OLED screens continue to steadily take market share from legacy LED technology, and the prime beneficiary of the movement is Universal Display (OLED -0.93%). The researcher and high-end screen technologist reported a fantastic second quarter this year as it lapped the depressed results from last spring (the start of the pandemic and the initial economic lockdowns), and showed great progress from the pre-pandemic era as well. A slight dip in share price following the report made Universal Display even more intriguing as a long-term value play. Here are three reasons why.
1. Steady growth and another annual sales record
Universal Display (UDC from here on out) reported year-over-year revenue growth of 124% to $130 million, up 10% from Q2 2019, the year before COVID-19. Through the first half of 2021, total sales were up 55% from 2020 and up 28% from 2019 to $264 million. The increase came from a rise in both raw material sales (about 60% of revenue) and income from licensing of tech processes and patents.
For full-year 2021, management expects 30% growth over 2020 at the midpoint of guidance to a range of $530 million to $560 million. Compared to full-year 2019, 2021 guidance represents a 35% increase over 2019 and yet another record for annual sales.
This has been a fantastic compound grower -- the company has averaged double-digit percentage sales expansion for years. And with OLED screens still the minority in consumer devices, the company should continue its steady progress for many more years to come.
2. More sales equals more efficient cash generation
As UDC has added more manufacturing partners to its ecosystem and generated progressively higher raw material and royalty income, it's turned into a highly profitable firm. In fact, net income of $92.2 million through the first half of 2021 represents an enviable net income profit margin of 35%.
UDC's average profit margins likely aren't going to rise much from here in the years ahead. But such a robust cash generating operation has led to an incredible balance sheet ($733 million in cash and equivalents, with zero debt) from which the company can develop better materials and processes to advance OLED in the tech world. And as UDC and its partners increase their manufacturing capacity and UDC develops new processes (like its OVJP subsidiary for lower-cost OLED manufacturing), OLED screens are becoming more affordable for consumers.
Shares of UDC now trade for 70 times trailing 12-month free cash flow after the Q2 update and subsequent drop in stock price. Given the company's fast pace of growth and high profit margins, it's a reasonable price tag if you're buying for the long haul.
3. OLED is about more than just better displays
On the last earnings call, UDC management confirmed that its forecast for manufacturing capacity to increase 50% from 2019 to 2021 has come to pass. And the company promises to provide another update on what it sees taking place in 2022 and beyond on this front on the end-of-2021 call. But with so many devices out there yet to get OLED screens (OLED has penetrated only about 1% of the IT market, for example), there is plenty of room for UDC to continue its run.
But OLED screens are about more than just getting higher-definition displays into devices. OLED images blur less and emit less blue light than LEDs: Blue light can lead to eye fatigue, headaches, and sleep loss after long hours of usage. Tech is invading all parts of daily life, so OLED can increase our health and happiness. Additionally, OLED uses far less power than legacy LED. UDC cited device manufacturing giant Samsung, which said the use of OLED has dramatically reduced carbon emissions for the company the last few years. According to Samsung, OLED use -- especially in mobile devices -- is a critical element in combating climate change in the years ahead.
Thus there's extra impetus now to continue advancing OLED technology, both for improving user health and for reaching global sustainable energy goals. Universal Display has a long road ahead of it, and its full of devices like TVs, tablets, and laptops that have yet to fully embrace next-gen screen tech.