Universal Display (NASDAQ:OLED) handily beat expectations during the 2019 third quarter. There was some U.S.-China trade war worry after the last report from the patent holder and materials provider of organic light-emitting diode (OLED) screens, but the OLED movement continues to build steam and is providing a strong tailwind that's filling Universal's sails. In fact, CEO Steve Abramson said on the earnings call that his company's prediction that square meter manufacturing capacity would increase by 50% from 2017 to the end of 2019 is on track. 

As a licensor of technology and seller of basic materials needed to make the OLED panels that are replacing older LED screens, Universal Display has been a big investment winner over the past few years. And if management is right, the run isn't over. Abramson and company said they expect manufacturing capacity to increase 50% again from the end of 2019 to the end of 2021. 

A bumpy ride, but who's complaining?

Though OLED screen adoption has been gaining momentum, it hasn't been totally smooth sailing for Universal Display. In 2018, many manufacturers took a breather as they geared up for the next run higher. That equated to a year of sharp sales declines, and the stock followed suit.

OLED Chart

Data by YCharts.

But management had always said there would be an inevitable rebound, and this year has delivered so far. Both materials and licensing revenues are up big, leading to even higher bottom-line increases.  

Metric

Nine Months Ended Sept. 30, 2019

Nine Months Ended Sept. 30, 2018

YOY Increase

Material sales

$183 million

$113 million

62%

Royalty and license fees

$112 million

$54.8 million

104%

Operating income

$124 million

$41.5 million

199%

Earnings per share

$2.36

$0.83

184%

YOY = year over year. Data source: Universal Display.  

Because of ongoing strength in the top line, management raised its full-year forecast once again. Adjusted revenue, excluding effects from new revenue recognition standards, should now be $435 million to $440 million by the end of the year, compared with guidance for $425 million to $435 million provided just a few months ago.

The Samsung Galaxy Fold smartphone, with the two halves unfolded to reveal a big OLED screen inside with the image of a butterfly.

Samsung's Galaxy Fold smartphone featuring an OLED screen. Image source: Samsung.

What it means for Universal Display

OLED has already become common in premium smartphones and wearables, but the new screen technology has a lot of room to run. Bigger OLED panels in TVs, computers, and tablets are still a small percentage of the total in use in homes and businesses around the globe. Auto displays and lighting are also untapped potential areas for growth. That will change in the years ahead. New factories and manufacturing capacity continue to come online. Abramson pointed out on the call Samsung's (OTC:SSNLF) new $11 billion investment in OLED output announced in October, as well as Volkswagen (OTC:VWAGY) subsidiary Audi's demonstration in September showing off OLED for high-end auto lighting. 

Universal Display's fat profits are enabling it to continue investing in display innovation. Work continues on better materials, as well as manufacturing technology to improve processes for the company's partners. As OLED proves its merits and cost of production falls, more companies are signing up to join the movement and new factories are being built. Over 20 are expected to come online in China over the next few years.

All of the activity in updating displays is good news for Universal Display. More plants churning out OLED screens means more material sales and royalty and license fees. Fifty percent more capacity in the next two years doesn't sound out of the question, with the technology building momentum. It will be a wild ride getting there, just as the past two years were, but the trend is clearly headed up.