If you're looking to invest in relatively small technology stocks, then two names that you might've come across in your research are Cypress Semiconductor (CY) and Universal Display (OLED -2.06%).
Cypress Semiconductor pitches itself as a company "focused on the high-growth Internet of Things ("IoT") and Auto markets," while Universal Display licenses out intellectual properties related to and sells materials used in the manufacture of a type of display based on organic light-emitting diode (OLED) technology.
Image source: Getty Images.
If you're trying to pick between these two stocks, here's a comparison of the two companies across a number of different vectors.
Growth prospects
To the extent that OLED-based screens become more ubiquitous, Universal Display is set to benefit. The company itself seems optimistic that the overall market for OLED screens is set to grow substantially in the years ahead. Putting some numbers to it, Universal Display pegged the size of the OLED screen market at around $23.5 billion in 2018, with that figure set to grow to $40.1 billion by 2022. That growth, according to the company, will be driven by a proliferation of OLED screens in mobile devices, as well as rapid adoption of OLED technology in televisions.
Now, there can often be a significant disconnect between expectations and reality and there are clearly risks to those growth expectations, but the idea here is simple: Universal Display's growth prospects ultimately hinge on the adoption of OLED screens in key markets.
With that being said, analysts aren't sanguine on the company's growth prospects in 2018: They expect that when Universal Display reports its results for the final quarter of 2018, its sales will drop a whopping 24.8% to just over $252 million. They are, however, expecting a 43.6% pop in 2019, with sales reaching $362.39. In 2020, analysts forecast Universal Display's sales to grow by another 31.5%.
Cypress Semiconductor generates its revenue from three basic product categories: microcontrollers, memory, and connectivity technologies. Last quarter, these segments accounted for 33%, 39%, and 28% of its overall revenue, respectively, arguably making the company more diversified than Universal Display, which primarily relies on the smartphone and television markets. Cypress is levered to more markets, which gives it an edge in terms of business diversity, but on the flip side, the quality of those markets is something of a mixed bag. It expects the market for connectivity chips to grow at a 16%-18% long-term compound annual growth rate (CAGR) and the MCU and programmable system-on-a-chip (PSoC) businesses to grow at 5%-7%, but its expectation for memory is a 2%-5% decline. All told, the company expects the end markets in which it participates in to grow at a 7%-9% rate.
As far as analyst estimates go, consensus calls for Cypress to see its sales decline 5.9% in fiscal 2019 (something that's helped along by the fact that Cypress spun off its NAND business), followed by 4.8% growth in fiscal 2020.
Ultimately, Universal Display's growth prospects over the next few years look better than Cypress', although there's always the looming risk that -- over a longer period of time -- OLED technology could be displaced by a newer technology, like microLEDs. Cypress' business seems less likely to be hit by a potential paradigm-shifting disruption.
Shareholder returns
Cypress pays a respectable quarterly dividend of $0.11 per share, translating into an annualized dividend yield of about 3.46% as of writing. Cypress hasn't raised its dividend in a while, though, so dividend growth investors should look elsewhere. The company also has a $190.8 million share repurchase program in place -- good for about 4% of its total outstanding share count. On top of that, Cypress' buyback activity hasn't been particularly vigorous lately, with the company only spending $10 million last quarter to buy back shares.
Universal Display's capital return program is even more underwhelming than Cypress' -- it pays an anemic quarterly dividend of $0.06 per share (on an annualized basis, this translates into a meager dividend yield of 0.26%) and it doesn't have a regular share repurchase program in place. That's not too surprising, though, considering the relative choppiness of Universal Display's free cash flow generation:
OLED Free Cash Flow (TTM) data by YCharts.
While Cypress isn't exactly a model dividend growth stock, for investors that do value having a meaningful dividend, Cypress wins this comparison by default.
Valuation
There's no getting around this one -- Universal Display is a really expensive stock by just about any metric you want to consider. It trades at a whopping 12.2 times projected 2019 sales and 37.7 times projected 2019 earnings per share (EPS). Cypress, on the other hand, is fairly cheap, trading at about 10.8 times analysts' 2019 earnings estimates.
Now, these valuation metrics shouldn't be viewed in isolation -- they need to be used in conjunction with each company's respective growth projections. Cypress isn't expected to grow quickly, so it's a relatively cheap stock. Universal Display is expected to grow extremely quickly and so the market rewards it with a larger multiple.
There's nothing inherently wrong with an expensive stock -- at least if it can meet or exceed the growth that investors expect. Things generally go wrong when investors expect massive growth and the company fails to deliver. In those cases, investors often wind up rethinking what that company is worth based on new growth expectations -- something that can lead to a fairly dramatic drop in the stock price.
So I can't really pick a "winner" on this metric and, frankly, overall. What I can tell you is this: If you're choosing between these two stocks and you're willing to accept potentially less exciting growth for a cheaper valuation and a meaningful dividend, then Cypress may be the way to go. If you're bullish on the growth of OLED screens and are willing to stomach significantly more risk (and, potentially, volatility), then Universal Display could be your pick.
Check out the latest Cypress Semiconductor and Universal Display earnings call transcripts.
