It was an epic run, but something needed to cool off for shares of Universal Display Corporation (OLED 1.07%). After more than doubling in value and hitting new all-time highs in 2019 on rallying demand for OLED display manufacturing setup and materials purchasing, the stock has since pulled back over 20%.
Some of the volatility is just the natural order of things when it comes to owning a high-growth stock, but where once the U.S.-China trade was the cause of worry, now it's coronavirus. Universal Display had a strong showing in the final quarter of 2019, but guidance for the new year was weaker than anticipated because of the health scare.
A quick recap
In the fourth quarter of 2019, revenue grew 45% year over year to $101.7 million (or 17% higher when adjusting for accounting changes that affect revenue recognition). Results were driven by the sale of materials (60% of total sales) used to make OLED screens. Earnings per share increased 40%, and the soaring bottom line led to a 50% hike in the dividend to $0.15 per quarter (though it's only good for a yield of 0.3% as of this writing).
The numbers were good, but they were nonetheless a slowdown from the pace set earlier in 2019 when Universal's results were lapping a poor showing in 2018.
|
Metric |
12 Months Ended 12/31/19 |
12 Months Ended 12/31/18 |
YOY Increase |
|---|---|---|---|
|
Material sales |
$243 million |
$153 million |
59% |
|
Royalty and license fees |
$150 million |
$81 million |
86% |
|
Operating income |
$158 million |
$57 million |
179% |
|
Earnings per share |
$2.92 |
$1.24 |
135% |
Data source: Universal Display. YOY = year over year.
Where we go from here
The coronavirus has become a serious concern as businesses in China (a significant market for OLED demand and manufacturing) limit hours or even close to slow the spread of the virus. Universal Display is working with its partners to help, but that means results in 2020 are likely to be impacted.
Specifically, management said to expect revenue in the $430 million to $470 million range, an increase of just 6% to 16%. That's quite the deceleration, but the purchase of $40 million to $50 million of OLED materials was subtracted out of guidance to account for the disruption from coronavirus. Also not included in the guidance is a trade-war related issue from last year. A customer purchased $25 million of material in 2019 that it has the right to return through the first quarter of 2020. However, management expressed confidence that if it was returned, purchasing from the same customer later in the year will make up for it.
Image source: Getty Images.
The lackluster outlook explains the recent tumble in Universal Display stock. However, the company reiterated its view that OLED screens are still in the very early phases of development. Only about a third of smartphones make use of the displays, and laptops, tablets, and TVs featuring OLED are about 1% of the total market. That's besides the other applications out there like AR/VR headsets, auto lighting and displays, and wearable devices.
Thus, Universal Display reiterated its previous outlook that OLED manufacturing capacity will increase 50% over the next two years. Coronavirus is creating some short-term demand disruption, but the tech industry continues to invest in and make new use of the next-gen displays. Shares still trade for a premium 60 times trailing earnings, so I don't think the wild ride from disruption in China is over yet. But for those looking out over the next three- to five-year stretch, this stock is worth keeping an eye on.
