Shares of Universal Display (NASDAQ:OLED) plunged after the company reported third-quarter 2018 results last week. Sales returned to year-over-year growth, but the recovery was not as robust as management had previously expected. Universal Display reduced its full-year revenue guidance to a range of $240 million to $250 million from previous expectations for $280 million to $310 million.
However, even before management knocked down its sales goal, 2018 was always expected to be a down year preceding a rebound in business in 2019. That viewpoint remains unchanged, and there's evidence supporting it.
2018 has been kind of a bummer
To give some perspective on how much business is down this year, investors should look at more than just one quarter of results. When looking at the three quarters of 2018 reported to date, it's easy to see why Universal Display shares have lost more than half of their value since hitting an all-time high early this year.
|Metric||Nine Months Ended Sept. 30, 2018||Nine Months Ended Sept. 30, 2017||YOY Increase (Decrease)|
|Material sales||$113.3 million||$140.5 million||(19%)|
|Total revenue||$177.3 million||$219.8 million||(19%)|
|Material sales gross margin||75%||76%||N/A|
|Operating income||$41.5 million||$88.4 million||(53%)|
|Earnings per share||$0.83||$1.49||(44%)|
There are numerous reasons for the sharp decline. The biggest is a change in revenue recognition related to new accounting rules that went into effect this year. Under the old standard, 2018 sales results would actually be 6% higher than last year.
Nevertheless, that's a dramatic deceleration in growth compared to the 69% revenue surge that Universal Display logged in 2017. Furthermore, Universal Display stock is still valued at 74 times its GAAP earnings for the last 12 months. On the other hand, Universal Display stock trades for a more reasonable 36 times its projected 2019 profit.
Looking for double-digit growth in 2019
A price-to-earnings ratio of 36 is still pretty rich, and it indicates that Wall Street is anticipating dramatic improvement at Universal Display. Though specific guidance hasn't been released yet -- expect that in the fourth-quarter report that will be released in late January or early February of 2019 -- management continues to contend that it will deliver strong growth next year.
That's because OLED technology is quickly becoming the standard in the world of digital displays. Apple's new iPhone lineup includes two phones with OLED screens, compared to just one last year. Lots of other new phones are following suit, including Alphabet's Google Pixel 3 and a new Samsung Galaxy Note 9. The pickup in the smartphone industry will help Universal Display, which is the patent holder and materials seller for all things OLED.
That's not to mention the TV market, where demand for ultra-high-definition OLED big screens continues to build.
Meanwhile, OLED is enabling new form factors that older LCD technology can't pull off. Manufacturers are beginning work on new phones and laptops that feature foldable OLED screens. OLED is also just beginning to find its way into the auto industry, as it is being tested for use on the digital displays in some luxury vehicles.
All of this new activity means display makers are investing to build new manufacturing plants (or upgrade existing ones) to handle OLED screen production. That means more royalty and consultation revenue for Universal Display, as well as the real growth driver: long-term increases in basic material sales of the organic material that's used in new screen production.
It's still too early to tell how significant top-line growth will be in 2019, but Universal Display's tempered guidance for this year has reset its valuation to a more realistic level. If you think OLED screens are the next stepping stone in display advancement, this stock is worth a look again after its drop.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares), Apple, and Universal Display. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), 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.