2023-03-18 02:52:23 ET
Summary
- OLED has been among the worst-performing semiconductor stocks in recent years, but the stock is currently in the midst of an uptrend.
- OLED disappointed with its FY2023 guidance, but the prospect of a strong rebound in FY2024 managed to overshadow it.
- Multiples for OLED are higher than many other semis, which could become a problem if earnings come in at the lower end of estimates.
- Long OLED has its strengths, but there is also enough out there to make people question the wisdom of pursuing it.
Universal Display Corporation (OLED), a developer of organic light-emitting diode or OLED technologies and materials for the display industry, has made a comeback. The stock spent almost two whole years in decline, but the stock has trended higher for the last five months or so. However, the stock may be finding it harder to go higher. Why will be covered next.
OLED seems to have encountered resistance
OLED is one of 30 stocks present in the iShares PHLX Semiconductor ETF ( SOXX ) and, for quite some time, it had the distinction of being one of the worst performers, if not the worst. OLED peaked in January 2021 when the stock hit an intraday high of $262.77, but that was as good as it got in hindsight. The stock proceeded to enter a long decline that ended almost two years later when the stock closed at $89.97 on November 3, 2022, capping off a decline in the value of the stock of as much as 65.7%.
However, the stock has since rebounded as shown in the chart below. The stock hit $137.89 on March 15, which means OLED has appreciated by 53.3% in value since it hit bottom in early November. Most of the gains have come in 2023 with the stock gaining 27.6% YTD. In comparison, SOXX has gained significantly less with a YTD gain of 18.4%. OLED has thus outperformed.
In addition, it's worth noting that the stock appears to be in an uptrend. There are higher highs and higher lows, which can be connected to form an upper and a lower trendline respectively. Both are going higher and both are running parallel to one other, forming what can be described as an ascending channel.
The stock moves higher within this channel, which means it is relatively easy to guess when the stock is likely a buy or a sell. If the stock is near the upper bound of the channel, it is the latter, and if the stock is near the lower bound of the channel, it is the former. At the moment, the stock is close to the upper bound of the channel, suggesting it is time to be cautious because the stock is at a point where there is more downside than upside to be had.
Furthermore, the stock has been struggling to move past the $135-145 region, suggesting the presence of resistance in this region. The stock reached the $134-145 region in early March, yet it has yet been stuck going sideways within this region for the last two weeks. Note that a number of OLED executives have sold shares and this may have tempered sentiment towards the stock in recent weeks.
If the stock is unable to go higher, the path of least resistance suggests a move back to the lower bound of the channel, which is currently at $125 or so. If people were thinking of locking in recent gains, then now may be a good time to do it.
Earnings got the stock rolling, but the opposite could also happen
It's not a coincidence the stock started its rally after November 3, which happens to be the day OLED released the Q3 FY2022 earnings report. OLED beat estimates for the top and the bottom line on that day and it provided upbeat guidance that surpassed expectations. The market applauded the results by raising the value of the stock by 12% the following day, putting an end to the stock's long decline and marking the start of the rally in the stock that has yet to reach its end.
The latest report from OLED kept the stock going. Not only did OLED once again beat estimates for the top and the bottom line, but it also raised its dividend by 16.7% to $0.35 a share. Consensus estimates expected GAAP EPS of $0.94 on Q4 revenue of $149M, but the actual numbers came in much higher. Q4 revenue increased by 15.6% YoY to $169M, a record high. GAAP EPS increased by 41.7% YoY to $1.36 or $0.42 more than expected. The table below shows the numbers for Q4 FY2022.
(Unit: $1000, except EPS) | |||||
(GAAP) | Q4 FY2022 | Q3 FY2022 | Q4 FY2021 | QoQ | YoY |
Revenue | 169,032 | 160,556 | 146,247 | 5.28% | 15.58% |
Gross margin | 82% | 77% | 78% | 500bps | 400bps |
Operating income | 83,083 | 68,463 | 56,462 | 21.35% | 47.15% |
Net income | 65,134 | 53,455 | 45,876 | 21.85% | 41.98% |
EPS | 1.36 | 1.12 | 0.96 | 21.43% | 41.67% |
Source: OLED Form 8-K
With the Q4 numbers out, so too are the numbers for the whole year. FY2022 revenue increased by 11.4% YoY to $616.6M and GAAP EPS increased by 13.7% YoY to $4.40. Materials contributed $331.1M, royalty and license fees another $267.1M and contract research services contributed the remaining $18.4M. OLED finished FY2022 with cash, cash equivalents and short-term investments of $577.8M on the balance sheet. Not included are another $259.9M of other investments.
(Unit: $1000, except EPS) | |||
(GAAP) | FY2022 | FY2021 | YoY |
Revenue | 616,619 | 553,525 | 11.40% |
Gross margin | 79% | 79% | - |
Operating income | 267,110 | 227,644 | 17.34% |
Net income | 210,061 | 184,213 | 14.03% |
EPS | 4.40 | 3.87 | 13.70% |
Source: OLED Form 10-K
However, while the Q4 numbers were better than expected, FY2023 guidance also came in lower than expected at $550-600M, a decline of 6.7% YoY at the midpoint, and below the $629M expected. From the Q4 earnings call:
"Now turning to our outlook. As we look to 2023, we believe that the macroeconomic uncertainties will weigh on consumer spending in the near term, which we expect to result in relatively flat year-over-year material volume demand. In addition, we realized $30 million in cumulative catch-up adjustments in 2022, which we do not expect to recur in 2023. Taking into account these factors, we expect our 2023 revenues to be in the range of $550 million to $600 million. We believe that the second half revenues will be higher than the first half of the year."
A transcript of the Q4 FY2022 earnings call can be found here .
OLED is anticipating headwinds in the near term that will negatively affect demand. As a consequence, OLED intends to increase capacity by 15-20% instead of the previously announced 20-25%.
"We expect 2023 macroeconomic clouds of uncertainty to weigh on near-term growth. Accordingly, we have revised our capacity forecast to reflect shifts in timing of the fill, select and expansion projects. As a result, our new forecast for year end 2023 installed OLED capacity as measured in square meters is to increase by approximately 15% to 20% over year end 2021. This compares to our previous estimate of 20% to 25%. As we look out, we believe these macro headwinds will be short-lived and continue to believe that 2024 will be a pivotal year for the OLED industry and for us."
However, OLED managed to offset the sting from weaker-than-expected guidance by pointing to a strong rebound in FY2024. OLED has a number of tailwinds to look for that should boost the numbers in FY2024, at least in theory. There is the start of blue, new investments in OLED by OEMs and the launch of new products utilizing OLED displays instead of LCD ones, particularly in IT.
An earnings drop in FY2023 followed by an earnings jump in FY2024
Consensus estimates have been adjusted accordingly. Estimates predict OLED will earn $3.15-3.91 on revenue of $565-641M in FY2023, which represent YoY declines of 22% and 2.2%, respectively, at the midpoint. These numbers go up to $3.65-6.06 on revenue of $615-807M in FY2024. On the other hand, there is a very wide range in estimates, which suggests that while some are very optimistic about OLED's prospects, others are much less so.
OLED | Sector median | |
Market cap | $6.47B | - |
Enterprise value | $5.93B | - |
Revenue ("ttm") | $616.6M | - |
EBITDA | $309.4M | - |
Trailing GAAP P/E | 31.34 | 21.77 |
Forward GAAP P/E | 37.38 | 23.55 |
PEG GAAP | 2.29 | 0.62 |
Price/sales | 10.60 | 2.57 |
Price/book | 5.16 | 2.78 |
EV/sales | 9.68 | 2.67 |
Trailing EV/EBITDA | 19.30 | 13.05 |
Forward EV/EBITDA | 23.30 | 12.82 |
Source: Seeking Alpha
OLED trades at a premium with multiples that are in many instances much higher than the average in the sector. For instance, OLED trades at 37.4 times forward GAAP earnings with a trailing P/E of 31.3. In comparison, the median is at 23.6x and 21.8x respectively. Part of the premium is due to OLED's inherent strengths, which includes deriving a major portion of its income from royalties.
This results in high margins for OLED as royalties are essentially pure profit. Royalty payments are also seen as more resilient and less prone to downturns in the business cycle, which could make a difference with many fearing the economy is heading for a recession. However, an expected surge in 2024 earnings has also played a role in determining multiples for OLED.
The stock has been bid up in anticipation of strong earnings growth next year. So while OLED may seem pricey to some at current multiples, OLED could still be worth it if earnings catch up to the stock price next year. On the other hand, if earnings come in at the lower range of earnings estimates for FY2024 as shown previously, then the stock could be hard pressed to stay airborne with current multiples.
Investor takeaways
It's a tough call, but I am neutral on OLED all things considered. It's true the stock is in an uptrend, but trends do not last forever. The stock is pricey at current levels. While multiples could quickly catch up to the stock price next year, there's a fair amount of uncertainty to the outlook. The wide range in earnings estimates makes this clear.
At the high end of earnings estimates, FY2024 EPS could increase by 37.7% compared to the record-setting $4.40 earned in FY2022. But at the low end, FY2024 EPS could still be 17% below FY2022 EPS. For FY2023, earnings are expected to decline with OLED's guidance calling for FY2023 revenue to decline by 2.7-10.8% YoY to $550-600M, which was worse than expected.
OLED did not get punished for it because it was the promise of a strong rebound in FY2024 that offset the disappointing outlook for FY2023. This could happen, but there are no guarantees the opposite won't happen. It's worth noting that the display industry is not doing well. The industry is struggling with too much supply and not enough demand, resulting in a depressed pricing environment.
This has been most pronounced in the market for LCD panels. Still, LCD woes have a spillover effect on OLED since cheaper LCD prices makes OLED panels less attractive. Panel manufacturers are working to stabilize the market, but the display market remains one of boom and bust. OLED is hence very much tied to the whims of the ups and downs in the display market. The display market is not an easy one and OLED is by no means a sure bet.
Bottom line, while there is a case to be made for long OLED, there is also an argument to be made against it. The case looks stronger if viewed from a long-term perspective, especially if one is convinced OLED will become the dominant display technology. Short-term headwinds can be set aside since OLED should rise along with the technology.
On the other hand, it's possible OLED may not realize its full potential, especially if advanced versions of LCD panels like microLED temper OLED's growth. If this happens in the long run, then paying attention to OLED's current drawbacks, which includes high valuations, may prove to have been the prudent move to make.
For further details see:
Universal Display Corporation: The Rally May Need A Break