Universal Display Corp.

Fundamentals

Written by Thomas White and Ophir Gottlieb, 11-28-2015

PREFACE
There is a small cap technology company that may be in the early stages of an historic rise, backed by its disruptive technology that is in every sense of the word, revolutionary. Make no mistake, while there is risk here, this is the kind of company that could quadruple, with a market cap today of just $2.5 billion.

A recent beneficiary of Apple's enormous success is Universal Display Corporation (OLED) whose shares have rocketed over 30% in the last 2 weeks.



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THE STORY
The current rally started after OLED reported Q3 earnings back on November 5th, and really gained traction on November 19th when the US Patent and Trademark Office published a patent application from Apple for an integrated OLED (the technology) display and touch panel with a fingerprint reader. This sparked renewed speculation that Apple would begin to use OLED technology in the iPhone. Apple already uses OLED technology in the Apple Watch and the patent application seems to have confirmed the speculation that Apple is set to expand its use of the technology.

A report in the Korea Times on November 22nd intensified the iPhone speculation:



Further, on November 26th Bloomberg reported that Apple supplier LG was going to invest almost $9 billion in a new plant to produce OLED displays.



So, the drumbeat continues to grow louder for the incorporation of OLED technology into the most important and profitable product line in the world: iPhone. But can OLED turn into a legitimate growth "story" stock? Let’s take a closer look while also remembering that this is still speculation about Apple, not a guarantee, and there is supply chain risk for Apple if it goes with a smaller company like Universal Display.

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THE FACTS
OLED saw tremendous revenue growth from 2011 to 2014, as revenues surged 212% during that time. But over the past year, revenues have plateaued, and the stock which nearly doubled in the first 5 months of 2015, dropped ~40% from early June to early October.

Here's the all-time revenue chart.



Interestingly, while revenue has stagnated recently, cash from operations has exploded 165% from $41.1M in the year ending 9/30/2014 to $109.1M in the year ending 9/30/2015. Here's that chart.



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OLED's increasing ability to generate cash coincides with its increasing reliance on royalty payments. Royalty payments (TTM) totaled $39.4M in 2013 Q3, by 2015 Q3 royalties had increased 81% to $71.3M. By 2015 Q3 Royalties accounted for nearly 40% of revenue, up from 31% two years earlier. OLED is increasingly relying on the monetization of its IP, and this is helping drive big gains in profitability.

TOTAL DOMINANCE
OLED was founded back in 1994 and has partnered with researchers at leading schools like Princeton, the University of Michigan and the University of Southern California to build an impressive portfolio of intellectual property. The company claims to have over 3,500 issued and pending patents worldwide covering OLED technologies, materials and processes. This is exactly how technology dominance is created.

OLED technology is a series of thin organic films between two conductors, when current is applied, light is emitted. It can be used for displays and lighting. Compared to the predominant LCD technology OLED offers better performance, more efficiency, a thinner and flexible form factor, and better color and contrast. In short, this is a potentially disruptive technology. Already, two of the largest TV makers Samsung and LG are pushing OLED technology in their television product lines. Apple uses OLED for the Apple Watch.


Source: Universal Display Corp. Investor Presentation November 2015

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THE FUTURE
In the next 5 years, this display market is projected to nearly double in size. What is particularly exciting about OLED stock is that their business model insulates them from the particulars of which specific manufacturers win. OLED simply licenses technology and sells materials. It doesn't matter if LG or Samsung wins in TV, or if Samsung or Apple wins in mobile, as long as OLED becomes the de facto standard for displays, Universal Display wins. Big.

The evolution of the company to its current licensing model rather than manufacturing model is apparent in this chart of Revenue per Employee.



Revenue per employee has grown from $140,000 in 2009, to now over $1.3 million. Yeah, that's not a typo.

It's easy to see why analysts are excited about the prospect of renewed revenue growth powered by iPhone adoption of OLED. Thanks to its licensing and royalty model UDC has become far more efficient at generating cash and new revenues should fall to bottom line at increasingly high rates.

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THE SECRET
Finally, there is one more potential driver for growth that ultimately could dwarf the display market and that is the lighting market. OLED technology is ideal and revolutionary for lighting. This isn't a market people think about much, but globally it is projected to be a $100+ billion market by 2020. OLED offers many advantages over older lighting technologies: low voltage, cool to touch, long lifetime, eco-friendly, instant "on", dimmable, no glare, no noise and perhaps most exciting of all the novel form factor and cost.

OLED lighting is thin, transparent, non-breakable and flexible. Imagine essentially wallpapering your ceiling with light that is cheap, cool, and will never burn out. OLED has already partnered with companies like LG Chem, NEC and Philips and OLED lighting products are now available from home improvement retailers.

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CONCLUSION
OLED is generating a lot of buzz at the moment, and you can see the outlines of a great growth story. Whether OLED is able to achieve its potential and become a disruptive growth story stock on the tip of pundit’s tongues is impossible to know. Though they certainly appear to be in an enviable position controlling critical, disruptive IP that impacts 2 enormous global markets.

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