In this MarketFoolery podcast, host Chris Hill is back from SXSW and ready to rejoin the fray with Million Dollar Portfolio's Jason Moser and Stock Advisor Canada's Taylor Muckerman.
In this segment, they talk about the rumor that was taking a chunk out of Universal Display's (OLED +1.66%) value on Monday: that Apple (AAPL +1.05%) is manufacturing its own microLED display screens at a "secret" facility in California. If true, the company could be losing a lot of sales to its biggest end user. How might it adapt? And for investors, is this a good time to jump ship on a stock that could take a much steeper fall if the scuttlebutt is confirmed?
A full transcript follows the video.
This video was recorded on March 19, 2018.
Chris Hill: Shares of Universal Display are falling on the news that Apple is reportedly producing their own display screens in "a secret manufacturing facility near Apple's headquarters in California."
Taylor Muckerman: They kept a secret?
Hill: It's not a secret anymore, apparently. But, Universal Display shares down about 14% this morning. Wasn't this always the case with Universal Display? Wasn't this always the situation where, we looked at this company and said, "This is great. They're doing great. And No. 1, or certainly in the top two or three in terms of risk factors, is if Apple decides to take their enormous pile of cash and start making their own display screens."
Muckerman: Absolutely. The talk lately has been about them getting into larger screens, televisions and monitors of that size. But, yeah, with their largest customer apparently switching to in-house micro-LED, which supposedly has darker blacks, brighter whites, slimmer and consumes less power, you're hitting on all fronts there. It seems like a no-brainer for them, if it is viable technology, to roll that out. And then, LG announced that its new phone, the LG 7, going LCD instead of OLED. So, getting hit from a few different partners.
Jason Moser: Yeah, it does seem like this is another chapter in the book on the pros and cons of working with Apple. We have a litany of examples out there, whether it's Ambarella or InvenSense or whatever provider, it's great, but you get hit on the backside there either on pricing or perhaps Apple considering taking you in house and getting a little bit more vertical, and that's what it looks like it could be here.
Universal Display makes their money by selling the materials for OLED and licensing their IP. And they have a decent catalog of IP, they've been in business for a while. But the numbers here are kind of concerning. If you look at the trail here, the chain of how this money is made, SDC is the company, they are a key customer of Universal, and SDC is essentially helping to assemble all this stuff for these phone companies. So, if you look at SDC as being a key customer of Universal, Universal, 62% of their consolidated revenue in 2017 came from SDC. Now, SDC is a very big supplier to Apple's move to OLED screens. So, you can put two and two together there and realize that Universal is very dependent on SDC, and if SDC is doing a lot of business with Apple, now we understand why the stock is behaving the way it is, because if Apple is taking this work in house -- and this doesn't mean they are, this means that they're working on that possibility -- then all of the sudden, you realize that Universal has the potential to lose a big chunk of revenue. And, trailing-12-month revenue is $335 million. It's not like it's some big, massive company. The stock is trading at better than 50X 2018 estimates. On the flip side, it has a healthy balance sheet, it's profitable. But, again, we've seen this play out before. They need to have something to go to if that Apple relationship deteriorates.
Hill: Let's say you own shares. Do either of you own shares of this company?
Moser: Of Universal? I don't.
Muckerman: Contemplated it, but never pulled the trigger.
Hill: Let's say you've owned shares of this company for a couple years, you've made a nice gain on it.
Muckerman: Yes, you have.
Hill: Yes, you have. But, as you said, Jason, we've seen this movie before, and here's how the movie goes: the report comes out. It's not confirmed from Apple, but the report comes out. And the stock of InvenSense or whoever else, in the case of InvenSense, it's like, they might not be in the next iteration of the iPhone. The initial report comes out, the stock falls somewhere between 5-15%. And then somewhere down the line, it gets confirmed, and then it really takes a hit.
If you've owned this stock and you've made a nice gain and you're seeing it down 14%, do you pull the plug right now? Or do you say, "I'm going to wait and see," knowing that at some point later in 2018, Apple could absolutely come out and say, "We're cutting the ribbon on our now-no-longer-secret manufacturing facility," and then Universal Display's stock really takes a hit?
Muckerman: Yeah, if this report is wrong, that's a huge blunder. So, I'm more likely to believe the report that this is actually under way, and talking about it being under way since 2016, maybe even earlier. I'm willing to cut some of the shares that I would potentially have in that company, for sure, because it's hard to believe that this isn't true.
Moser: Yeah, the nature of Universal Display as a stock, it's not a stock that I look at as a "buy it and plan on holding it for a long period of time." I think it's one you have to keep tabs on. Like you said, we've seen this play out before. Apple is one where you can buy and set it and forget it. Universal Display, not so. If I did own shares and was sitting on a big win there, I'd be looking at this and taking it very seriously based on the history of examples out there. I'm not telling anybody what to do, but if it were me, I more than likely would be leaning toward cutting bait and moving on.
