Few stocks are as polarizing as Universal Display Corp. (NAS: PANL) .
The company is notoriously volatile, as its future prospects are both promising and at times, questionable. As one of the largest intellectual property holders of organic light-emitting diode (OLED) technology, it stands at the forefront of the next stage of LED evolution.
Its future success and profitability are far from certain, but here's why an investor might buy, sell, or hold Universal Display.
The future of display: When compared to traditional liquid crystal display (LCD) technology, OLED displays are more power-efficient, durable, and brighter. OLED displays can also be extremely thin and versatile, even curved or transparent.
Think about adding a transparent heads-up display (HUD) straight out of a science-fiction movie that conspicuously displays information onto your car windshield. Sony (NYS: SNE) has demonstrated a rollable OLED display, which could eventually transform dull newspapers and magazines into vibrant dynamic displays.
Anyone who follows the tech specs of the smartphones, tablets, and TVs coming out nowadays will notice an increasing number of them feature OLED displays. Panasonic (NYS: PC) just unveiled a new phone last week and is also building a factory for OLED displays destined for TVs. Motorola Mobility's (NYS: MMI) new Droid RAZR also features an OLED screen.
Source: Motorola.com, Droid RAZR.
Samsung is one of UDC's largest customers, explaining why it frequently uses OLEDs. The pair's licensing deal was up in the air earlier in the year, which overshadowed the stock. When the two inked a long-term contract in August, it set an important precedent and validated UDC's role in the supply chain. Just as validating was UDC's 208% revenue jump last quarter.
The technology is still in its infancy, and supply constraints are the main reason Apple (NAS: AAPL) hasn't incorporated OLED into iPhones, but that hasn't stopped speculation on when (not if) an OLED iPhone will arrive. Apple has shown its interest in OLED through patent applications related to power efficiency, so we know it's on Cupertino's mind.
The future of lighting: OLEDs are promising not only in display technology, but also in lighting. It's mind-boggling that much of the world continues to rely heavily on incandescent light bulbs, whose origins date back to the 19th century. In comparison, they are power-hungry beasts of heat generation and inefficiency. Roughly 90% of the power used by incandescent bulbs is emitted as heat instead of light. When we're talking about a light bulb, and not a space heater, that's a bad thing.
Source: UniversalDisplay.com, courtesy of NEC Lighting.
Nations around the world have contemplated banning old bulbs, from the U.S. to the European Union and Australia, and recently China. The latter sparked a rally in LED names like Cree (NAS: CREE) and Veeco (NAS: VECO) . Even Goldman Sachs is bullish on the general lighting market for these disruptors, expecting UDC's time to shine as a follow-up to Cree.
Intellectual property: As with any company whose business is built around intellectual property, UDC relies on its trove of patents to keep the royalty checks coming in. Patent lawsuits are inevitability par for the course. Even Samsung fought to invalidate UDC's patents, hoping to free itself from the millions it pays in royalties, before finally signing on the dotted line.
Having its revenue stream rely on the outcome of court decisions, to an extent, is a risk in itself to factor in. The other portion of UDC's revenue comes from selling supplies used, but that segment's success also hinges on the patent protection.
Ramp: OLED technology still has a long ramp in front of it before it can be established as the standard. Materials are still costly, which can slow the rate of adoption. The lifetime of the materials is also relatively limited. Blue OLEDs in particular have a shorter lifespan than red and green.
While the kinks should get worked out as the technology progresses, the disruptor can always become the disrupted in the meantime. For example, American and Swedish researchers have developed a material called graphene, which is cheap and 100% recyclable. It can be used for lighting and display purposes as well, and addresses some of OLED's drawbacks. By no means is graphene the definitive OLED killer at this point, but it shows that threats are on the horizon.
Bright road ahead: Existing shareholders who have ridden out the bumps in the road thus far have already overcome many of the risks that any new technology faces. There are plenty of risks ahead, but many sizable ones are now in the rearview mirror. The company's risk profile continues to positively shift as it overcomes hurdles. Last quarter also marked the first time UDC saw a diluted EPS profit, which came in at $0.12.
Universal Display is a buy. OLED technology is currently set to become the future of display and lighting, and until a viable disruptor threatens its future prospects, the potential rewards far outweigh the risks. On top of that, I'm going to put my (already beaten down) CAPS score where my mouth is today by giving UDC an outperform CAPScall.
At the time thisarticle was published Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Universal Display and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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