What Are the Biggest Risks for Universal Display Investors?

The next generation of display technology will be centered upon organic light-emitting diodes, or OLEDs. The technology's viability in mainstream applications continues to ramp up in conjunction with advancements, but its advantages over traditional LEDs and other display technologies are too promising for investors to ignore.

As the dominant supplier of OLED materials and intellectual property, Universal Display  (NASDAQ: OLED  )  has a bright future ahead of it. To break down exactly how investors should understand this company, the Fool recently crafted a premium research on Universal Display, a brief excerpt from which we've included in the text below. Enjoy!

Universal Display's most recent quarter was very disappointing, with revenue of just $12.5 million. Management attributed this to a temporary slowdown to macroeconomic challenges and product delays at key customers. OLED TVs have been delayed and this led to worse-than-expected materials sales, particularly within green phosphorescent emitters and host materials.

Even worse, Universal Display lowered its full-year revenue guidance from a prior range of $90 million to $110 million to a new range of $80 million to $82 million. That implies fourth-quarter revenue of $24.9 million to $26.9 million. Of that total, $15 million will come from Samsung's licensing agreement. That puts full-year growth at 32%, a deceleration relative to the 94% growth the prior year.

These lackluster results highlight how vulnerable Universal Display's results can be in the short term, as slowdowns in consumer demand in its end markets can weigh heavily.

Universal Display has an extremely concentrated customer base, which represents a substantial amount of risk. For 2011, three customers collectively accounted for 80% of total revenue: Samsung, LG, and Nippon Steel. This shows how important it is for Universal Display to ink long-term agreements with its key customers.

As any company that relies heavily on intellectual property, Universal Display's patents are sometimes called into question. The company's customers are heavily concentrated in South Korea and Japan, so the results of patent suits in those countries can affect financial performance.

In May 2010, Universal Display received notices of invalidation trials against two of its Japanese patents that were issued in 2009. A year later, the Japanese Patent Office found these two patents invalid, and the company appealed this decision to the Japanese IP High Court. On the most recent conference call, management said they were just informed that the Japanese IP High Court reversed the prior invalidation decision, upholding the validity of these two patents. This is certainly a positive development.

This was but one of many trials that Universal Display is involved in, and patent litigation is an important risk. It inevitably adds costs as well, but so far the company has defended its intellectual property well.

Steve Abramson has been Universal Display's CEO since January 2008. Prior to that, he served as COO from 1996 to 2008, so he has been with the company for over fifteen years. He also previously spent nearly a decade at InterDigital, another company that specializes in patent licensing. Abramson takes a very long-term view to the OLED industry, which is a good thing. He beneficially owns approximately 440,000 shares, which is less than 1% of shares outstanding.

Abramson became CEO after founder Sherwin Seligsohn stepped down as CEO at the end of 2007. Seligsohn remains chairman of the board and still has a 7.4% stake in the company.

CFO Sidney Rosenblatt has been with the company since 1995 in that role, and is Universal Display's principal accounting officer. Rosenblatt has also been a director since 1996, and also spent eight years as CFO of InterDigital around the same time that Abramson was at that company. He beneficially owns 620,000 shares, or a 1.3% stake in Universal Display.

Universal Display has a powerful patent portfolio behind OLEDs, a technology poised to dominate the displays of the future. Its placement at the center of OLEDs makes the company an underappreciated way to play the enormous sales growth in tablets and smartphones. However, like any new technology, there are plenty of risks to Universal Display. I've put together a new premium report that dives into reasons to buy the company as well as the challenges facing it. For access to this comprehensive report, simply click here now.

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