Please ensure Javascript is enabled for purposes of website accessibility

How Universal Display Corporation Is Stacking the Deck Against the Competition

By Maxx Chatsko - Oct 29, 2017 at 2:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The OLED leader made a huge bet on its technology, which is quickly becoming the industry standard.

If you can't beat 'em, join 'em. If you can beat them, however, make sure they know it, and then convert them to customers.

That's basically become the growth strategy for Universal Display Corporation (OLED -0.10%) -- and one that's difficult to argue with. The materials leader reported 68% year-over-year revenue growth in the first half of 2017. Earnings per share soared 137% in the same span. How is everything seemingly going right for the growth stock?

Simply put, Universal Display is stacking the deck against the competition by turning the gatekeepers of older-generation display technologies into its most important customers and partners.

A woman's hands texting on an illuminated smartphone screen.

Image source: Getty Images.

Big bet, big moves, big growth

Having a superior display technology certainly, helps to fuel the company's growth strategy. Organic light-emitting diodes, or OLEDs, offer higher-definition displays, reduced energy consumption, less wasted energy in the form of heat (they're cool to the touch), and more even light distribution compared to LED materials. They can be used for display screens in smartphones and televisions and even in lighting applications ranging from traditional light bulbs to ultra-thin and flexible light-emitting "sheets," for lack of a better word.

In other words, OLEDs appear to be the next logical step in the continuum of display and lighting technologies. In display applications, the technology arc has progressed from cathode ray tubes to plasma to liquid crystal displays (LCD) to LEDs (and is beginning to transition) to OLEDs. In lighting applications, this has recently progressed from incandescent bulbs to compact fluorescents to LEDs (and soon) to OLEDs.

But there's much more to Universal Display's success than having a superior technology. For starters, it made its initial bets on OLED technology all the way back in 1997 by funding a research grant with Princeton University -- well before even LCDs or compact fluorescents were widely available. That early start allowed the company to amass its current portfolio of 4,200 issued and pending patents worldwide. 

OLED Chart

OLED data by YCharts.

Because OLEDs ended up being a superior technology (it didn't have to turn out that way), and because Universal Display never wavered in its technical hunch, it's now nearly impossible for any display or lighting company to use OLEDs without first talking to the materials leader.

Major customers and growth drivers in displays include Samsung Display, LG Display, Apple, Panasonic, Sony, and the like. Importantly, these companies used to or currently do rely on competing for older display technologies such as LCD and LED. As they convert to OLED en masse, they'll continue to drive Universal Display stock higher.

There's a similar -- if not larger -- opportunity for OLED lighting, although it's earlier in the development process. Nonetheless, it could become a $1.9 billion market in 2021 and a $5.8 billion market by 2025. That means those 4,200 patents will prove pretty valuable for the foreseeable future.

What does it mean for investors?

Shareholders have been in a state of pure bliss with the recent performance of Universal Display stock. It's tough to argue with five-year returns of 323%, after all. While growth should continue for the foreseeable future, there are rumblings that OLED smartphone displays are suffering from burn-in. That occurs when certain objects that regularly appear on the screen (for example, the top menu bar displaying time, notifications, and network activity) seem to be permanently displayed on the screen. It could be a risk to the expansion of OLEDs if the problems are as bad and widespread as initially reported. 

On the same note, there will come a day when OLEDs are the "old" technology for both displays and lighting. In fact, one of Universal Display's largest customers is already banking on it.

Of course, that day is still far away. So assuming screen burn-in is much ado about nothing, this could be the era of OLEDs -- and this stock is the only game in town.

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Universal Display. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Universal Display Corporation Stock Quote
Universal Display Corporation
$126.02 (-0.10%) $0.13
Panasonic Corporation Stock Quote
Panasonic Corporation
$8.49 (0.06%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.