Article from Shaking the Money Tree by Robert Metz dated 2/3/98 talks.com
Cree: There's Light At The End of The Tunnel Diode, Colored Light
Cree Research (Nasdaq: CREE) is like a Christmas tree blazing with lights: you have to look very close to tell if the tree itself is real. Those focusing on Cree's roots see, among other key attributes, a literal diamond in the rough.
If the few analysts who are using a jeweler's loupe are right, the market's perception, that of a company which produces a gazillion not-so-precious semiconductor chips that emit light, may be, well, flawed.
Light-emitting diodes or LEDs are vital in today's world (in laptop computer screens, digital watches, etc.) but they are also widely available.
However, in Cree's case, it is the "substrate" silicon carbide that defines its semiconductors. Hark back to 1987 when Cree scientists began seeking a viable alternative to plain silicon, the traditional element used in semiconductors. Cree scientists chose silicon carbide for its unique properties, properties that could result in proprietary products.
Cree's effort followed that of a number of other manufacturers who broke their picks trying to create silicon carbide crystals. To Cree it was "inordinately difficult" to create crystals of this extremely hard material.
But in just a few years, Cree turned the material into successful products including the first viable silicon carbide wafer. Cree Research insists that it stands alone as the only company in the world that has been able to commercialize silicon carbide as a semiconductor material. Cree Research adds that it has "more than 40 patents related to silicon carbide. "
Last year, Cree "dramatically improved its wafer product family." First, it decreased the number of micropipes, which is to say, microscopic flaws in its wafers. "By reducing micropipes by 50% in some cases, Cree offers its development customers an improved substrate."
The company also began to fabricate larger two- and three-inch wafers which allow Cree's customers to experiment with new uses.
Importantly, Cree has created unique blue LEDs of silicon carbide, a scientific feat said to have eluded other manufacturers. Remember that the three primary colors out of which all other colors are created are red, green and blue. Top quality red and green LEDs are easier to come by.
Krishna Shankar of Donaldson, Lufkin & Jenrette says the following points are salient here: Cree is an emerging growth semiconductor firm. It focuses on high-growth markets such as high-brightness blue LEDs and the blue laser diode market for color display, optical recording/storage for data storage and DVDs. (Digital Video Disks may replace video tapes in the future. They can be etched with Cree's proprietary lasers.) Cree uses its diodes in printing, industrial and consumer electronics applications, too:
"Through a proprietary combination of Gallium Nitride epitaxial films layered on silicon carbide substrate wafers, Cree is able to produce cost-effective, high-brightness blue LEDs and R&D laser diodes. ... As opposed to conventional silicon wafer substrates, silicon carbide substrates have the advantages of high power, GigaHertz level high-frequency device operation, and high heat dissipation capabilities. The devices can be used in rugged applications such as automotive, electric power conversion, high-frequency cellular and satellite communications, space/military applications, and UHF-level broadcast equipment applications. Cree has solved many of the traditional problems with Silicon Carbide wafer crystal growth such as defects, uniformity, high costs and reliability."
About that diamond in the rough. Cree calls its silicon carbide the "third hardest compound known to mankind with diamond the first."
Cree's new partner, C3 Inc., offers silicon carbide as "a logical material for a new diamond substitute that's almost indistinguishable from the real stone." The two companies are working to reduce the flaws in the crystals and also to grow higher purity, larger diameter crystals.
Donaldson Lufkin's Shankar says the C3 deal has supplemented the company's revenue stream and is helping fund 3-inch chip development.
Shankar's report, published in mid-January when the stock was 15-1/2, gave a price target of 25 in 12 months. Cree closed on Feb. 6 at 16-1/4. In the last 12 months, Cree has traded as high as 30 and as low as 9.
Shankar expects earnings per share of 90 cents per share in the 1999 June year, or double the 45 cents he anticipates for the current fiscal year that ends this June. Cree earned 28 cents in fiscal 1997. He expects 35% to 40% growth for five years.
Herbert Jackson of Renaissance Research Corp. in Richmond, Va. had just spoken by telephone with Cree Controller Cindy Merrill when I reached him last week. He said, "We would be inclined to raise estimates to 48 cents for the fiscal year ended June." That's core operating earnings.
Jackson calls Cree "a misunderstood semiconductor materials company. Everyone figures they make little blue lights, but Cree is more than that ... Cree's stock price would be higher if The Street focused on its earnings power as a wafer materials company. Its LED sales have made it possible for them to expand into other areas without diluting stock." |
