Shares of Universal Display (NASDAQ:OLED) enjoyed a strong day today, closing out trading with 5% gains. The stock had risen as much as 10% during trading before giving back some of those gains. The driver behind today's move was Susquehanna initiating coverage on the organic light-emitting diode (OLED) pioneer with a "positive" rating alongside an ambitious $100 price target. That valuation represents meaningful upside relative to the all-time high of around $74 set last August, a level flirted with today.
What will it take for Universal Display to hit three-digit prices?
OLED adoption may (finally) accelerate
Analyst Mehdi Hosseini says that OLED adoption within the smartphone and TV markets is "set to accelerate." However, this is a storyline that's been repeated for years, as investors patiently await for the adoption curve to spike. To be clear, OLED adoption is likely to spike meaningfully, and when it does it will translate into major upside for Universal Display's financials, but the timing is what's so hard to predict.
Universal Display also enjoys a fairly easy competitive environment, as the company lacks any meaningful rivals that can compete in terms of intellectual property and patent licensing. Hosseini notes that Universal Display recently announced that it was doubling its manufacturing capacity for the OLED materials that it subsequently resells to customers. The company said last week that it would invest $15 million in PPG's (NYSE:PPG) manufacturing facility in Ohio to double capacity for Universal Display's proprietary UniversalPHOLED phosphorescent emitter products. The expansion is set to be completed by the third quarter.
The analyst believes that Universal Display's business of materials sales combined with patent licensing (which is not unlike a certain mobile chip giant) gives it an enviable position once OLED adoption accelerates further. OLED penetration of the smartphone market is currently a mere 16%, according to Hosseini's estimates, but this is expected to rise to around 30% by 2019. The TV market moves much slower, and OLED penetration in TVs is a minuscule 1%, although this may triple to 3% over the same time frame.
Flexible designs are expected to be the key driver of adoption, as manufacturers can explore a wide range of innovative new use cases that are currently unavailable with traditional LCD displays.
In other news
Separately, Bloomberg reported yesterday that Apple (NASDAQ:AAPL) is in negotiations with China-based BOE Technology Group to provide OLED displays. BOE is already planning on investing nearly $15 billion to build two AMOLED manufacturing facilities in Sichuan. That could potentially supplement the $4.3 billion supply agreement that Apple has reportedly inked with frenemy Samsung, one of the largest proponents to date of OLED displays.
Apple's adoption of OLED is very much baked into broader expectations of OLED adoption throughout various markets, given the Mac maker's unique ability to bring new technologies to the mainstream. By the looks of it, Apple appears intent on reserving OLED displays for its most expensive iPhone model due to the added costs associated with OLED panels. As costs naturally come down over time, you can expect that the company would bring OLED to the rest of the lineup, much like it has done with other technologies.
More than most, Universal Display investors recognize that patience is a virtue, and that patience is finally paying off.