Hold on to your hats, Universal Display Corp. (OLED 1.10%) investors, because it's time to delve into what to expect from your favorite OLED technologist in 2014.
But first, a little background ...
Earlier this week, I took some time to explain how shares of Universal Display rose by 34.1% in 2013. While that was good enough to narrowly exceed the S&P 500's solid 32.4% total return last year, Universal Display investors endured more than their fair share of volatility in the process, in part a byproduct of the company's chunky revenue stream, which overwhelmingly relied on a twice-per-year, $20 million patent licensing payment from Samsung (NASDAQOTH: SSNLF).
And wouldn't you know it, strong material sales growth last quarter propelled Universal Display to its very first profit without the aid of Samsung's payment -- that is, at least since the two companies signed their 6.5-year deal in mid-2011.
So what should we expect next year?
The Samsung license fee will increase
First, let's not kid ourselves: Just because Universal Display can make money without those big checks from Samsung doesn't mean they aren't great to have, especially considering each payment increased by a third from $15 million last year.
And make no mistake: That fee will go up again this year. When prodded for details on 2014's license revenue growth during last quarter's earnings conference call, Universal Display management responded, "2012 was $30 million and this year it's $40 million. [...] Just to look at the trend and that's what we expect from Samsung."
Now that could mean one of two things: (1) Either UDC's license payment from Samsung is pegged to increase by a flat $10 million each year, or (2) it's set to increase by one-third annually.
Why should we care? Even though the difference between the two would amount to "only" a few million dollars next year, investors should hope Universal Display's contract dictates the latter option, which would allow the magic of compounding to do its work over the course of the contract.
Unfortunately, management declined to provide any more details until their fourth-quarter report, saying, "We'll talk about it in the next call."
Another long-term licensing deal
Next, I think it's safe to assume a similar long-term deal will be signed in 2014 with LG Display (LPL 1.78%).
And yes, I'm aware we've been waiting for the LG Display deal to happen for nearly a year. So why do I think it'll happen before the end of 2014?
For starters, consider that LG Display last April confirmed more than 50% of its 2014 capital expenditures budget is going toward OLED development.
What's more, last month The Korea Herald reported LG Display was nearing an agreement to supply small, flexible OLED displays to a little company we all know as Apple. And based on supply chain research from DisplaySearch in October, those screens are likely intended for use in Apple's iWatch device with a planned late-2014 launch.
Then earlier this week, LG Display lauded its latest large screen OLED television line-up to be featured at this year's Consumer Electronics Show, listing at least five new models including curved 55-inch, 65-inch, and 77-inch versions. At the same time, according to Tim Alessi, LG USA's director of new product development, while LG viewed 2013 as "kind of a positioning year," they now "see 2014 as the start of a rapid shift to these new technologies."
LG Display's New 77-inch curved OLED TV. Image source: LG Display.
Steady material sales growth
Even so, given OLED TVs' prohibitively high cost and still-limited manufacturing output, LG estimates total industrywide sales of only 30,000 to 50,000 units this year -- a far cry from the roughly 227 million total TV units sold in 2013.
But that doesn't mean Universal Display investors should run for the hills.
If LG's increased presence in the OLED market wasn't enough, recent reports suggest Samsung Display is set to increase its already-enormous OLED production capacity in 2014 by 33%, largely the result of increased use of OLED materials planned in both mobile devices and TVs made by the company going forward -- a report bolstered by the fact both LG and Samsung also recently projected 40% of all smartphones sold could feature flexible OLED displays by 2017.
The end result for Universal Display, then, should be steady material sales growth in 2014 as their flagship technology continues to take hold.
Foolish final thoughts
These three items certainly don't represent an all-inclusive list of Universal Display's long-term catalysts, either. Remember, OLED lighting solutions remain in the very early stages of development, and the company is also working on an encapsulation solution meant to seal bezel-free flexible OLED displays from harmful outside elements.
For now, though, Universal Display has plenty of good news to fill its coffers, which is why I plan to hold on to my shares tightly in 2014.
