Why I Bought Universal Display

I'm sorry I ever doubted you, Universal Display (Nasdaq: PANL  ) . I won't make that mistake again. Welcome back to my portfolio.

A trip down memory lane
The first time I picked up shares of UDC was in May 2010. This was before I was an official Fool, and I saw opportunity in the company as the leading intellectual-property provider for OLED technology, a theme that kept popping up in the tech world. Little did I know that our Rule Breakers service had recommended it five years prior.

I had a limit order in to buy shares at $12, which was promptly triggered during the "flash crash" on May 6 that left everyone scratching their heads. A few months later in July, UDC would see a re-recommendation from our chief Rule Breaker and Foolish co-founder David Gardner, leading to some self-back-patting on my part.

The next year would be a good one, albeit with incredible volatility. Here's a price chart starting from the fateful day my order got filled.

PANL Chart

PANL data by YCharts

Within less than a year, I was enjoying a five-bagger as shares briefly topped $60.

Then, in June 2011, I got shaken out. Some dubious reports from the Far East (The Korea Times, specifically) claimed that UDC's largest suppliers, Samsung and LG Display (NYSE: LPL  ) , had successfully invalidated its patents in Japan. That seemed like a pretty serious threat to my thesis, as patent litigation is a major threat to any IP company.

At the time, I also had a somewhat itchy trigger finger generally. I was working at Charles Schwab on a team of brokers and trading specialists catered toward active traders, after all. I foolishly (lowercase "f") sold my shares near $42 -- still a respectable gain.

Less than three months later, I punched myself in the face when Samsung inked a long-term six-and-a-half year contract with UDC. LG similarly signed a short-term renewal last month.

With shares pulling back down over the past few months as UDC's business strengthens, I've decided to buy back my shares at $35 -- lower than where I sold. The market doesn't frequently give you a chance to make up for your mistakes, so I'm taking my mulligan while I can.

Why buy?
I've already listed out a handful of reasons UDC is a buy. The technology's benefits in power efficiency, flexibility, and improved display characteristics are validated by the fact that panel makers are investing heavily in OLED manufacturing facilities.

The South Korean conglomerate invested $4.4 billion in OLED factories last year, followed by another $6.2 billion planned this year. Sammy might even spin off its flailing LCD business just to focus on OLEDs. LG is planning on spending $3.5 billion for the same reason, about what it spent last year on OLED technology. They're clearly betting pretty heavily that this is the next generation of display technology.

Thankfully, UDC isn't the one on the hook for the capital-intensive manufacturing -- it gets to sit back and collect royalty and license fees while scaling its R&D spending. Here's a breakdown of revenue over the past three years as recurring material sales in particular take off.

Source: 10-K annual report.

Source: 10-K annual report.

UDC's largest cost is R&D as it develops its IP. It's only mildly increased in dollar terms over the years, but it has substantially fallen as a percentage of revenue as its top line soars.

Metric

2009

2010

2011

R&D expense (% of revenue) 134% 71% 39%
R&D expense ($) $21.1 million $21.7 million $24.1 million

Source: 10-K annual report.

The company just recently passed the important threshold of profitability, and revenue growth looks set to continue accelerating.

PANL Revenues Chart

PANL Revenues data by YCharts

iCatalyst
One day down the road, I expect Apple (Nasdaq: AAPL  ) to adopt OLED technology in iDevices. The Mac maker recently filed numerous patents for OLEDs, including one involving improved power efficiency and another on how they may be implemented in future iPads. Another three (all related to touchscreens) were uncovered more than a year ago, so you know it's on Cupertino's radar.

Meanwhile, Samsung is one of Apple's largest display suppliers. This is probably far down the road, but I still think it will happen eventually. It's a cherry on top of my current UDC thesis that will hopefully materialize in the future -- a potentially enormous cherry.

Android's doing it
Google
(Nasdaq: GOOG  ) Android OEMs have been adopting OLED displays, including Samsung's own Galaxy Nexus, the current Android flagship phone. Motorola Mobility's (NYSE: MMI  ) Droid RAZR sports one, too.

UDC actually bought a handful of OLED patents from Motorola about a year ago, and part of the deal had Motorola getting a small stake in the company.

The color of the weakest link
In fairness, there are some obstacles holding back wider adoption. Specifically, blue OLEDs have shorter lifespans (about 14,000 hours) than red and green ones do (46,000 hours to 230,000 hours). Manufacturing costs remain high, keeping prices high and holding back adoption. The high costs also present some supply constraints, which is one reason Apple can't adopt OLEDs quite yet.

Without a doubt, there are some kinks in the technology and hurdles to widespread adoption. I believe those challenges will soon be overcome and OLEDs will eventually become the standard for display technology, with UDC cashing in on the process.

Mobile displays are just part of The Next Trillion-Dollar Revolution. Get this new free report on another way to play the rise of smartphones and tablets. It's free.

Fool contributor Evan Niu has sold bullish put spreads on Universal Display and owns shares of Universal Display and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Charles Schwab, Universal Display, Google, and Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2012, at 12:30 PM, TMFNewCow wrote:

    Oops, meant largest customers (not suppliers) Samsung & LG

  • Report this Comment On April 14, 2012, at 12:50 PM, beavercreeked wrote:

    The above reasons are exactly why there are a few dozen retail longs and tremendous short pressure by the manipulators. Retail longs know that we will be rewarded eventually. The institutional manipulators know that PANL is a safe short they can make money on shorting until they are ready to let PANL fly. Then the sucker shorts who thought they were brought in on the sure thing, will suffer when the downward pressure is removed.

  • Report this Comment On April 14, 2012, at 2:14 PM, sufferingproust wrote:

    I think one of the major issues is lack of perspective. The reality is that in 2010 there were basically no AMOLED phones being sold while today Samsung is outpacing apple and their most successful phones are AMOLED. I think there is little to no acknowledgement of how fast the adoption rate actually is by the street. The evaluation of risk has also been pettifogged by the street. Every year there is less risk than the last but more possible reward. The long term SMD contract provides much more than royalty or license fees. It directly attributes the success of PANL to Samsung continued success. Some would argue that this creates risk but I think the reality is very different when the company essentially has a monopoly on the technology.

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