When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Universal Display (NASDAQ:OLED) today, and see why you might want to buy, sell, or hold it.
Founded in 1985 and based in New Jersey, Universal Display is in the business of developing and selling technologies and materials for flat panel displays and solid-state lighting, among other things. Its specialty is organic light-emitting diode technologies, and variations on it such as transparent OLED, flexible OLED, and more.
The company sports a market capitalization of about $1.1 billion. Over the past year its stock has shed some 29%, and it's down about 50% from its 52-week high.
The first thing to like about the company is the business it's in, supplying products such as smartphones, which are growing very rapidly. Universal Display itself is also growing quickly. Its revenue has grown by an annual average of 50% over the past five years and that growth rate has only gotten faster in recent years. Well, until recently, that is. Its recent third quarter was disappointing enough to cut shares down by a third.
Still, the potential is great. Universal's OLED technology is in the popular Samsung Galaxy S III smartphone, which is competing with Apple's (NASDAQ:AAPL) iPhone and Apple's Retina displays. It speaks well for Samsung's products that Apple has been fighting to restrict them.
The company's balance sheet is strong, with plenty of cash and little debt.
Despite Universal Display's rapid revenue growth, until recently it was unprofitable. It ended several years of being free-cash-flow negative in 2011, but over the past year, that number has reverted to being red.
Universal Display's valuation is not screaming "Bargain!" right now. Its recent price-to-earnings ratio of 119 is well above its five-year average P/E of 77 (which is itself high). On the plus side, its price-to-sales and price-to-book-value ratios are below their five-year averages. One reason the stock is down lately is that in addition to posting disappointing third-quarter results, it also lowered its near-term guidance, due to not so many OLED TVs flying off shelves. That's not a permanent problem, though, as makers such as LG Display (NYSE:LPL) are boosting their TV-building capacity.
Universal also holds gobs of patents, partly due to having bought 1,200 OLED-related ones from Fujifilm.
Stock dilution is another potential concern. The company's share count has grown by 41% over the past five years, which dilutes the value of each share. Ideally, the growth will screech to a halt or at least taper off in the near future. One way the company is trying to limit dilution is by buying back shares, but that's not usually smart if the company's stock isn't undervalued.
Given the reasons to buy or sell Universal Display, it's not unreasonable to decide to just hold off on it. You might want to wait for it to post a few more quarters of profitability, and for it to return to being free-cash-flow positive. You might want to see OLED TVs and OLED-based lighting selling briskly.
You might also consider other companies tied to the explosive smartphone market. Vringo (UNKNOWN:VRNG.DL), for example, helps people customize their phones with ringtones and other features. It has a lot of potential, but also some concerns such as rising costs and share counts. A pending legal outcome could make a big difference for the company.
Garnering much more support in our CAPS community of investors is InvenSense (NYSE:INVN), specializing in gyroscopes used in motion-tracking devices such as smartphones and tablets. It's young and volatile, but growing rapidly, eying China's huge market, and offering an appealing valuation.
I'm holding off on Universal Display for now, but I'm intrigued, too. But everyone's investment calculations are different. Do your own digging and see what you think. Universal Display may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple. The Motley Fool owns shares of Apple, InvenSense, and Universal Display and has the following options: short DEC 2012 $10.00 calls on InvenSense. Motley Fool newsletter services recommend Apple and Universal Display . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.