2023-05-31 14:26:34 ET
Summary
- Semiconductor stocks, including NVIDIA and AMD, experienced sharp rallies in May due to the AI boom.
- Universal Display holds a strong position in the OLED materials market with over 5,000 patents worldwide.
- Despite a mixed valuation, OLED's technical trends have improved, and the stock is expected to test the $175 to $180 resistance range.
Semiconductor stocks enjoyed a fruitful May. The SPDR S&P Semiconductor ETF is up about 15% as shares of NVIDIA ( NVDA ) and AMD ( AMD ) have soared amid the AI boom. Other names are participating, too. Universal Display ( OLED ) is a tangential play on chips, though it may be more defensive than risk-on areas that the picks and shovels names play in.
That is what Goldman implied earlier this year when their sell side team included OLED in a recession-scenario basket . I have a hold rating on OLED on a mixed valuation picture but improved technical trends.
Semis' May Relative Strength
According to Bank of America Global Research, OLED is currently a leader in the research, development, and commercialization of OLED materials with over 5,000 patents worldwide. UDC's business segments include OLED material sales (over 50% of sales), royalty and license fees (40%), and contract research services (2-3%). Key customers are all major global panel makers such as Samsung Display, LG Display, BOE, etc.
The New Jersey-based Semiconductor industry company within the Information Technology sector trades at a high 36.6 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.9% dividend yield , according to the Wall Street Journal.
In early May, OLED reported a modest EPS beat , though revenue dropped by more than 13% year-on-year and missed analysts’ estimates. Lower material volumes dinged top-line growth and a reduced total royalty and licensing fee sum was not encouraging. Still, the stock managed to hold its recovery gains that began last October. On a forward-looking basis, the management team affirmed its 2023 revenue guidance. I will be watching what its outlook is within its early August quarter in light of the AI boom that has taken off in the last few weeks.
On valuation , analysts at BofA see earnings falling sharply this year before recovering above $4 per share in FY 2024. Per-share profits are then expected to climb at a more moderate pace through 2025. Dividends, while modest, are expected to rise over the coming quarters. With ample free cash flow growth this year and next, profitability trends are looking better, though the stock still trades at lofty earnings multiples. What’s more, its EV/EBITDA ratio is nearly twice that of the broad market.
Universal Display: Earnings, Valuation, Free Cash Flow Forecasts
OLED’s forward operating P/E is at a sharp premium to the sector average, though at 41.1, it’s at a more than 20% discount to its 5-year average. The forward PEG, though, is pricey relative to the sector and OLED’s history. I reiterate my hold rating on valuation given these mixed signals.
OLED: Lofty Valuation Measures Without Strong and Sustainable EPS Growth
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, August 3. Before that, the firm holds its annual shareholders’ meeting on June 15.
Corporate Event Risk Calendar
The Options Angle
Digging into early expectations on the upcoming earnings reports, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $0.75 which would be a 14% decline from $0.87 of per-share profits earned in Q2 2022. OLED has a mixed beat rate history with EPS topping estimates in seven of the last 12 instances. On the bullish side, the stock has finished higher post-earnings in five of the previous six reports.
This time around, options traders have priced in a 7.1% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the August 3 report. That is similar to pricing in previous quarters, and we have seen some sizable moves after the company reports, so that premium appears fair to me.
OLED: A Q2 EPS Drop Expected
The Technical Take
OLED has broken the downtrend I described earlier this year . I now see a bullish rounded bottom pattern, but resistance remains near the $175 to $180 range. Notice in the chart below that the long-term 200-day moving average has turned higher as shares put in a series of higher highs and higher lows. Near-term, I would like to see OLED rise above $155 – that was the March peak and the high from just recently.
Also take a look at the $125 to $126 double bottom which now has confluence with the 200-day. These are key prices to watch, but with an uptrend in place since October, I foresee a test of that $175 to $180 before long. Overall, the technical situation has improved and there is robust momentum .
OLED: Bearish to Bullish Reversal, $180 Remains Resistance
The Bottom Line
I reiterate my hold rating on OLED. I like how the technical situation appears more sanguine, but the valuation remains mixed following a sharp rally in the last seven months.
For further details see:
Universal Display: Better Technical Trends, But The Valuation Remains Concerning