Recent favorable analyst comments on the LED (Light Emitting Diode) market and, specifically, market leader Cree Inc. (Nasdaq: CREE) have once again fired up interest in LEDs, which have the potential for long-term market-share gains in many conventional lighting markets. In fact, it seems that, if anything, LED growth has been underestimated.
LED lights differ from conventional lighting materials in that they are powered by chips, rather than filaments, as are incandescent lightbulbs, or gas in the case of fluorescent lights. They are significantly more energy efficient than traditional lights and can last as much as 10 times as long. Studies by the American Council for an Energy-Efficient Economy (ACEEE), for example, indicate that the LEDs used in traffic signals save as much as 93 percent in costs per signal.
LEDs have recently experienced steady market growth in two primary segments: the "backlight" market, where they are used to illuminate screens in TVs and personal electronics; and commercial and residential lighting. Other applications include municipal lighting.
LEDinside, an industry tracker, estimates the entire lighting market at US$73 billion, with LEDs having only about 3 percent penetration, or $2.4 billion.
To put things in industry perspective, take a look at Cree, considered a market leader with the largest market share in LED components and a strong patent position. Cree, despite showing the largest gains in the market, still had revenues of only about $867 million in the fiscal year ended June 27 and $7.4 billion in market capitalization as of Friday, Dec. 3.
Cree has been growing fast. It reported record revenue in fiscal 2010, up 53 percent from $567 million in the prior year, while non-GAAP earnings increased 203 percent to $179 million, or $1.71 per diluted share. Cree CEO Chuck Swoboda said at the end of that fiscal year that "we are in the early stages of broad adoption to LED lighting over the next 10 to 15 years." Other leading global manufacturers of LED components include Osram GmbH, Koninklijke Philips Electronics N.V. , and Nichia Corp.
The LED market might progress something like the computer market: First, it started as an expensive and eccentric technology only used for the largest commercial and industrial applications. Then, Moore's Law drove the cost of the technology down, and it made its way into the consumer technology market. This appears to be what's happening to LED lighting as the cost curve has Moore's Law properties and can be scaled on a manufacturing basis because they are, in fact, chips.
And this is what generates real excitement in the LED industry: the notion that the entire lighting market will be taken over by the technology. In Japan, further penetration of LEDs into the consumer market has already happened (why do the Japanese always seem to be on the leading edge?). According to Asian investment and research firm GFK, LED lightbulbs now account for more than 50 percent of the entire lighting market in Japan. Yet, worldwide, LEDs are only a small portion of the global lighting market. Digitimes research estimates that the share of the global lightbulb market could reach 17 percent by 2013. From 2011 to 2013, global LED production value will rise by at least 25 percent every year and surpass $20 billion, according to Digitimes.
Combine LEDinside's numbers with Digitimes numbers, and it's clear the LED lighting market could easily grow from $3 billion to $20 billion in less than 10 years.
Commercial and municipal activity is currently driving the LED market. New York City mayor Mike Bloomberg famously replaced all of New York City's traffic lights with LED-based technology a number of years ago. New York City also announced in 2008 that it is exploring the move to LED streetlamps. And Walmart has made aggressive moves to replace conventional lights with LEDs in many of its buildings.
The criticism of LEDs has been similar to that of nearly every other cutting-edge technology: They are too expensive. And history has shown such criticisms to always be short-lived, as the price of the new technology always drops rapidly enough to drive broader adoption.
Take a look at the flashlight at your local hardware store. Chances are it's an LED-based flashlight. Just five years ago this would have been considered eccentric or expensive, but now it's mass market. This simple little flashlight demonstrates the power of the technology. Do you really think cost is going to stop LEDs from taking over all lighting?