Better Buy: Universal Display vs. Applied Materials

Many of our modern electronic devices wouldn't exist in quite the forms we know without the contributions of Universal Display (OLED 0.09%) and Applied Materials (AMAT 0.73%).

Universal Display owns the world's largest portfolio of OLED patents. Unlike LCDs, which light up an entire screen, OLED screens turn individual pixels on and off -- which enables them to display deeper contrasts while consuming less power. Many high-end smartphones, TVs, and monitors use OLED screens. The company licenses its patents and sells the materials for OLED manufacture to display-panel makers.

Applied Materials provides equipment, services, and software for manufacturing semiconductors, display panels, solar products, and coatings for flexible electronics. It also overtook ASML Holding as the world's largest semiconductor equipment maker last year, according to The Information Network.

Image source: Getty Images.

Universal Display's stock more than doubled over the past 12 months, while Applied Materials' stock more than tripled. Both of those performances easily topped the broader market's results, but which will of these two tech stalwarts is likely to deliver better returns in the year ahead?

How the companies make money

Universal Display generated 54% of its revenue from materials in 2020. Another 43% of its revenues came from royalties and licensing fees, while the rest came from its contract research services.

Applied Materials generated 66% of its revenue from its semiconductor systems in 2020. It generated 24% of its revenue from its applied global services business, which installs and maintains those systems, and the remaining 9% from its display and adjacent markets business, which provides manufacturing equipment for LCD and OLED screens.

Why the bulls preferred Applied Materials

Here's how the two companies fared over the past year.

Source: Company quarterly reports. YOY = Year over year.

Universal Display started off the year strong, but its sales plunged in the second quarter as the pandemic disrupted the global production of OLED screens. However, it broadly recovered in the second half as stay-at-home trends boosted sales of new PCs and TVs.

Applied Materials struggled with sliding memory prices, sluggish smartphone sales, and soft demand for display panels in 2018 and 2019. But most of those headwinds waned in 2020 as stabilizing memory prices and rebounding smartphone sales offset its pandemic-related headwinds in the automotive and industrial markets. It also benefited from the rebounding demand for display panels in the second half of the year.

Universal Display also suffered a steep drop in profits during the second quarter due to supply-chain disruptions and higher material costs, and that decline caused its full-year earnings to drop 4%. Applied Materials didn't face any comparable challenges, and its earnings growth accelerated significantly.

Source: Company quarterly reports. YOY = Year over year.

Universal Display's slowdown was brief, but investors were clearly more impressed by Applied Materials' accelerating growth. That's why it attracted more bulls than Universal Display over the past year -- but past performance never guarantees future gains.

The outlook and valuations

Analysts expect Universal Display's revenue and earnings to rise by 29% and 41%, respectively, this year. Those impressive forecast growth rates suggest the stock is still reasonably valued at 43 times forward earnings.

During Universal's latest conference call, CEO Steven Abramson declared the company would generate "meaningful growth" in 2021 as the pandemic passes, smartphone makers launch new 5G devices, PC makers introduce new OLED laptops, and TV makers sell bigger OLED TVs.

Wall Street expects Applied Materials' revenue and earnings to increase by 26% and 43%, respectively, this year. Those are high growth rates for a stock that trades at just 18 times forward earnings.

During Applied Materials' latest conference call, CEO Gary Dickerson declared the company could carry its "strong momentum" from 2020 into 2021. It expects higher capital expenditures from semiconductor makers, rising memory prices, and a rebounding display market to all generate strong tailwinds.

Both companies pay dividends, but neither will attract serious income investors. At current share prices, Universal Display's forward yield is 0.4%, while Applied Materials' is 0.8%.

The winner: Applied Materials

Universal Display and Applied Materials are both still solid long-term investments. However, Applied Materials' better-diversified business, low valuation, and higher yield all make it a more compelling investment than Universal Display right now -- and indicate it still has plenty of room to run this year.