Why Some Investors Wonder If C3 Will Continue to Sparkle for Cree Research

Also, splitsville, and this column's name game.
Author:
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Nobody at

Cree Research

(CREE) - Get Report

or

C3

(CTHR) - Get Report

is hiding the ties that bind: CEOs of the companies are brothers. Cree makes silicon carbide, which is used in high-tech electronics; another one of its products, silicon carbide crystals, are used to make fake gems. C3 makes fake gems, and Cree has agreed to sell its crystals to nobody but C3.

It has been good business for both sides, but especially good for Cree, which has told Wall Street that C3 accounts for between 15% to 20% of sales.

That's the good news.

And now the bad news:

When one company accounts for that much of your revenue, its biz had better be good. And while it was an improvement over a year ago, C3's latest quarter sparked concerns among some Cree investors when compared with the prior quarter. While second-quarter sales rose just 10% from the first quarter (roughly half of what the company itself had projected) C3's inventories leaped by 46%. What's more, C3 isn't yet profitable and it isn't even hinting at when it will be.

Still, C3 pointed to ballooning gross margins, thanks to better yields of fake gems from Cree's crystals.

And therein lies the possible problem: If C3's sales growth is below its own estimates and its inventories are rising and it's getting more gems from each crystal, won't it have to cut back on its purchases from Cree? And why, one short-seller wonders, isn't C3 talking about profitability, now that its gross margins are a fat 54%?

Cree officials couldn't be reached, but a C3 spokeswoman said her company isn't worried about the high margins and sales shortfall because the company expects to be selling to 500 retail stores by the end of the year; that compares with about 180 stores now. She adds that orders are expected to rise from existing stores as the holidays approach.

For Cree's sake, she had better be right. With a stock that has zoomed to yesterday's close of 69 3/4 from a 52-week low of 10 1/2 and a market cap of $1 billion -- roughly 17 times sales and 80 times trailing earnings -- investors aren't likely to look kindly on a sudden slowdown in demand from one of its largest customers.

And this note: Long-term, this isn't likely to be a problem for Cree, whose principal market may be poised to eventually boom. But short-term, "it's a valid issue," says analyst J.D. Abouchar, of

Preferred Capital Markets

, who downgraded the stock two weeks ago, citing its price.

In this market, unfortunately for Cree, short term is what counts.

Splitsville -- a sign of increasingly bad times?:

Remember when splits mattered? Remember back in November, when

Amazon

(AMZN) - Get Report

CEO Jeff Bezos pulled that split out of his hip pocket, and ignited Amazon on the next leg of its supersonic journey? Amazon tried the same trick again last week and its stock

fell

! Cree did the same thing two weeks ago and got the same result. Calling

David Copperfield

!

Enough with the names:

Yesterday's item on whether readers of this column should call themselves

Herbians

or

Herbiots

prompted reader

Greg Starks

to write, "I like '

Herbahooligan

' myself." And from an anonymous reader: "

Herbigan

sounds better than 'Herbiot' or 'Herbian'. Besides, it's more fun to evoke an image of a '

hooligan

' than a mere 'idiot'." And from

Darren Thorneycroft

: "How about a '

Herbivore

'?!?"

Prompting another ripoff of the

Padinha

poll:

What should Herb's readers be called?

Herbians

Herbiots

Herbahooligans

Herbivores

Herbicidal

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.