2023-10-19 14:51:17 ET
Summary
- Universal Display Corporation is well-positioned to benefit from the shift to OLED displays in mobile devices, tablets, laptops, and the automotive industry.
- The company reported strong Q2 results and raised its revenue guidance for 2023, indicating positive momentum and improved growth prospects.
- The adoption of UDC's blue OLED emitter material is expected to drive sales growth in the coming years.
Thesis
A pure-play in the OLED display market, Universal Display Corporation (OLED) is in a strong position to benefit from the ongoing shift from LCD displays to OLED in mobile devices like smartphones, as well as tablets and laptops. I see a significant growth potential for UDC over the next few years as OLED technology gains more market share in smartphones and TVs. Additionally, UDC stands to benefit from the adoption of OLED displays in new applications like laptops, PC monitors, gaming devices, and the automotive industry. As UDC continues to commercialize its phosphorescent blue emitters, it should further enhance its growth prospects. Therefore, I remain bullish on the company and assign a buy rating to the stock.
Company Overview
Universal Display Corporation is a frontrunner in the research, advancement, and market introduction of organic light-emitting diode ((OLED)) technologies and materials for applications in displays and solid-state lighting. UDC currently holds, has exclusive licenses for, or possesses the sole authority to grant sublicenses for over 5,000 patents globally, making it a prominent player in the space. The company offers licenses for its proprietary technologies, such as the UniversalPHOLED phosphorescent OLED technology, to manufacturers seeking energy-efficient and environmentally friendly display and lighting solutions. In 2022, approximately 52% of UDC's revenue came from sales of its PHOLED emitter materials, 45% from royalties and license fees, with the remainder stemming from contract research services.
Q2 Review and Outlook
UDC reported impressive Q2 results in August, surpassing both revenue and EPS market expectations. Q2 revenue increased by 7.3% year-over-year (and 12.3% from the previous quarter) to $146.6 million. The gross margin was 78.1%, a significant rise from 74.7% in Q1. At the close of the June quarter, UDC had a total of $771 million in cash, cash equivalents, and both short-term and long-term investments, which translates to roughly $16 per share. This was a decrease from the $859 million they had at the end of March, mainly due to the $66 million cash payment they made in April 2023 to purchase Merck KGaA's collection of OLED-related patents. UDC has no debt.
The management raised the lower end of its guidance for 2023 due to these strong Q2 results. The management increased the lower end of their 2023 revenue guidance to a range of $560 million to $600 million from the previous range of $550 million to $600 million, based on the strong Q2 performance and improved visibility for the second half of the year.
The updated guidance still indicates a stronger second half of the year, but the midpoint of the outlook suggests a 9% improvement in the second half compared to the first half, which is lower than the 24% 5-year average. The subdued production of smartphones may affect UDC's outlook for the second half, but the situation is expected to stabilize in the latter part of the year, especially with the launch of the iPhone 15.
Despite ongoing challenges in the consumer electronics market, UDC entered the second half of the year with positive momentum. Additionally, there is growing anticipation for UDC's improved growth prospects in 2024 and 2025, driven by the expected adoption of OLED displays in IT applications like tablets and laptops. Furthermore, the commercialization and scaling of UDC's phosphorescent blue emitter, which generated $2.4 million in revenue in Q2, are contributing to this optimism.
Positioned to Sustain OLED Leadership
Universal Display's innovations in phosphorescent organic light emitting diodes (PHOLED) materials are one of the foundational technologies for today's OLED displays. The energy efficiency of UDC's PHOLED is four times superior, boasting extended durability, slimmer designs, and enhanced clarity, making it superior to LED technology.
OLED displays, due to their enhanced image quality and energy efficiency, are ideal for mobile devices. OLEDs lack a backlight, preventing light leaks, and thus enhancing contrast levels. This results in thinner, lighter smartphones compared to those with LCD screens, allowing for larger batteries and extended usage durations. The individual diodes in OLEDs ensure rapid responses, producing clearer, lag-free images, especially beneficial for gaming and sports.
UDC, with its robust collection of patents supporting PHOLED technology and its leadership in material innovation, is the top choice for vendors seeking OLED-emitter products. The company holds over 5,000 patents, either issued or pending globally, safeguarding its OLED innovations and maintaining its licensing partnerships. Although some early patents of UDC have lapsed, its vast portfolio safeguards its primary PHOLED business.
Company Presentation
Automotive OLED Market Growth Remains a Catalyst
Although OLED displays are not currently widely used in automotive displays, I anticipate that this market sector will experience significant growth in the coming decade. The automotive display market is expected to grow at a CAGR of 10% until 2030. This growth is expected to be particularly prominent in the premium and electric vehicle segments, as automotive original equipment manufacturers aim to enhance the energy efficiency of vehicle systems.
While the annual sales volume of automobiles is considerably lower than that of the IT market, I anticipate that the trends of increasing the number of displays per vehicle and incorporating larger vehicle displays will create a substantial and sustained demand for OLED materials in the long run.
Company Presentation
Strong Catalyst Ahead for Growth
The probability of UDC successfully bringing its blue OLED emitter material to market and generating sales is growing stronger as more panel manufacturers are testing it for their devices. In the second quarter, UDC reported $2.4 million in sales related to the blue emitter material for customer development, a significant increase compared to the several hundreds of thousands of dollars in the first quarter. This robust sequential growth can be attributed to more customers adopting the material and a wider range of applications utilizing it.
The actual revenue impact from the blue emitter material depends on how extensively customers incorporate it into their products, which may not become clear until 2024. I believe the adoption of the blue emitter material will be gradual, with full market penetration expected around the 2026-27 timeframe.
UDC's OLED display technology is expected to show improvement in 2024, even without a boost in sales from blue material. In 2023, I see a transitional phase for OLED TVs and smartphones due to the weak economic conditions. However, in 2024, I anticipate a rise in OLED smartphone and TV shipments due to stronger demand and panel makers having addressed inventory issues. According to Omdia , OLED panel shipments for monitors are expected to reach 800,000 units in 2023, and in 2024, this number is anticipated to increase to 1.74 million units, and by 2026, it is forecasted to more than triple to 2.77 million units. Furthermore, the anticipated release of an OLED-enabled iPad in 2024 could significantly boost sales, with the volume of tablet OLED screens expected to triple.
Valuation
UDC stands out in the consumer electronics supply chain with a highly profitable model. The expected growth in its commercial blue materials in 2024 and the continued potential for OLED displays in mobile devices, TVs, and the emerging IT market are expected to significantly boost the company's earnings per share over the next few years. The stock currently trades at a forward PE of 40x at a premium to the sector median of 21x. I believe that the stock would maintain a premium valuation to its peer group due to potential revenue and earnings growth from "blue" OLED material sales and a deeper expansion into IT markets expected in 2024. UDC's current forward price-to-earnings ratio of 40x is approximately at par with its three-year average and below its five-year forward PE average, likely due to the weaker consumer demand in end markets. Further OLED screen penetration, paired with the sales contribution from blue emitter material, could support multiyear double-digit revenue growth, and strengthening operating leverage could help drive faster EPS gains into 2024. Hence, I remain bullish on the company and assign a buy rating to the stock. I do not have a specific price target on the stock currently and would continue to observe the market dynamics, the macro environment, and the competitive environment for any updates or changes to my buy thesis.
Seeking Alpha
Risks
While I have a positive outlook on the prospects of Universal Display Corporation, it's important to acknowledge certain risks associated with its relatively high valuation. These risks include competition from technologies like mini-LED screens, the potential for UDC's emitter material to be replaced, and the risk that the adoption of blue material might not meet expectations.
Moreover, customer concentration also remains a key risk for Universal Display. However, it's worth noting that Universal Display's strong intellectual property portfolio related to emitter materials helps address concerns about its reliance on a few key customers. The company's PHOLED emitter material is the preferred choice among display manufacturers. Even though alternative OLED technologies are emerging, the upcoming commercialization of blue material in 2024 will complete UDC's red-green-blue emitter stack, providing added protection against the risk of being replaced by competitors.
Conclusion
I expect Universal Display's 2024 sales to strengthen to double-digit growth after a challenging 2023 that was weighed down by weaker TV and smartphone shipments. Factors like increased production capacity among panel makers and growing demand for OLED panels in personal computing are expected to drive UDC's performance in the long term. As a leading materials provider for OLED screens, the company is well-positioned to benefit from the ongoing demand in my view. Additionally, the commercialization of its blue OLED material alongside green and red materials is anticipated to boost sales further. I remain bullish on the prospects of the company and assign a buy rating to the stock.
For further details see:
Universal Display Corporation: Capitalizing On The OLED Display Revolution