Universal Display (NASDAQ:OLED) holds itself out as an "innovator and enabler" of a type of display technology known as organic light emitting diodes, or OLEDs.
The company profits from such displays in two ways. First, it licenses critical intellectual property that's required to manufacture such displays, claiming that it has over 4,500 "pending and issued patents worldwide." The company receives both licensing fees as well as ongoing royalty payments for the use of its intellectual property portfolio.
Beyond licensing out intellectual property, Universal Display also sells materials that are used to manufacture those displays. In 2017, Universal Display generated $126.5 million in "royalty and license" revenue and $198.7 million in revenue from emitter materials used to build OLED displays. Generally speaking, the more widely OLED-based displays are adopted, the more Universal Display stands to profit.
One market where OLED displays are becoming increasingly popular is the premium smartphone market. Last year, Apple (NASDAQ:AAPL) adopted OLED display technology on its flagship iPhone X. That likely led to a spike in demand for OLED displays, since Apple ships more premium smartphones than any other smartphone maker.
This fall, Apple is expected to launch three new iPhones, two of which are expected to incorporate OLED displays. The third, a lower-cost model, is expected to incorporate a more traditional liquid crystal display. That sounds like good news for general industry-wide OLED adoption and, by extension, for Universal Display, right?
While Apple's apparent increased proliferation of OLED displays across its iPhone product stack sounds like a positive, a recent report from The Wall Street Journal was a clear negative.
Apple's mix shift
The Wall Street Journal said in a June 15 report that Apple "expects LCD models to make up the majority of iPhone sales in its lineup to be released this fall."
"Industry executives with direct knowledge of production plans said Apple initially wanted roughly equal production of the two screen types," The Wall Street Journal reported. "Now, they say, Apple plans to make more of the LCD model, anticipating that customers would lean toward the cheaper model."
Apple's shift in production plans is a clear negative for Universal Display because lower industry-wide OLED display shipments could mean lower royalty revenues as well as lower sales of emitter materials. Moreover, Apple is widely viewed as a trend-setter in the smartphone market. If Apple's most popular iPhone during the coming iPhone product cycle is a model with an LCD, then that could mean less pressure on the part of Apple's competitors to more broadly proliferate OLED display technology across their own lineups to keep up.
Looking longer term
Over the longer term -- perhaps within a product cycle or two -- I could see Apple adopting OLED displays more broadly across its iPhone lineup if it can get the costs in check. LCDs are still cheaper to produce because the technology is more mature and there are more suppliers of mobile LCDs than of mobile OLEDs. Such broader adoption would be a boon for Universal Display and could help fuel revenue and profit growth.
However, what might be a bit troubling for shareholders with even longer-term time horizons is that Apple is reportedly working hard on trying to commercialize an emerging display technology called MicroLED. MicroLED promises all of the advantages of OLED, but with even greater benefits in terms of brightness and pixel speed.
Bloomberg reported in March that Apple intended to bring MicroLED technology to the Apple Watch first and then bring it to the iPhone at some point down the line. Though the report said that it's "unlikely that the technology will reach an iPhone for at least three to five years."
Until Apple (and presumably the rest of the industry) is able to transition to MicroLED for premium smartphones, Universal Display could be poised to enjoy revenue growth from the increased adoption of OLED displays in such phones. However, if MicroLED does ultimately displace OLED in premium smartphones, then Universal Display's prospects could be fairly dim.