OLED display technology is quickly finding its way into a wide variety of devices. Two companies at the forefront of the movement are Universal Display (OLED 3.37%) and LG Display (LPL +2.47%). Both recently reported full-year 2017 results, and one of them looks like a clear-cut winner for betting on the continued adoption of OLED tech.
|
Metric |
Universal Display |
LG Display |
|---|---|---|
|
Market Cap |
$6.2 billion |
$9.9 billion |
|
2017 revenue |
$336 million |
$25.8 billion |
|
Trailing-12-month price-to- earnings ratio |
60.4 |
5.6 |
|
Forward 12-month P/E ratio |
31.2 |
8.2 |
Chart by author. Data source: Yahoo! Finance.
A supplier of OLED technology
A few years ago, Universal Display was a little-known supplier of OLED-enabling supplies and patent licensor for the digital display industry. As OLED has found its way into an ever-expanding variety of devices, from cellphones to TVs to lighting, sales at the company have doubled nearly three times in the last five years. The stock has followed suit.
Data by YCharts. TTM = trailing 12 months.
In 2017, revenue increased 69% year over year and is sitting at all-time highs. However, the outlook for 2018 is that OLED product output will take a breather as manufacturers plan for the next big wave of product launches -- which isn't expected to happen until 2019.
In the meantime, Universal Display's management is calling for 2018 revenues of $350 million to $380 million. That works out to only a 4% to 13% increase over last year. While something is better than nothing, that's a big slowdown from the last few years. That outlook is reflected in the recent share price decline.
The good news is that revenue growth has been translating into even faster profitability growth, so it could still be a successful year for the stock. Universal Display's management also believes OLED is still in the early stages of adoption and that sales should reaccelerate going into 2019. The message: short-term headwinds, but a rosy looking long-term outlook remains intact.
Image source: Getty Images.
An industry giant bets on the future
LG Display, nearly 40% of which is controlled by former parent LG Electronics (NASDAQOTH: LGEAF), designs and manufactures various display panels for the technology industry. Products are diverse, spanning TVs, phones, automotive displays, and lighting. While the company also maintains its own research and development department, the real difference from Universal Display is that LG Display builds panels in-house.
The company has a leading portfolio of OLED displays, but it isn't a pure play on the advent of the new technology. Mixed into the portfolio are legacy technologies like LCD that are still the best sellers at LG. Prices on that product are in decline as it ages and from competition from other display makers. What that means is that while Universal Display is seeing strong sales growth, LG Display has been stagnant.
Data by YCharts.
It's not as if LG isn't benefiting from OLED, but the growth hasn't been enough to offset performance of its older business lines. The good news is that as OLED adoption continues in a variety of applications, LG Display's fortunes could change as well, as it is in position to benefit. That is especially the case in the TV and smartphone industries, from which LG Display derives about 70% of its revenue, and TVs and smartphones are only just beginning to use OLED.
The bad news is that the anticipated slowdown in OLED in 2018 will likely affect LG as well, so the company could be heading into another phase of sales contraction. Management said it will speed up its transition to OLED this year to take better advantage of the next wave of growth.
The winner is...
For investors wanting to bet on OLED, Universal Display is the ticket. The company is not laden with legacy lines of business, so it is better set up to benefit from future adoption of OLED technology. One area of concern, though, is the company's high price-to-earnings ratios, at 58.9 as of this writing when looking at last year's profits and 31.2 based on 2018's expected numbers. That rich valuation could make the next year a rough one if management's forecast slowdown transpires.
However, while 2018 could be a challenge, robust growth is expected to return in 2019. LG, on the other hand, has the added headwind of needing to replace its old and declining product lines. Now might not be the best time to buy Universal Display stock given its high P/E, but it's the right bet for the long term.
