Applied Materials has seen a huge jump in orders for OLED manufacturing equipment, Image source: Applied Materials.
Shares of Universal Display (OLED +1.39%) closed at an all-time high on Tuesday, and investors in the OLED technologist have Apple (AAPL +1.15%) to thank -- albeit not directly. Shares of Universal Display are up nearly 30% year to date as of this writing and began their recent ascent after electronics manufacturing equipment maker Applied Materials (AMAT +1.19%) credited an unusually strong quarter to large orders of OLED equipment.
During Applied Materials' conference call on May 19, CEO Gary Dickerson explained:
The major technology inflections that are taking place require materials innovation so our available market is expanding significantly. One great example of this is thin film encapsulation that protects an OLED device from air and moisture. The precision deposition of this film stack is incredibly challenging and relies on Applied advanced materials engineering capabilities. Overall, we estimate that our opportunity in OLED is more than three times larger than for traditional LCD. I believe we're still in a very early innings of OLED, but we're already seeing a significant impact on our business. This quarter, our orders in display were an all-time record.
More specifically, Applied Materials received $700 million in display orders last quarter alone, up nearly sixfold from just $120 million in the same year-ago period. Within that, Dickerson says, more than 70% was dedicated to mobile display equipment, with the "vast majority" focused on the OLED market.
To be fair, Dickerson didn't specifically say during the call that this demand was for Apple. But he did subsequently tell Bloomberg -- which promptly tied the orders to the Cupertino-based tech giant's plans -- it won't be "a peak or a one-time event." Dickerson elaborated, "This is going to be sustainable growth. We all know who is the leader in terms of mobile products."
Then again, the folks over at Samsung (NASDAQOTH: SSNLF) might take offense to that assertion of leadership. But either way, it's obvious Dickerson was referring to Apple, considering Samsung -- as the only other electronics maker to utilize mobile OLED displays in any meaningful volume -- has already implemented cutting-edge OLED technology in its massively popular Galaxy line of smartphones and tablets.
If there were any remaining doubt, Universal Display shares soared a few days later, as analysts on Wall Street took note, starting with an upgrade to "buy" from "hold" (and a simultaneous per-share price target increase to $76 from $55) from Goldman Sachs' Brian Lee. At the time, Lee argued that Universal Display is set to benefit from both its expanded inclusion in Apple's repertoire, as well as a "secular shift across the handset market," with only 10% penetration today and a potential "hockey-stick adoption across multiple product cycles and categories in coming years."
Surprise?
But this also shouldn't come as a huge surprise to observant Universal Display investors. In fact, around this time last year I went out on a limb to argue that Apple would ultimately transition all of its product lines to OLED displays, starting with its Apple Watch line and continuing with iPhones in the coming years. In part, I made made my argument based on earlier reports that Apple had contracted both Foxconn (NASDAQOTH: FXCOF) and Innolux to build a $2.6 billion OLED display plant for both wearables and smartphones with a targeted time frame of "2016 or 2017" to reach full production capacity.
Then last November, shares of Universal Display rose after CFO Sidney Rosenblatt said he believes it's only a matter of time before Apple introduces an OLED iPhone, citing both the Foxconn equipment orders and comments made in early 2015 by Apple Chief Design Officer Jony Ive contrasting the "old"-looking LCD technology in his iPhone 6 with what we now know is an OLED display in the Apple Watch.
The Apple news only continued to flow this past January, when Focus Taiwan reported that Apple was mulling an investment to transform Universal Display customer AU Optronics (AUO +0.00%) into a third potential source of OLED displays. And in April, leading South Korean news sites reported that key Universal Display customer Samsung Display had struck a multi-year agreement to supply Apple with around 100 million 5.5-inch OLED smartphone displays annually.
Finally, during Universal Display's most recent quarterly conference call one month ago, I noted that Rosenblatt "dedicated a significant amount of time [...] to the enormous amount of activity and resources being poured into the OLED industry." Rosenblatt summed up the call by reiterating the company's view of 2016 as "a year of building."
All things considered, I would have been shocked if Apple didn't eventually drive a massive increase in orders for OLED-centric manufacturing equipment. Now that we see those orders coming to fruition through Applied Materials, and considering Universal Display will arguably stand the greatest beneficiary of this vote of confidence in its flagship technology, it's no surprise to see Universal Display stock trading near all-time highs today.
