Universal Display (NASDAQ:OLED) has many upside catalysts on the horizon. Beyond the big one, display makers continue to increase their investments in OLED manufacturing facilities. Management already noted a few important developments within the Middle Kingdom on the last earnings call, but Bernstein analysts have just put out a research note (via Tech Trader Daily) that further supports this thesis.
Shares of Universal Display recently tapped fresh all-time highs last month, but it seems like shares may have more room to run.
OLED capital spending is soaring
Following a trip to Asia to research the electronics supply chain, the analysts noted that China is driving a precipitous rise in overall investments in OLED technology, noting that manufacturing capacity continues to ramp faster than previously anticipated. A wide range of companies that provide equipment and materials are capitalizing on the increased capital spending; emitter material sales comprised half of Universal Display's total revenue last year.
Panel makers are rapidly shifting away from traditional LCD panels in favor of OLED, which also has some negative implications for glass companies like Corning (which was downgraded to neutral earlier this week by Goldman Sachs for similar concerns). The analysts estimate that total OLED capital expenditures will remain elevated through 2020, and Bernstein has had to upwardly revise these spending estimates on numerous occasions already.
Universal Display is named as one of the top expected beneficiaries of the ongoing OLED transition, along with other companies that supply emitter materials like South Korea's Duksan Neolux, among others.
Supply needs to catch up with demand
On last month's earning call, CEO Steve Abramson noted that the company had inked several new agreements in China in 2016. Customer BOE Technology is investing heavily:
And in China, BOE Technology, who has been producing small quantities of OLED displays, is reportedly investing over $10 billion in OLED pilot and commercial lines from its gen-5.5 pilot lighted orders for small and medium displays, and its gen-8 pilot line (inaudible) for its OLED TV R&D program. BOE's also completed construction of its first greenfield gen-6 OLED fab in Chengdu with ramp-ups slated to begin in the second half of this year and mass production to commence in early 2018.
BOE's production isn't expected to ramp meaningfully until 2018. The company was previously rumored to be in negotiations with Apple for the OLED iPhone, although more recent rumors suggest the Mac maker will predominantly rely on Samsung for its OLED fix.
Bernstein also notes that many Chinese smartphone manufacturers have been unable to procure OLED displays because existing capacity remains low and the larger players are gobbling up OLED supply. That's despite the fact that these local original equipment manufacturers (OEMs) are willing to pay double the cost of an LCD display. Clearly, there's demand at the OEM level, and the supply situation needs to improve. As it does in the coming years, Universal Display will be sitting pretty.