Specifically, we believe the applications for LDMOS, SiC, and GaN technology will largely be for power amplifiers targeted at transceivers in wireless base stations. Our
estimate for the total available market for 2001 is approximately $840 million.
,,,,,Revenue by Product Segment
Revenue from LED products accounted for approximately $20.2 million (46%) of the company™s
revenue in 1998 and grew to $68.3 million (63%) in 2000, a compound annual growth rate of
approximately 84%. Cree accounted for approximately 34% of the total LED market, in terms
of unit shipments, in calendar year 2000. Revenue from SiC materials and wafers grew to
$28.2 million in 2000 from $14.5 million in 1998, a compound annual growth rate of
approximately 40%. Revenues derived from government contracts increased to $11.9 million
in 2000 from $9.2 million in 1998, a compound annual growth rate of approximately 14%.
,,,,,,,,,,,,,Intellectual Property,,,,,,,,,,,,,,,
Cree currently holds 97 patents related to SiC, LDMOS and Si Bipolar technologies. The
patents expire between 2007 and 2018. Included in the patent licenses is an exclusive
license granted by the North Carolina State University to 10 U.S. patents and corresponding
foreign patents, including a process to grow single-crystal SiC. The license is worldwide,
fully paid, and exclusive.
The company maintains a considerable amount of proprietary technology that is not patented
or published. The company seeks to protect this technology, primarily through the use of
nondisclosure agreements with customers and employees.
u Manufacturing Cree operates its own facilities in Durham, North Carolina. Direct control over SiC crystal
growth, wafering, epitaxial deposition, device fabrication, and test operations allows the
company to shorten its product design and production cycles, and to protect its proprietary
technology and processes.
The company acquired its present manufacturing facility in November 1997: an industrial
site in Durham, North Carolina, consisting of a production facility as well as service and
warehouse buildings. Cree has recently completed the construction of an addition to the
main production facility. The company also recently purchased a site close to its present
facility for potential future expansion.
With the acquisition of UltraRF, the company also operates a fabrication LDMOS and Silicon
Bipolar fabrication facility in Sunnyvale, California.
u Marketing and
Distribution Cree primarily uses targeted marketing and a small direct sales force for its wafer and opto-
electronic products. The targeted customer base for these products is limited, and the com-
pany believes this is the best approach. Cree departs from the direct-marketing approach in
certain Asian countries. In Japan, the company markets its products through Sumitomo Cor-
poration and Shin-Etsu Handotai Co., Ltd. Cree also utilizes sales representatives in Hong
Kong, China, Taiwan, and South Korea. For RF and microwave products, the company uses
both direct sales and sales representatives in the United States. The company has yet to an-
nounce a relationship for RF and microwave component sales outside the United States.
,,,,,,,,,,,,, Investment Thesis and Valuation,,,,,,
Clearly, an investment in Cree, Inc. is an investment in the potential of the Silicon Carbide
technology in several differentiated business. The LED business is well developed and has
enabled Cree to build a substantial manufacturing base that it can now leverage in the RF and
microwave component, power device, and laser-diode markets. These new market oppor-
tunities will most likely be less price sensitive and potentially offer higher gross margins.
As a substrate, Silicon Carbide provides significant technical advantages over Silicon and
Gallium Arsenide for RF and microwave components, particularly at higher powers. We
expect Cree to leverage its investment in UltraRF, and its LDMOS technology penetrate the
power amplifier market, providing future opportunities for SiC and GaN-based components.
Products in the power device, advanced microwave, and laser diode markets are in
development. These devices target markets that should not only provide significant revenue
opportunities, but also diversify the company™s concentrated revenue stream.
We expect Cree to report earnings of $0.18 per share on $52.0 million in revenue for its third
fiscal quarter of 2001, ending in March. For fiscal year 2001 ending in June, we estimate
Cree will report earnings of $0.68 per share on $176.1 million in revenue. Going forward,
we believe Cree can trade conservatively at a forward 12-month P/E ratio of approximately
66x earnings or approximately 56x calendar year 2001 earnings. This is a significant discount
to its historical average forward 12-month P/E ratio of 82x and a slight discount to the mean
2001 P/E ratio of its peer group of 59x. We rate Cree Strong Buy-Speculative with a price
target of $38 per share.( DAIN RAUSCHER WESSELS) |
