor in these cases would
impair our ability to sell both our standard brightness and high brightness LED
products in Japan. Subject to contractual limitations, we have an obligation to
indemnify our distributor for certain patent infringement claims.

WE ARE SUBJECT TO RISKS FROM INTERNATIONAL SALES.

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Thanks for the great analysis, Erick. As far as risks, I summed up some of it in our Halloween special:

As good as the story sounds, be aware that a few gremlins are hanging around that could leave you holding a bag of rocks instead of treats, especially in the short term. A delay in getting the new plant online, losing a key customer, failure to increase production yield as expected, a patent lawsuit that goes the wrong way -- any of these could take a big chunk out of the share price (even though it's already well off its 52-week high). All of these factors should scare you into thoroughly researching this company before you invest a dime.
http://www.fool.com/Specials/2000/sp001024d.htm

But definitely read the rest of it; I measured Cree's financials using the Rule Maker metrics.

Cheers,

orangeblood
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First, I'd like to thank Xerohype and the other fools for stimulating me to pay closer to this company. The DD on Cree has been very educational for me. I might even put some money in this one :)

One thing that I found very interesting about this company that hasn't been mentioned in this thread, is the company's cash conversion cycle. From it's 10K, I calculated a CCC of 8. Cree's CCC for 1999 FY was 54. This seems like a nice improvement to me, and at first, I was afraid that I had miscalculated. But I checked my results against Madmarv (http://boards.fool.com/Message.asp?mid=13476824) and I'm a little more comfortable with my numbers. The decreased CCC seems to be due to an increase in Days Payable Outstanding, and a decrease in Days Sales Outstanding.

I realize that CCC is not a part of the KARB requirements, but I wanted to come out of lurk mode and highlight the company's improvement. Just another indication that Cree appears solid.

Mike
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Just reviving a very old thread since I noticed CREE showed up in Anne's overlaps scans.

Obviously CREE hasn't been a net gainer rally since that time. I think it's a much different situation now though . LED lighting tech is much closer to being reality now

I think CREE could be a solid play despite the very very lofty valuation going into 2012 which is when Federal mandates that incandescent lightbulbs will be come illegal to sell for retailers.
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