When Universal Display (NAS: PANL) signed a long-term OLED contract with Samsung in August, I called it "a watershed moment." Universal Display just published its first quarterly report since that contract was signed, and it was indeed a huge milestone for the business.
Sales nearly doubled from the record-setting second quarter and tripled over the year-ago period. That metric alone might be enough reason to send shares up by as much as 11.7% -- but sales growth isn't even the main event.
Universal Display just turned its first honest-to-goodness profit. Last year's net loss of $0.19 per share turned into $0.12 of beautiful black ink per share. The previous quarter also produced a profit, but only with the help of a very large and helpful change in warrants valuation -- which have now expired and won't help or hurt the bottom line anymore.
The analyst call also cleared up some investor worries:
Recent reports about a negative patent ruling in Germany sent some investors scrambling for the exits, fearing that Universal's crucial OLED patents might be worthless in the long run. The patent challenge was brought by unlikely allies BASF (OTC: BASFY), Merck (NYS: MRK) , and Cambridge Display parentSumitomo Chemical. The way Universal CEO Steve Abramson sees it, that decision only clarified his patents for iridium-based OLED materials and helped reorganize osmium-based claims that really belong in a different patent application altogether. "We are extremely pleased with this result," he said.
The new Samsung agreement took out a royalty rate per kilo of OLED materials used and replaced it with a straight-up annual license fee, which seemed to remove Universal from the profit equation as OLED sales scale up. But there's also a materials supply agreement that serves the same purpose, and that's why the commercial materials business is going gangbusters.
And if you're worried about Universal running out of growth opportunities, take a deep breath and relax. The results you see today are built almost exclusively on red pixels, and only one layer of the many-layered OLED screen model. Green materials are just coming into the commercial revenue stream while blues need more work before joining the commercially viable colors. The company is working on the so-called host layer too, with further revenue-making layers on the horizon. So there's a lot more revenue to squeeze out per square inch of screen area sold.
The stock has more than doubled over the last year as the investment thesis became clearer. And we haven't even seen the first sales into OLED TV screens and lightbulb replacements yet.
I'd say that the runway ahead of Universal Display is a lot cleaner than those of fellow hypergrowth stocks such as Amarin (NAS: AMRN) (which depends on fickle FDA decisions), lululemon athletica (NAS: LULU) (fickle consumers), or Silicon Graphics International (NAS: SGI) (fickle IT directors). Unlike these companies, whose stocks have kept pace with Universal Display over the last year or so, OLED gadget builders simply don't have much of a choice -- they need licenses and maybe materials from this company.
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At the time thisarticle was published Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of lululemon athletica. Motley Fool newsletter services have recommended buying shares of Universal Display and lululemon athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.
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