2020 has so far been a tough year for suppliers and manufacturers of consumer electronics. While consumer spending has been resilient -- propped up by government aid amid the COVID-19 pandemic -- it hasn't translated to great sales for many electronic devices. Smartphones, for example, are expected to take a massive 12% dip this year and won't return to growth until the beginning of 2021, according to tech researcher IDC.
And that was the problem for Universal Display (OLED 2.58%) during the second quarter. Between some of its manufacturing partners pulling orders forward into the first quarter (as a precaution against possible supply-chain disruptions during the global pandemic) and sluggish demand for devices, the second-quarter numbers looked disastrous. Yet the stock didn't skip a beat and is continuing its rebound after the March market meltdown. What gives?
As is the case with all businesses linked to manufacturing, quarterly (and sometimes annual) results can be incredibly volatile. And while 2020 could go down as a forgettable year for the business, UDC's long-term potential is still intact.
A disastrous spring?
UDC reported revenue of $58.0 million and meager net income of $815,000, declines of 51% and 98%, respectively, from a year ago. Breaking down the numbers further: The sale of basic material used in the making of OLED (organic light-emitting diode) screens fell 58% to $31.9 million, and the slightly less volatile royalty and license fees for UDC's patented manufacturing processes were down 42% to $22.4 million. Thanks to the epic drop, trailing 12-month results are now in decline from the halfway point of 2019.
However, it's worth noting that even after the big tumble, UDC remains a very profitable enterprise. Free cash flow (revenue less cash operating and capital expenses) was $121 million over the last 12 months on revenue of $369 million -- good for an enviable free-cash-flow margin of nearly 33%. And with cash and equivalents of $644 million and zero debt on the books (enough liquidity to cover some three-and-a-half years of operating expenses), UDC is far from being in any kind of trouble.
No surprises for manufacturing
The real reason the stock is holding its ground, though, is that manufacturing sales can be highly variable as supply and demand ebb and flow. And although UDC management said July demand was picking up pace again, enough variables remain that it opted not to offer any full-year guidance.
That doesn't mean the OLED display market is suddenly drying up. On the contrary, about two dozen OLED factories will be opening soon, and more devices in the small-screen wearable, smartphone, and tablet industries are making use of OLED tech. Laptops are only just beginning to move away from legacy LED (light-emitting diode) displays. And more TV manufacturers like Vizio and Xiaomi (for the Chinese market) are also starting to offer OLED for the first time.
In fact, in an updated investor presentation for the third quarter, UDC reiterated previously stated long-term guidance for annual OLED panel area demand to increase to 13.4 million square meters in 2021 -- up from 8.2 million square meters in 2019. And by 2024, annual demand is expected to be 19.3 million meters. That bodes well for UDC's OLED basic material sales unit, as more and bigger screens will equate to a big jump in raw OLED compounds needed by manufacturers. Additionally, UDC continues to develop new manufacturing methods to increase the viability of OLED for manufacturers and consumers.
Along the way, it's going to be a wild ride. And longtime UDC investors are no doubt familiar with the current situation. Quarterly revenue looks ugly and the immediate-term outlook is foggy, but a big rebound will eventually come. That expectation is why share prices didn't crater after the quarterly update.
As OLED screen tech continues to make steady progress against LED (OLED is still a low single-digit percentage of the overall global digital display industry), Universal Display has plenty of growth potential remaining. For investors looking a couple years or more down the road, there's a lot to like about this highly profitable display manufacturing partner.