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Better Buy: Universal Display vs. LG Display

By Brent Nyitray, CFA - Mar 3, 2020 at 8:07AM

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A maker versus a toll-taker.

Universal Display (OLED 1.19%) and LG Display (LPL 2.59%) are both in the Organic LED (OLED) business, which is rapidly gaining share in smartphones, TVs, tablets, and monitors. OLED technology provides a better picture and is more energy-efficient -- it is a better mousetrap. As an investor, which stock would be the better bet on OLED technology?

The maker versus the toll-taker

The OLED market is hot right now; however, the business models of the two companies are vastly different. LG Display is a manufacturer of OLED screens, while Universal Display is an intellectual property company that earns royalties and supplies proprietary chemicals to manufacturers. As the popularity of OLED technology grows, more manufacturers enter the business, which is great news for one and not the other. Additional competitors mean falling prices and more unit volume, and cheaper products attract consumers. For a manufacturer like LG Display, that means falling margins. For an intellectual property company like Universal, it means more revenue. In essence LG Display is a maker, while Universal is a toll-taker. 

Couple watching TV

Image source: Getty Images.

LG Display is struggling to make a turnaround

LG Display has struggled over the past year, with the stock price falling 38%. The company has struggled to make the transition from liquid crystal displays (LCD) to OLED screens. EBITDA (earnings before interest, taxes, depreciation, and amortization) has been falling for years, and the company just took a one-time charge of approximately $1.3 billion.  The company is losing money, and reported a 48% drop in EBITDA for the fourth quarter of 2019. EBITDA has dropped for four consecutive quarters. LG Display is a turnaround story, and until the ship is righted, it's probably a stock to be wary of. 

Universal Display is in a great position, but the stock is pricey

Universal Display, on the other hand, is a profitable pure-play OLED company. The company trades at 48 times expected 2020 earnings, which is not necessarily cheap. However, the company pretty much owns all the patents for a growing market. The stock has gone nowhere over the past year, as coronavirus fears out of China wiped out its gains. Coronavirus issues will certainly buffet the stock, and given its high multiple and high beta, investors can expect some stomach-churning drops. However, OLED technology is simply a better mousetrap, and the market will continue to grow. New applications like lighting could be the next stage of Universal's growth; however, it remains a niche application. The holy grail is office lighting, but the cost is still too high.

The verdict: Universal Display is the better buy

Competition is heating up in the OLED display space, with Vizio, Koninklijke Philips Electronics NV, Konka, and Skyworth all slated to enter the market in 2020. We saw price wars during the holiday shopping season, which will probably not go away given the new entrants. Neither company will be able to escape the coronavirus issues, and a global economic slowdown will affect both as well. If the global consumer turns ill, both stocks will suffer. Universal is in the position of being the weapons manufacturer to multiple parties in a war, and benefits no matter who wins. LG is just one of the combatants. Despite the high multiple, Universal is the better buy. 

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Stocks Mentioned

LG Display Stock Quote
LG Display
LPL
$5.95 (2.59%) $0.15
Universal Display Corporation Stock Quote
Universal Display Corporation
OLED
$115.02 (1.19%) $1.35

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