Universal Display (PANL +0.62%) investors had a rough day yesterday as their stock dropped nearly 13% on heavy volume.
The culprit? With Universal Display announcing earnings tomorrow, Piper Jaffray analyst Jagadish Iyer lowered his firm's price target for Universal Display from $18 to $16 and reiterated its "underweight" rating on the stock. All told, even after today's pullback, this means Iyer thinks Universal Display deserves to fall another 45%.
So why the negativity?
According to the note, Iyer warned investors that Universal Display may not be the sole supplier of green host materials for Samsung's next-generation Galaxy S IV smartphone. Instead, he suggested Samsung may also use green materials from Japanese OLED supplier Nippon Steel. Furthermore, Iyer noted Samsung is implementing process and recycling improvements to help it make the most of the materials it buys from Universal Display, which would prevent Universal's revenue from increasing at the same torrid pace as sales of Samsung's OLED devices.
At first glance, this admittedly seems ominous; Samsung Display is far and away Universal Display's largest customer, and any negative developments there could have wider implications for Universal Display's business as a whole.
But is this just cause for Universal Display shareholders to run for the exits? Absolutely not.
The sky is not falling
As we dig deeper, it's obvious Universal Display's long-term business has never been stronger.
First up, regarding Samsung's process and recycling improvements, is it really that surprising Samsung would want to better utilize the OLED materials it purchases? Of course, some of the materials are bound to be wasted given today's production processes. As economies of scale kick in, however, and adoption of OLED technology continues to increase, it's only fair to expect a huge company like Samsung will want to streamline operations and minimize expenses by increasing production yields.
Would it be better for Universal Display if Samsung were to simply waste the unused OLED material and buy more? Sure.
Is this a deal breaker for Universal Display shareholders? No way.
While Universal Display may be the most visible publicly traded OLED company, retail investors need to remember it's hardly the only one in the space. Even so, according to Universal Display's SEC filings, Nippon Steel itself is actually one of Universal Display's largest customers and accounted for more than 10% of its revenue in 2011.
What's more, considering the numerous cooperative press releases between Universal Display and Nippon Steel going as far back as 2006, we can see the two companies have worked together to improve efficiency of OLED devices for the better part of the last decade. In fact, as recently as August, Universal Display CEO Sid Rosenblatt referenced his company's continuing collaboration with Nippon, saying, "If you work together as a team, you can then get the most efficient devices."
This in mind, it shouldn't come as a surprise that Samsung might use both Universal and Nippon's green host materials in an effort to achieve the highest efficiency possible. When the rubber hits the road, however, Nippon hardly appears to be the business-threatening competitor today's announcement implies.
The sky is the limit
Putting these concerns aside, it's also helpful to step back and look at the bigger picture.
For its part, Universal Display's long-term potential is about much more than just Samsung's smartphones. While Samsung is also on the verge of commercially releasing its first large-screen OLED television, so are competitors LG (LPL 0.72%), Sony, and Panasonic.
In addition, despite CEO Tim Cook's best efforts to convince us otherwise, speculation continues that Apple (AAPL +0.07%) is seriously considering using OLED in some capacity going forward. In fact, exactly one week after I noted Apple's recent under-the-radar OLED hire, the folks at Cupertino surprised with a patent application for a flexible wristband which would incorporate -- you guessed it -- an OLED display. And with consumers becoming increasingly curious about Samsung's new flexible Youm OLED displays, one can't help but wonder whether the notoriously secretive Apple is racing to beat Samsung to the punch with the world's first tangible product featuring a flexible screen.
Also, keeping in mind Apple's fondness for aesthetically pleasing products, the design possibilities afforded by OLED might just be too much for Apple to ignore. Not only that, but a new device with a revolutionary screen could also be the perfect way for the tech giant to reinvigorate its share price into finally reflecting an appropriate valuation.
Finally, OLED lighting remains Universal Display's most under-appreciated segment. While it's understandable since development of OLED lighting is still in its infancy, at least one industry expert is convinced the OLED lighting market could grow from nearly nothing last year to representing a $1.7 billion industry over the next seven years -- a prediction which looks increasingly likely considering several industry giants continue to aggressively improve their OLED lighting solutions including LG, Philips, Konica Minolta, and GE. In fact, less than two weeks ago, LG even announced it hopes to mass-produce the world's first flexible OLED lighting panels. Similar to its leading position in the OLED television race, LG will most certainly benefit from being a first mover in OLED lighting as well.
Heads I win, tails you lose
In the end, however, all OLED roads eventually lead right back to Universal Display and its more than 2,200 patents, which ensure it can benefit no matter who uses its technology.
