NEW YORK ( TheStreet) - Revenue growth in the LED sector will be only 4% in 2011, reaching $8.7 billion, according to the latest estimate from IMS Research, a sign that margin and pricing pressure, fostered by increased competition, will remain a headwind for LED stocks, including Cree ( CREE), Rubicon Technology ( RBCN), Veeco Instruments ( VECO) and Aixtron ( AIXG).

LED unit growth will increase by 32% to 75 billion units, but the backlighting market for LEDs, which has been the near-term driver of demand, is screeching to a halt, according to IMS Research. IMS predicts that backlighting revenue grows only 2% in 2011. The general lighting market for LEDs will be the fastest-growing market, up 29%, but it represents only 20% of LED market revenue.

The backlighting market, which ranges across consumer electronics from flat panel TVs to notebook computers and cell phones, has caused a boom and bust cycle over the past few years.

"Backlighting is the primary problem. Despite significant reductions in packaged LED prices, demand is growing slower than expected as panel suppliers cut both their overall forecasts for monitors and TVs and lower their LED penetration forecasts. LED penetration is growing, just slower than expected," said Ross Young, IMS Research senior vice president and LED market analyst.

Cree has reduced its exposure to the backlighting market -- Wall Street now estimates Cree has roughly 5% exposure to backlighting. However, Cree bears argue that even if it is less directly exposed to backlighting, the weakness in backlighting ultimately hits pricing and margins across the LED supply chain.

For Cree, IMS Research's Young says that revenue growth is nearing a bottom, and the general illumination market should start to become significant as a driver. However, competition will intensify as the market grows, so as the opportunity gets bigger, so do the number of players. Chinese competition has a subsidized cost base from the Chinese government and the Korean and Taiwanese players continuing to make major investments as well.

Cree's technical advantages should result in premium pricing, but prices and costs are still expected to fall rapidly. "I wouldn't predict margin expansion at this point, but do see the market growing and Cree should certainly participate although it should lose share as the number of players grow," Young said.

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