The Uncommon Idea in Brief
Buy Universal Display (OLED) stock for the long term. (Published Aug. 13, 2017)
— Build a long position between $108-$112. Add aggressively in the $90-$99 ra1nge.
The Industry Opportunity
Worldwide cell phone sales in 2016 totaled about 1.5 billion units, up 5% from 2016 with Samsung and Apple (AAPL) the two clear leaders in sales. In the first quarter of 2017, sales jumped by 9% over 2016. Expectations for this foreseeable future is a continuation of mid-single digit percentage growth.
CNET, PC Magazine, and Tech Radar all put organic light-emitting diode (OLED) televisions at the top or near the top of their list for best large screen TV’s of 2017. All three hold a consensus OLED technology offers the best picture currently available in the market.
– Ease of Access: Developing high-tech and sophisticated technology like smartphone display screens and television screens requires years of research and hundreds of millions of dollars in cost without the foresight of guaranteed success. The barriers to entry are extremely high and the current participation rate in both the smartphone and television market are limited.
– First Mover Advantage: Consumers want the latest and greatest in technology. Holding the key to a component that can provide a better picture, energy efficiency or reduced size without sacrificing quality will find a high demand for product. Because of this revolving consumer demand, being first should generate sales and rapid growth.
What Does OLED Do?
Universal Display Corporation (OLED) develops organic light emitting diode (OLED) technologies, materials and services for the display and lighting industries. It licenses its proprietary technologies that can enable the development of low-power and eco-friendly displays and solid-state lighting. The company also develops and offers high-quality, state-of-the-art UniversalPHOLED materials that are recognized as key ingredients in the fabrication of peak performance OLEDs.
The Uncommon Market Position That Sets Universal Display Apart
Universal Display’s ability to virtually control the OLED display market elevates it to the clear best-of-breed in the new trend in mobile phone and television screens. OLED displays offer significant advantages of LED, including energy efficiency, thinner profile, lighter weight, wider viewing angles, faster video streaming, lower manufacturing costs and higher contrast ratios that lead to sharper images, richer colors, darker blacks and faster refresh rates.
Given its business concentration in OLED, Universal Display does come with very specific risk factors. Universal Display’s holds a heavy reliance on PPG (PPG) for supply. Currently, all the raw materials critical to manufacturing OLED are sourced from PPG. Display technology is constantly evolving and while OLED appears the superior approach at the moment, it won’t always be that way. If Universal Display does not improve and evolve OLED technology, it may one day be overtaken by Quantum Dot Display, which utilizes metallic nanoparticles with semiconductor-like properties.
This technology offers the possibility of thinner screens, less energy consumption, and ease of manufacturing. Fortunately for Universal Display, quantum dot only lives in R&D labs. It is difficult to produce in large quantities and the most common process needs cadmium to function. Products utilizing cadmium are still banned in many countries.
Another risk is Universal Display’s reliance on PPG for supply. Currently, all the raw materials critical to manufacturing OLED are sourced from PPG.
Financials – OLED Continues to Display Strength
OLED surprised analysts with a much-stronger-than-expected second quarter. The company reported strong revenues of $102.5 million, a 59% year-over-year increase. Material sales surged 110% to $46.8 million driven by phosphorescent emitter sales. A $45 million payment from Samsung boosted royalty and license fees to $53.7 million. OLED will receive another $45 million fee in the fourth quarter as part of a $90 million settlement agreement with Samsung.
Net income of $0.99 per share on $47.2 million of income showed strong year-over-year growth from the $0.46 per share on $21.8 million in net income in 2016. The company finished the quarter with $365.6 million in cash, or $7.67 per share, with no debt ,which allowed the company to continue paying a $0.03 per share quarterly dividend.
Managements guided revenue higher for the remainder of the fiscal year. Expectations are for revenues of $285 million to $300 million, although management did reference the young and volatile nature of its business, so guidance equates more to a best guess. But things could quickly change.
The Technical Analysis – On a breakout over $126 or pullback to $108.00, OLED is an optimal technical BUY
The recent market pullback in many small-cap and mid-cap momentum names has created some challenging technical setups. OLED’s current setup exemplifies this phenomenon with its double-top pattern.
Over the past two months, buyers have challenged the $126 level on two occasions, but failed at pushing the bar higher on a closing basis. The first attempt saw shares retrace to $108 before making another assault on $126. The stock has failed a second time and current sits midway between $108 and $126, which we would label a bullish channel here as the stock is still near highs.
The pattern is similar to the March-April 2017 period. That consolidation came after a big February push. This one began after a big May push, but there is a major difference between the current setup and the previous one that led to a big move higher. Earnings spurred the push into and out of the previous channel. OLED recently released earnings, but the stock did not experience a push higher, so expectations should be tempered on a breakout.
This setup provides two entry options: buy the breakout or buy a successful test of support. A weekly close over $126, despite being $15 higher than the current price, is still a possible trigger before $108. It would likely signal a return of both trend and momentum. Additionally, there is no technical resistance level above $126 and the stock would be trading above the 13-week simple moving average (SMA). The upside extension targets $144.
A secondary approach is to buy a successful test of $108 where the stock does not close under the $108 consecutive weeks. This becomes a range trade where one would expect the stock to move between $108 and $126 in a zig-zag fashion.
Volume has been relatively stable, with only the week of the earnings release popping above the long-term moving average. It is encouraging to see volume at or below average during the pullback. Momentum and trend appear to be bottoming and we have a slight turn in the Full Stochastics, so we’d anticipate price support holding at or above $108. This lends support to the thesis buying a weekly close as close to $108 as possible or over the resistance level of $126.
Should support fail, we’d anticipate a new consolidation channel to develop between $85 and $100. Unfortunately, wide trading channels are common with OLED, but this is the area where we’d expect investors to become more aggressive buyers for the longer term.
Our initial target on a breakout, independent of fundamental views, would be $134 in short fashion with an ultimate upside of $144.00 within eight to twelve months.
Catalysts for the Thoughtful Investor on Why Universal Display is a Buy
All roads using OLED technology run through Universal Display. Universal Display holds more than 4200 patents and exclusive claims on organic light-emitting diode technology (OLED). While competing technology will eventually emerge, the prime candidate to replace OLED is only in research and development labs facing huge barriers to entry, especially in the cell phone market. The advantages of OLED vs. LED are clear and concise.
Apple is expected to use OLED screens in the new iPhone8 as the company transitions away from liquid crystal display (LCD). While it’s likely Apple will simply buy panels from Universal Display customers like LG Display and Samsung, it is possible Apple will license directly from Universal Display given the company has begun to invest significant resources in an OLED manufacturing facility. Furthermore, LG Display is investing $13.5 billion into its OLED display manufacturing capabilities, so seeing one of Universal Display’s two biggest customers investing significant resources into the technology lends credence to the thesis OLED is not going to be replaced any time soon.
The Bottom Line
1. Universal Display is the unquestioned leader in organic light-emitted diode (OLED) technology.
2. The advantages of an OLED display over LED television screens and LED or LCR mobile phone screens cement OLED as the superior technology. Future competition from Quantum Dot Displays is expected in the future, but that technology does not appear as if it will be ready for the consumer market for at least five, if not ten, years.
3. In the range of $108 to $112 we like OLED as a long-term buy and hold. Over $126, we like OLED as a momentum breakout long. The mid-cap nature, short interest and emerging technology will make it volatile.
4. Universal Display’s two largest customers represent the top producer of OLED screens for televisions and the top producer of OLED screens for smartphones.