According to a recent report by technology research firm iSuppli, the market for organic light-emitting diode (OLED) displays will just about quadruple this year.
Sony (NYSE: SNE ) paved the way for such lofty estimates with its very expensive but ultra-cool 11-inch-wide, 3-millimeter-thin OLED television set. Now, manufacturers everywhere from LG Display (NYSE: LPL ) to Seiko Epson are rushing to follow in Sony's footsteps. Over the next five years, iSuppli expects high-end active matrix OLED panel revenue to grow a compounded 86% a year.
Pay close attention to the man behind the curtain
That's clearly great news for the companies that supply the technology behind OLED displays, such as DuPont (NYSE: DD ) and Eastman Kodak (NYSE: EK ) . But both of those companies are already very large and have their tentacles extended into plenty of markets. If the research note proves correct and worldwide active-matrix OLED sales rise to $225 million next year, well that's great, but even a 100% market share would be just a drop in the bucket for those guys.
It's a very different story for Motley Fool Rule Breakers pick Universal Display (Nasdaq: PANL ) , where commercial revenue over the past four quarters stopped at $4.5 million, and the company has yet to post its first quarterly profit. If you apply iSuppli's growth figures to Universal Display, growing commercial revenue but removing the effect of its development contracts, and scaling up the operating costs in a reasonably pessimistic manner, then this year still won't look all that great.
Follow the model
Even if revenue were to increase substantially, I'd expect about a $16 million loss in the next 12 months because of the increasing costs needed to scale up the business. That's about even with the losses of the last four quarters. I think that Universal Display will break even when it hits about $65 million in annual revenue, which should happen in about three years. At that point, I'm sure that Wall Street will give the stock a serious boost.
I think that in five years, this model could lead to about $200 million in operating profit on $400 million in sales. Again, that would be a measly 5% increase on top of DuPont's $3.7 billion in trailing operating income, but it's a totally different story for tiny Universal. The company will certainly feel at home among other technology research companies like Rambus (Nasdaq: RMBS ) or Macrovision (Nasdaq: MVSND ) , whose market caps are much larger than that of Universal Display.
If my projections are correct, Universal Display's stock could quadruple in the next five years. That would be equivalent to about 30% annual returns. I'd ask where to sign up, but this Fool already owns Universal Display shares.
It's not too late for you to join the party, but you might want to wait for the next underwhelming short-term report and the concomitant price drop. Just don't forget about OLED, or you'll regret your oversight in a few years when those panels are everywhere.