An Analysis of Universal Display's Business

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There are many ways of analyzing a business. But one of the best ways to do so is by creating a SWOT analysis. This sheds light on the good and bad aspects of a business in terms of its strengths and weaknesses, which are mostly internal in nature; as well as opportunities and threats, which are largely external.

I have recently written about why Universal Display(Nasdaq: PANL) has a bright future, but here's an all-around assessment of the company's business using the SWOT analysis.

Strengths

  • The company has technological expertise in OLEDs, which consume less power and are brighter than traditional LCDs. OLEDs, at present, are mainly used in high-end mobile phones made by companies such as Samsung, LG, and Motorola. Even Nokia's new lineup of Lumia smartphones sports AMOLED screens.
  • Universal Display has one of the largest patent portfolios in connection with OLED (Organic light-emitting diode) technology. It has over 1,400 issued and pending patents for OLED materials and processes.
  • The company has licensing and material-supply agreements with leading electronics companies such as LG Display, Samsung, and AU Optronics.
  • The company has made tremendous progress in the development of efficient white OLED lighting. Its achievements in the field of solid-state lighting have been recognized by the U.S. Department of Energy.
  • Universal Display conducts research for U.S. government agencies such as the Army and the U.S. Department of Energy. As a result, it enjoys strong support from these agencies.  
  • The company became profitable in the second quarter last year and has managed to stay debt-free so far.

Weaknesses

  • Universal Display relies a lot on Samsung for its licensing revenues at the moment. Out of the $5.4 million the company made as royalty and license fees in the fourth quarter last year, Samsung's share accounted for $5 million.
  • OLED is still a very costly technology, which is why its application has been restricted to small screens of smartphones and tablets. For that reason, the company does not generate much revenue or profits, even with its expertise in the new field of OLED technology.

Opportunities

  • If a significant breakthrough is made in efficiently manufacturing OLED products, the technology can be widely used in large televisions sold by top electronics companies, as well as in lighting solutions.
  • The company can explore the possibility of expanding into manufacturing display panels and solid-state lighting to increase its revenue potential.
  • Universal Display is a potential takeover target for companies that could benefit immensely from its technologies, such as display material manufacturers Corning and LG Display. In my opinion, even Apple could be a valid contender for acquiring Universal Display, as it has been acquiring companies such as Anobit that have high technological expertise.

Threats

  • Universal Display faces the risk of poor consumer adoption for OLED products, as traditional technologies such as LCDs are a lot cheaper. This can negatively impact the company's future growth.
  • The company also faces competition from newer LED technologies such as which was also unveiled at the Consumer Electronics show in Las Vegas.
  • The company faces legal challenges from other OLED companies. Last year, a South Korean company called Duksan Hi-Metal challenged Universal display's OLED patents concerning the use of phosphorescent materials. The material in question significantly boosts the energy efficiency and brightness of OLED displays.

Previously, two phosphorescent-related OLED patents held by the company were invalidated by a court in Japan. In addition, there are many other companies litigating against Universal Display's patents in Europe.

The Foolish bottom line
While Universal Display may have a bright future with respect to the growing adoption of OLED in display and lighting solutions, it faces the risk of losing rights to key patents due to suits filed by companies keen to protect their intellectual property.

Nevertheless, I'll be watching Universal Display's situation closely and I think you should, too, by adding it to your Watchlist. It's free and it lets you stay on top of the latest news and analysis for your favorite companies.

At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article.  The Motley Fool owns shares of Corning and Apple.Motley Fool newsletter serviceshave recommended buying shares of Universal Display, Corning, Apple, and Nokia; and creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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