Shares of Universal Display (Nasdaq: PANL) are down more than 6% the day after its fourth-quarter report. At one point, the stock crashed all the way to a 10.5% overnight drop.
A haircut like that can mean one of two things:
- Something went horribly wrong this quarter and it's time to sell, or ...
- The market is being irrational again; this is a buying opportunity.
The way I see it, investors and analysts still don't quite understand the OLED pioneer. In particular, clouds of confusion hang around the crucial long-term contract with chief customer Samsung. The next quarter will come in a bit light on revenue because Samsung pays license fees only twice a year. Lumpy sales often make for nervous investors, and that's what's happening here.
You are not alone
This is a problem not only for individual investors but also for some of the Wall Street analysts who are supposed to guide their clients. Here are two examples from the conference call:
- Avondale Partners noted that Samsung's license fees are due in the second and fourth quarters and then asked management whether that applied to materials sales as well. In fact, the Avondale analyst assumed that it would work this way. But it has been clear from the start that the materials follow a very different model and are the closest thing to a traditional royalty play in this contract. CFO Sid Rosenblatt set the record straight: "We will record them when we ship them. It is only the license fees that will be lumpy on a quarterly basis."
- Brigantine Advisors also fretted about the lumpy license revenue and asked the company to "smooth that out" in the future. Rosenblatt told the firm to model it that way if it wanted to, but the checks get cashed when the checks get cashed.
Critics are pinning short-term worries on a tremendous long-term growth story. Universal even has answers for the legit concerns. Canaccord Genuity worries about the way Universal relies on Samsung for the lion's share of its business. Too many eggs, not enough baskets; I can dig that.
But help is on the way. Both LG Display (NYSE: LPL) and AU Optronics (NYSE: AUO) are set to start large-volume OLED production in 2012. Right alongside Samsung, both plan to introduce OLED television sets this year, much larger and more commercially viable than the Sony (NYSE: SNE) experiments we've seen before.
Catalysts? Yeah, we have 'em
CEO Steve Abramson believes that TV sets can spark another growth spurt under OLED technologies, even before the smartphone rocket fuel runs out. The electronics industry hopes that he's right. "The industry is anxious to find the next big thing that will reignite television sales as these manufactures are placing their bets on OLED technology," Abramson said. "Once you've seen an OLED television you're going to want one."
Not that Abramson is biased or anything, but I think he's right. And considering the enormous size of a 55-inch screen that needs to be slathered in OLED materials, it doesn't take a whole lot of unit sales to make a big revenue difference for Universal Display.
Time to take Foolish action
I'm not worried about lumpy license revenues. What I see in Universal Display is a company that grew fourth-quarter sales by 72% year over year while turning a $0.14 net loss per share into profits of $0.12 per share. Both numbers beat analyst estimates by a very comfortable margin. Meanwhile, the stock went nowhere in 52 weeks.
Today's drop is a modest invitation to start a position or build your existing one. I recently invested cold, hard cash in Universal Display myself, and this is the second biggest winner out of the nearly 200 tickers that have passed through my CAPS portfolio. That bullish CAPScall remains firmly in place because we frankly ain't seen nothing yet.
Universal Display is a tremendous play on the mobile market in the short term and even wider avenues in the distance. It's hardly the only top-notch smartphone bet, of course. Check out these three hidden winners of the iPhone, iPad, and Android revolution, for example.
