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A Universal Display Corporation Bear Changes His Tune...Sort Of

By Steve Symington - Feb 18, 2014 at 7:30PM

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Shares of Universal Display rose 6% after Canaccord Genuity upgraded the stock. Here's what investors need to know.

Thanks to an early upgrade from a perennial bear, Universal Display Corporation (OLED 2.79%) shareholders just started their shot week on a high note.

On Tuesday morning, Canaccord Genuity analyst Jonathan Dorsheimer shifted his rating on the OLED technologist from sell to hold this morning, but also raised his per share price target by 50% from $22 to $33.

To explain the move, Dorsheimer pointed to a week of supply-chain meetings in Asia that left them with "increased confidence that there are no supply constraints in the OLED space and that Samsung's flagship Galaxy platform will continue to utilize OLED technology." Going further, he insisted, "We believe that the recent negative IP ruling against UDC has not altered UDC's current contract with Samsung."

Here's why this is a big deal
So, why is this significant?

Remember, back in November shares of Universal Display plunged nearly 19% in a single day after the company announced the European Patent Office had revoked its key, broad-reaching Organometallic Iridium Patent.

UDC, for its part, was quick to note it had pending a divisional patent application through which it would pursue "substantial patent coverage [...] similar to that provided in related patents that have previously been issued in other jurisdictions." Put another way: Even though Universal Display's broadest claims had been revoked in Europe, the company was already working to put into place patents with a smaller scope -- and with previous precedent in other regions -- to accomplish similar end goals.

But that didn't stop Dorsheimer from reiterating his sell rating at the time, saying he regarded the decision as "potentially transformational and likely to affect the Samsung agreement."

In short, today's about-face means the folks at Canaccord have effectively put those concerns to rest. What's more, this also helps rebut recent rumors that Universal Display's flagship technology could be absent from Samsung's next round of Galaxy series devices.

Canaccord's not entirely sold yet
But Mr. Dorsheimer isn't quite ready to completely hang up his bear claws just yet.

Canaccord's report states, "Our long-term negative call on competitive pressures post 2017 (when key IP expires) remains, but it is becoming clear this will not play out in UDC's results or investor sentiment in the near-term/intermediate-term. Given a lack of negative near-term catalysts, we are stepping to the sidelines."

But we Fools always take a long-term view in picking stocks, right? So why am I not concerned? 

As it turns out, Universal Display management offered its latest thoughts on that topic only few days ago at the Goldman Sachs 2014 Technology and Internet Conference. Specifically, CFO Sidney Rosenblatt reminded investors patent expirations were "never in the mix" when they decided on 2017 as the expiration for their long-term deal with Samsung DisplayRosenblatt elaborated:

We do not believe that we have a cliff for our patents in 2017. We have four basic families of patents are on the early architecture of patents for phosphorescence and that group is four families which is comprised of 60 patents which run through 2020. [...] That does not mean that our licensing business goes away in 2020. We have more than 3,000 patents of which more than half of them are architecture-related, whether it's encapsulation, whether it's stock architecture, transparency, red-green, blue-blue there is a number of different areas that we still have and so we expect our licensing business to continue beyond 2020.

Foolish takeaway
Now I'm certainly no patent expert, but I do know patent challenges like these are par for the course for intellectual property owners like Universal Display.

And that's also why we shouldn't be surprised Universal Display remains hard at work not only filing for new patents to ensure their moat remains wide, but also stated at the aforementioned conference they're developing new OLED materials based upon the treasure trove of 1,200 patents they acquired from Fuji in mid-2012.

In the end, though Canaccord may not be ready to jump in with both feet, I remain confident Universal Display will continue to reward investors for years to come.

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