Universal Display Company (NASDAQ:OLED) is a New Jersey-based developer of OLED or organic light-emitting diode technology. The company is best known for providing key display technology to many of the mobile devices we use every day. The The company holds over 5,500 patents and currently has a market capitalization of $5.7 billion. Recent market volatility has taken this stock to multi-year lows, providing investors with a rare opportunity.
Universal Display Corporation has several patented technologies that make up its core product and service offerings. Its flexible OLEDs or FOLEDs are a new technology that enables a flexible and stronger display on devices. Although this technology is still in its infancy, it is already incorporated into the screens of new smart devices, albeit with minimal flexibility from the user’s perspective. Samsung’s new range of foldable smartphones have incorporated this technology.
White OLEDs or WOLEDs are revolutionizing the lighting industry. These OLEDs have the potential to achieve energy efficiency that far exceeds standard light bulbs, which have the equivalent of approximately 12 lumens per watt of use. WOLEDs can potentially deliver up to 150 lumens per watt efficiency, significantly reducing the 15% of global lighting energy consumption.
Perhaps the most promising is the company’s Universal PHOLED Materials segment, which uses phosphorescent OLED materials, which represent much lower power consumption. PHOLEDs are up to four times more energy efficient than fluorescent OLEDs and have several advantages for both the consumer and the manufacturer. PHOLEDs offer greater vibrancy in color presentation, have record energy efficiency performance, and offer much longer lifespans than traditional fluorescent OLEDs. Not only is this the brand’s core product offering, but it has helped build the sustainability of the company’s footprint.
OLED revenue in the second quarter of 2022 was $136.6 million and operating profit was $53.3 million, with net profit of $41.5 million and profit of 0 $.87 per diluted share. The second quarter started on a good note. OLED customers have lowered their expectations as summer approaches, given the downward trend in forecasts and revisions due to the hawkish Fed and supply chain challenges with China. This caused the company to lower its revenue forecast for 2022 to around $600 million.
Near-term headwinds are expected to continue to weigh on the economy and impact consumer spending, but long-term trends and the company’s strong pipeline continue to improve. As the OLED industry continues to evolve and grow, all major industry roadmaps remain promising, and there is every indication that growth will continue on the other side of Fed tightening.
Recent reports reveal that Samsung, LG Display, DOE, Tianma, China Star and Vision RX are all considering new investment plans. This new capacity increase should be beneficial for the OLED industry.
Panel manufacturers are working on new technologies in addition to their capital investment plans. This includes LTP for backplanes and tandem OLED material structures for OLED TVs. This aligns with growing trends in digital adoption around the world.
Universal Display Corporation has also teamed up with the tech industry behemoths. Its technology can be found in the latest models of smartphones and smartwatches from Samsung and Apple (AAPL). In larger products, OLED materials are used in high-definition smart TVs for LG, Sony Bravia (SONY) and Samsung, while they are also found in laptop screens for Samsung, Lenovo and Asus. Finally, its OLED products also power the screens of the Nintendo Switch platform and the passenger and driver touchscreen dashboard systems of the all-new Mercedes EQS luxury sedan.
The stage is set for the next phase of market growth. In the face of recent economic uncertainties, consumer demand is expected to be restrained in the near future. Today, many expanding panel manufacturers are entering commercial production of large and mid-size OLEDs, with an increasing number of companies investing in manufacturing OLED products.
Rating and forward-looking commentary
OLED was a high-flying tech company in recent memory, but the Fed hikes have rewritten valuation history across the board for tech companies. The result is that high-quality companies like OLED are trading at remarkably low multiples compared to historical levels. Investors will say that alone should be enough to indicate value at current levels, but OLED offers even more with an affiliation with high-growth markets that are fueled by secular growth trends. We can see that the stock is currently trading at the lower end of its historical range for many of the key valuation multiples.
We can also see that the company is doing a somewhat decent job of meeting earnings expectations. There was only one beat in the last four quarters, but despite clear macroeconomic headwinds, they saw no downside shocks.
The company recently updated its revenue guidance to six hundred million dollars for 2022. Which I think is a reasonable target as long as we don’t see a financial shock in the next few quarters. The stock is currently trading at around $121 per share and has a PS ratio of around 10.5, which is a significant departure from multiples above 25 at the start of calendar 2021. The general expectation is that as the Fed-tightening cycle comes to a halt, we should start to see multiple expansion for high-quality tech stocks like OLED. There is also room for earnings improvement throughout 2023, but I think investors should instead target calendar year 2024 as a safer bet for robust earnings improvement. Once the conditions for growth stocks start to ease at the macro level, we should easily be able to get back to a price-to-sell ratio of 15 on high quality stocks like these. If we’re aiming for $600 million in revenue, that should be good for a market cap of around $9 billion, which would represent a price target of around $191 per share. We can then take a 20% safety margin, which leaves us with a price target of about $153 per share, about 25% higher than current levels.
The opportunity is quite straightforward for long-term investors here. OLED is a company that provides key technologies to high-growth companies supported by strong secular trends. Even if there is a recession or financial crisis, the business will likely do very well on the other side and continue to see strong tailwinds. Investors should feel great about starting a position here, I consider OLED a strong buy.