In late 2017, Apple (NASDAQ:AAPL) began selling a smartphone dubbed the iPhone X. This product represented an ultra-premium offering within the company's lineup, sporting advanced features and a new design, but at a higher price than what the company wanted for its more mainstream iPhone 8 and iPhone 8 Plus.
One of the distinguishing features of the iPhone X was that it incorporated a type of display based on organic light-emitting diode (OLED) technology. OLED screens offer improved contrast and faster pixel response times versus more traditional liquid crystal displays (LCDs), which Apple had used exclusively in its iPhones until the launch of the iPhone X.
The company adopted OLED screens more broadly with the 2018 iPhone lineup, using them in both the iPhone XS and its larger sibling, the iPhone XS Max. The more affordable iPhone XR, on the other hand, uses an LCD screen that Apple markets as a "liquid retina display."
The Wall Street Journal recently reported that Apple might adopt OLED screens across the entirety of its 2020 iPhone lineup, leaving LCDs behind. That would be a good development for a small company called Universal Display (NASDAQ:OLED). Here's why.
More OLED screens, more sales for Universal Display
Universal Display generates revenue in three ways. Sales of materials to manufacture OLED screens came in at just over $200 million in 2017, representing the majority of its revenue (59.7%). License fees and royalties for the use of Universal Display's technology generated $126.5 million in 2017: 37.7% of sales. The company also gets a small amount of revenue -- nearly $8.9 million in 2017, or 2.6% of sales -- from "contract research services."
The key thing to understand is that to the extent OLED screens capture share in the world of displays, Universal Display stands to benefit. Smartphones represent a key market for display technology, and OLED technology has become increasingly pervasive in premium smartphones (although makers of LCDs are also taking steps to make their screens more competitive).
If Apple were to go all-in on OLED screens for the iPhones that it launches in the second half of 2020, it would significantly increase the number of OLED screens that Apple would buy over the course of that product cycle, benefiting Universal Display.
Another thing to consider is that a meaningful percentage of Apple's iPhone shipment volume in a given year comes from its older devices, which are discounted to allow the company to serve lower price points without explicitly building products for those price points. If Apple were to abandon LCDs entirely in the 2020 iPhone lineup, then within a few years, all of the iPhones that Apple sells would have OLED screens -- a nice development for Universal Display.
A longer-term concern looms
If you've been following the Apple rumor mill, you'll probably remember that back in March of 2018, Bloomberg published an article detailing Apple's in-house display development efforts. The report revealed that Apple is working on a type of display called microLED. In fact, Bloomberg said that Apple has prototypes of microLED screens for the Apple Watch and that those screens "are notably brighter than the current OLED Watch displays, and engineers have a finer level of control over individual colors."
That same report also said that "[it's] unlikely that the technology will reach an iPhone for at least three to five years," citing "people familiar with the situation." But if Apple -- and potentially other premium smartphone makers -- were to ultimately replace OLED screens with microLED screens, it would pose a clear long-term risk to Universal Display's business.
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Universal Display and is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.