Amid a nasty downturn for the smartphone market, Universal Display (OLED 1.88%) is holding its own. The patent holder on ultra-high-def OLED displays and seller of OLED base materials reported revenue of $130 million in the first quarter of 2023, down 13% year over year. Not bad, considering other companies heavily reliant on smartphone sales (like Qualcomm, for example) reported far worse results.
Despite the current situation, Universal Display (UDC from here on out) stock has rallied nearly 40% so far in 2023. What's going on, and is it too late to buy?
This semiconductor company is profitable, rain or shine
UDC's small OLED technology empire started hitting speed bumps in 2022 as consumer purchasing of smartphones started to decline from the early pandemic boom and the initial 5G mobile upgrade cycle. Smartphones and tablets, especially top-dollar models, currently are the most prolific users of OLED. Smartphone shipments fell about 11% in 2022 and are expected to fall another 1% in 2023, according to researcher IDC.
By way of a quick summary, OLEDs (organic light-emitting diodes) are carbon-based materials that emit light when an electric current is applied -- making them a type of semiconductive material. These make the ultra-high-def screens you'll find in many smartphones (like Apple's iPhones and Samsung's Galaxy phones), as well as top-tier TVs from the likes of LG Electronics, Samsung, and Sony.
In spite of the smartphone market downturn, though, UDC has remained highly profitable. Generally accepted accounting principles (GAAP) net income was a very healthy $39.8 million in Q1, or 30% of that $130 million in revenue. Free cash flow was similarly healthy at $38.5 million, easily funding UDC's small but growing dividend (current annual yield of 1%).
In fact, UDC tends to go through cycles like this one -- completely normal for any business tied to manufacturing. And all along the way, financials have remained strong.
Data by YCharts.
Is OLED about to start cooking with gas?
Now after the rally in share price, UDC stock trades for nearly 36 times trailing-12-month earnings, or nearly 40 times expected 2023 earnings (based on an outlook for revenue and profitability to slightly fall compared to 2022). That doesn't sound like such a great deal.
However, along with other industry players, UDC's management still expects a gradual recovery in smartphone sales during the second half of 2023. Indeed, though Q1 2023 revenue of $130 million ($520 million on an annualized basis) was down significantly from 2022, UDC still thinks full-year 2023 revenue will wind up being $550 million to $600 million -- as little as 3% below 2022's sales haul.
Besides the smartphone market heating back up, UDC cited more research (this time from Omdia) that hints that the PC and laptop market could be the next big thing for OLED. Of 470 million "IT products" shipped last year (PCs, laptops, monitors, etc.), only 9.1 million of them had OLED screens. Omdia predicts that number will increase to 12.9 million OLED units this year and roughly double to over 25 million in 2024.
Foldable phones with OLED are also picking up steam. Alphabet's Pixel phone lineup will get a foldable phone this year, as will a few other smartphone manufacturers. And in automotive, Omdia was again cited, with predictions of vehicle in-cabin displays increasing to nearly 7 million units by 2027, up from a meager 770,000 in 2022 (yeah, OLED is a luxury car thing at the moment).
Paired with UDC on track to add blue phosphorescent OLED material to its portfolio next year (currently, UDC sells phosphorescent red and green, with blue set to complete the trio of ingredients), 2024 sounds like it could be quite the year for growth.
Of course, that's all next year, and we're not even halfway through the nastiness of 2023 yet. Given the elevated valuation and some expected bumps between now and a rosier-sounding 2024, I wouldn't be surprised to see Universal Display's stock price flatline a bit until we are given some more clarity on growth expectations. This nevertheless remains a great stock for investors looking for a long-term dividend growth story (the quarterly payout has been raised every year since initiated in 2017, going from $0.03 a share to currently $0.35).
Keep Universal Display on your watchlist. In the meantime, there are some other great semiconductor stock deals brewing in the market.
