On Tuesday October 7, 2014, Samsung (NASDAQOTH: SSNLF) issued guidance stating weakness in its mobile business will lead to yet another disappointing quarterly report. Specifically, though Samsung enjoyed slightly higher smartphone unit shipments in Q3, those units came with lower average selling prices amid higher promotions and weak high-end smartphone sales. As a result, Samsung now expects sales to fall more than 20% year over year to 47 trillion Korean won, which should translate to a nearly 60% decline in operating profit to 4.1 trillion won.
However, Samsung's stock wasn't the only one affected.
On the surface, this also seems to be terrible news for Universal Display Corporation (OLED 3.01%). Universal Display has long counted Samsung Display as its single largest customer given the inclusion of its OLED materials in Samsung's typically popular high-end Galaxy smartphones. If those high-end smartphones aren't selling well, it stands to reason Universal Display's most significant revenue stream will suffer.
Sure enough, shares of Universal Display got smacked to the tune of 5% the day of the report, and continued to trickle downward as the week has progressed. As of this writing, Universal Display stock has fallen more than 10% since Monday.
Samsung's high-end phones still matter, but ...
However, the market seems to be ignoring several key pieces of the Universal Display puzzle.
First, back in May, large-screen production difficulties caused Samsung to temporarily abandon plans to build a new OLED television manufacturing facility. Instead, Samsung subsequently decided to build a new facility to expand small and midsized OLED panel manufacturing for smartphones and tablets.
It should come as no surprise, then, that recently leaked specifications for Samsung's upcoming Galaxy A3 and A5 smartphones indicate both will feature AMOLED displays. For Universal Display, this marks a significant milestone in that it expands the presence of its flagship OLED technology into Samsung's entry level and midrange smartphones, which aren't expected to suffer the same unit sales weakness as the high-end Galaxy devices to which it was previously restricted.
What's more, back in June Samsung unveiled two new Galaxy Tab S tablets: one with an 8.4-inch AMOLED display and the other with a 10.5-inch AMOLED display. More importantly for Universal Display, both represented a notable shift away from Samsung's use of LCD in previous tablets. Needless to say, these larger screen sizes should mean higher material sales for Universal Display.
Samsung isn't the only game in town anymore
Speaking of which, let's also not forget fellow UDC customer LG Display (LPL -0.81%) is working on ramping production of its own large-screen OLED televisions, the price for which has plunged by more than 75% over the past year given huge improvements in production yields. Ultimately, LG Electronics management has stated their goal is to bring the price of OLED televisions down to a 10% premium to competing LCDs. That shouldn't be a problem considering the construction of LG Display's expanded gen-8 OLED TV manufacturing line is expected to be complete by the end of this year.
Last but not least, the market still hasn't come to terms with OLED's presence in the upcoming Apple Watch. Of course, Apple hasn't technically confirmed it, either, opting instead to call the Apple Watch's screen a "flexible Retina display." That verbiage wrongly crushed Universal Display stock last month when many assumed it meant the display was an LCD. But as I wrote at the time, all signs still pointed to OLED in the Apple Watch, and South Korean news site DigiTimes has since cited sources at LG Display confirming as such.
Given all these catalysts, I shouldn't think Samsung's high-end Galaxy smartphone weakness alone will significantly hurt Universal Display. In the end, while the recent pullback is certainly painful for otherwise patient Universal Display longs, it should only be a matter of time before the market realizes its mistake. When that happens, Universal Display investors will be more than happy they held on.