Mobile game developer Glu Mobile (GLUU) is turning a lot of heads these days. Growth investors love the stock's market-stomping gains of 87% over the last year, driven by fantastic in-app sales through titles such as Kim Kardashian: Hollywood and Covet: Fashion. But Glu's games can fall out of fashion just as fast as they connected with users in the COVID-19 lockdowns, most likely taking the stock price down in a hurry.
What if I told you that you can buy a much more stable company with even greater long-term growth prospects and that this stock is quite affordable right now after falling 12% in 2020? Well, you can and it is indeed on sale. I'm talking about display technology developer Universal Display (OLED -1.37%).
What is this company?
Universal Display has a patent-protected stranglehold on the market for organic light-emitting diode (OLED) panels. Universal has developed the gold-standard techniques and chemical recipes for making phosphorous-based OLED (PHOLED) screens. The company makes money by collecting royalties on the sales of OLED panels that were created under these patented processes, and the payments typically depend on the total area of shipped OLED screens. On top of that, Universal often acts as a reseller of the necessary materials in a long-standing partnership with chemical giant PPG Industries.
Every OLED-equipped smartphone, tablet, television set, and lighting panel that relies on PHOLED technologies generates revenue for Universal Display in a combination of area-based royalties and OLED material sales. The exact mix of these components varies between different screen makers and the contracts are confidential, but you can't argue with the results.
What about the financial picture?
We're looking at a financially stable company here.
Universal Display's sales have grown at an average annual rate of 27% over the last three years while earnings expanded by 42% per year. The company reports a healthy blend of reliable top-line growth, consistently positive bottom-line results, and cash profits that are greater than the taxable earnings.
The squeaky-clean balance sheet holds $640 million of cash equivalents and no debt at all. The company even pays a modest dividend, generating an annual yield of 0.3% at current payout rates and stock prices.
What's up with the generous discount?
The coronavirus pandemic weighed on Universal Display's results in the second quarter. The company posted deeply negative surprises on both the top and bottom lines as OLED panel builders scaled back their manufacturing plans dramatically amid weak consumer demand for high-end TV sets and premium-quality smartphones.
The stock did not plunge on the news, because the signs of this weak report were written on the wall long before the reporting date. Market makers simply didn't let this stock rebound from the market bottom in March quite as quickly as many other stocks did.
Yikes! Why isn't that report a deal-breaker?
The COVID-19 speed bump will not last forever.
Consumers will eventually work up their appetite for OLED-based phones and TV sets again, which will let OLED screen builders such as LG Display and Samsung Display ramp up their production volumes again. Both Samsung and LG have decided to stop making LCD screens for big-screen TV sets, focusing on their OLED solutions instead. The screen-building clients have been ramping up their OLED manufacturing facilities for years, and it would be a crying shame not to put these expanded panel-making assets to good use.
The balance sheet is robust enough to carry Universal Display through a long period of end-market lull, and the company isn't even burning cash. If the future didn't look bright enough already, you should know that Universal Display is expanding its business plans to include solutions for additional layers of the OLED-panel architecture, commercializing the use of OLED panels for general lighting, and even a small but rapidly growing presence in the pharma and biotech materials research sector.
What's next for Universal Display?
CFO Sidney Rosenblatt admits that the pandemic has slowed down both customer orders and the OLED industry's manufacturing capacity, but he does not expect any long-lasting damage to a generally thriving OLED market.
"So do I think it's slower? Yes. But do we think that there's a long-term impact? We don't think so," Rosenblatt said in the second-quarter earnings call. "We think long term, the OLED industry and all of this is just all positive."
Glu Mobile has nearly tripled its stock price in five years but Universal Display delivered a 384% return over the same period -- and the best is yet to come. Growth investors should be swarming all over this great investment right now before the market comes to its senses and the bargain-bin stock price goes away.