Few companies can match the growth of Veeco Instruments (VECO). The company produces MOCVD chambers – that’s metal organic chemical vapour deposition chambers, to be precise – which are used to make compound semiconductors, thin film solar cells and, most importantly, light emitting diodes (LEDs).
The company competes with Aixtron, a German listed company and Jusung Engineering, listed in South Korea. Aixtron is far and away the market leader with about a 70% share of global sales.
Today, the main end use for LEDs is as the backlighting source for flat screen TVs. Last year about 3% of flat screen TVs shipped were lit with LEDs. Thanks to Samsung’s (SSNLF.PK) pioneering efforts, LED lit TVs have become a monster hit with consumers. Analysts have repeatedly increased forecasts in an effort to keep pace with a rapidly growing market. This year the consensus is that 20% of the flat screen TV market could be LED lit. By 2012, the consensus view is that LEDs could be in half the flat screen TVs sold. These numbers are indicative; the probability is that either more flat screen TVs will be shipped than expected, or that LEDs will make up a higher proportion of the market than the consensus believes.
The slower growing LCD monitor and TV market gives us a clue to the problem. Three months ago shipments of LCDs were widely expected to decline by 5% to 15%. Instead, they grew by 7%. Veeco gives us a clue as to what is happening in the LED market.
In the third quarter last year, the company shipped 22 MOCVD chambers. By the fourth quarter, it has shipped 40 units. Fast forward to the end of this year, and Veeco expects to have shipped an average of 120 units per quarter. Most of this growth will come from the TV and computer monitor market. But new suns are rising on the horizon. Both China and the general lighting market will soon become the new drivers of LED growth. As these new markets take off, the likelihood is that LED sales will continue to outstrip market estimates.
Unless, of course, there is a collapse in consumer demand.
LED lighting sales now accounted for 10% of Philips’ (PHG) overall lighting sales. In its conference call (see transcript here), Veeco said that the general lighting market might be worth a $100bn and was 10 times the size of the market for back lit TVs. As a sign of what is to happen, Samsung has just announced a joint venture with Acuity Brands, a US quoted lighting equipment maker to enter the lighting market. The company also pointed out that the use of LEDs for general lighting was just beginning to hit its stride in China, due to government initiatives to promote its use.
In its conference call, Veeco’s CEO said, “We expect China to be an enormous market for LEDs.”
China and the general lighting market are still nascent, in the meantime Veeco is still seeing hectic growth in the solar panel and flat screen TV market. In the fourth quarter, bookings were up 200% on the previous year, at $262m. In the previous quarter, orders were $226m.
At present LED supply is constrained by supply bottlenecks, which means that equipment makers, such as Veeco and Aixtron (AIXG) have probably never had it so good. The chart below illustrates the performance of Aixtron’s shares compared to its peers and the Philadelphia Semiconductor Index (SOX). Analysts’ earnings estimates for all four stocks have been rising for most of the last 12 months, driving the shares up. Aixtron shares have started to fall, just at the point when earnings estimates have once again been increased.
However, the weakness in the shares probably has more to do with general market worries about the sustainability of economic growth in the face of a likely need to raise tax rates and reduce the fiscal stimuli.
In our view growth for both flat screen TVs and demand for LEDs is probably less dependent on economic growth than some realise. At the nadir of economic growth, which was the first quarter of last year, flat screen TV sales in the US were still growing at more than 20% compound (Issue 35, The Mash, 27th August 2009).
As we pointed out at the time, demand for flat screen TVs took place against a dire backdrop where retail sales in New York were down 10% year-on-year. Demand for products, such as flat screen TVs, LEDs and smart phones is central to our investment case for some tech shares. New product cycles drive demand and can – while growth is at an early stage – continue at a fast pace despite the conditions of the overall economy. We saw just this effect with mobile phone growth during the 1990s in Japan. Despite a stalled economy mobile subscriber numbers in Japan increased several fold over the course of the decade.
As the company said on its earnings call, demand for MOCVD chambers is at the beginning of a multiyear cycle. Veeco believes that it can ship between 400 to 500 units just to meet backlight demand this year. When it comes to growth, Veeco is shooting the lights out. One to buy on a disappointing quarter or a sharp fall in the market. There are steep barriers to entry in Veeco's market and LED is a growth story that keeps on giving.
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