If you're looking to invest in an individual company to get exposure to the display panel industry, two names that might have appeared on your radar are Universal Display (NASDAQ:OLED) and LG Display (NYSE:LPL). Although both of these companies will get you that exposure, their business models are radically different.
Completely different business models
LG Display is a by-the-books display panel manufacturer. The company designs and builds display panels covering a wide spectrum of applications that it then sells to customers.
Indeed, LG Display sells screens that are used for computer monitors, televisions, smartphones, tablets, and smartwatches. Apple (NASDAQ:AAPL), for example, is said to rely on LG Display's products for some of its iPads, the Apple Watch, and even for the LCDs used in its lower-end iPhone models.
The company was also rumored to be supplying more advanced organic light emitting diode (OLED) screens to the iPhone maker for its current iPhone lineup, but it's not clear if that is currently happening. (LG Display management is optimistic that 30% of its 2019 sales will come from OLED screens, with that figure rising to "close to 50%" by 2021, so I'm confident that LG Display will eventually be a major OLED screen supplier to Apple.)
LG Display's business performance ultimately depends on the overall industry-wide supply and demand situation, as well as its own ability to build competitive, cost-effective displays for its customers.
Exposure to OLED screens
Universal Display's business model, on the other hand, is wildly different. It doesn't make or sell displays at all -- it sells the ingredients used to manufacture OLED screens, and it licenses out intellectual property related to the manufacture of OLED screens.
There has been an ongoing shift from LCDs to OLED-based displays in many areas of the market. High-end smartphones like Apple's current iPhone XS and iPhone XS Max use OLED screens to deliver better image quality, faster pixel response times, and potentially thinner display assemblies. High-end TVs are also adopting OLED technology. Oh, and OLEDs are practically table stakes in the world of smartwatch displays.
Universal Display is a pure-play bet on that shift to OLED screens: As more display manufacturers ramp up production on displays utilizing that technology, Universal Display stands to benefit from both increased material sales and larger royalty checks.
LG Display, on the other hand, still generates most of its revenue from sales of LCD screens, and is likely to do so until at least 2021 based on comments from LG Display's management. Moreover, while OLED screens tend to be higher margin products than LCDs today because fewer companies can actually manufacture OLED screens, that situation will undoubtedly change over time. Incidentally, LG Display's increased presence in the market should actually lead to increased OLED supply, something that could lead to a decline in OLED screen prices.
Now, while Universal Display is poised to profit from this long-term shift to OLED screens, there is always the possibility that a new display technology will emerge and, in time, do to OLEDs what OLEDs are currently doing to LCDs in some markets. In fact, Samsung (NASDAQOTH: SSNLF) recently demonstrated a TV based on a new type of display technology called a microLED and claimed that the technology offers "unmatched picture quality that surpasses any display technology currently available on the market."
It may be a long time before microLED is viable for the range of applications that OLED screens are finding success in, but if that transition were to occur, Universal Display's business would face an existential threat, while LG Display would simply develop and deploy microLED-based displays for those markets and likely survive.
Frankly, I like Universal Display's business model better than I do LG Display's -- LG Display is just one of many display makers in a crowded field, while Universal Display's business model allows it to better profit from the overall industrywide shift from LCDs to OLED screens.
However, from a longer-term perspective, LG Display will probably still be around even if OLED screens are eventually replaced, while Universal Display would find it tough to prosper in such a scenario. That said, I wouldn't be surprised if LG Display's stock manages to significantly under-perform int the years leading up to that replacement and potentially beyond, as the display market is, quite frankly, a really tough business.
Neither one of these stocks seems like a screaming buy to me, but now armed with a basic understanding of how each company participates in the display panel market, you should be able to pick whichever one you think is appropriate for your portfolio.
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