September's been a rough month for Universal Display (NASDAQ:OLED) investors so far. Even as the broader indexes rallied to near all-time highs, shares of the OLED technologist have pulled back a whopping 23% from their own high mark set on Sept. 6.
We should keep in mind the stock is still up an enviable 95% over the past year as of this writing. And more than anything, this drop seems to mark a natural correction fueled by a broader sell-off in high-flying tech stocks, as well as a downgrade last week from analysts at Susquehanna (who worried that Universal Display's lofty share price already reflected their "best case" earnings scenario).
Still, I don't think shareholders should take the move as an indication of weakness in Universal Display's underlying business.
To the contrary, even putting aside the impressive momentum Universal Display demonstrated in its latest quarterly update last month, just prior to its recent pullback Universal Display announced a promising new partnership that has largely gone unnoticed.
OLED emitters versus hosts
More specifically, on Sept. 4, Universal Display struck a strategic partnership with Korea-based LG Chem (NASDAQOTH: LGCLF)(NASDAQOTH: LGCEY) to commercialize red, green, and yellow OLED "host" materials.
By contrast, today Universal Display generates the vast majority of its revenue from patent licensing and material sales related to its portfolio of phosphorescent OLED "emitter" materials, which work together with separate host materials (generally not sold by Universal Display) to enable the vibrant, efficient source of light we see in today's OLED devices.
While emitters have always represented the core of Universal Display's strength, however, some of you might remember a time when its results included a significant amount of host sales -- more than a third of its total, in some quarters -- primarily derived from its green OLED host materials used by Samsung. But because Universal Display's host products didn't benefit at the time from the same patent fortress that ensures customers must buy its emitters today, that revenue stream largely dried up starting in 2014 after Samsung acquired a small affiliate called Cheil Industries to help mass-produce its own lower-cost green host material.
What Universal Display and LG Chem hope to accomplish now
Of course, Universal Display has done just fine since then without the help of those green host material sales to Samsung. But given the choice, you can be sure it would have rather not had to weather the temporary hiccups -- notably including a one-time $33 million writedown in 2015 -- created by losing that revenue stream.
So what do Universal Display and LG Chem hope to achieve via their new host-centric partnership?
"As the adoption of OLEDs continues to widen across the consumer electronics landscape, product roadmaps and OEM specifications are rapidly changing," elaborated Universal Display CEO Steven Abramson. "We believe that this host collaboration will deliver customer value and further serve and support the Korean OLED ecosystem with high-performing, energy-efficient, cost-effective phosphorescent OLED emissive systems for bright, brilliant, and beautiful displays."
LG Chem president Yu Jiyung added that the two industry leaders should enjoy "synergy [...] so great" it will enable OLED emissive layers that have "greatly improved high 'Wide Color Gamut' performance in line with the expansion of the OLED market and timely supply to customers."
To that end, LG Chem will serve as a local manufacturer of the new host materials "for specific customers in Korea." So keeping in mind specific financial terms for the agreement were not released, it's unclear if Universal Display investors should expect to see a bump in material sales, an increase in research and advisory services revenue, higher figures on the license-revenue side, or a combination of the three.
In any case, I think this new partnership is a win for Universal Display and its shareholders. And over the long term, its stock price should eventually continue to respond in kind.