What: Shares of Universal Display Corporation (OLED +0.18%) were down 11.6% as of 1:15 p.m. Friday after Goldman Sachs analyst Brian Lee downgraded shares from "buy" to "neutral."
So what: Lee also reduced his 12-month price target on Universal Display Corporation from $50 per share to $40, representing only a slight premium to yesterday's closing price. Keep in mind shares of Universal Display had already climbed more than 40% year-to-date going into yesterday's close, most recently spurred by an upgrade and $60 per-share price target from analysts at Cowen last week.
Today, however, Lee expects OLED TV volumes to "disappoint meaningfully" the rest of this year and in 2016, especially as planned manufacturing capacity additions for the sector overall "appear to be more weighted toward 2017 and beyond..."
As it stands, these concerns primarily apply to OLED TV leader LG Display (LPL 0.23%), which signed a long-term patent license and material supply agreement with Universal Display earlier this year. Per the terms of that agreement, Universal Display not only supplies phosphorescent OLED materials required for LG Display to build its OLED products, but also receives license fees and running royalties on sales of those products. Indeed, if LG Display has trouble selling its high-priced OLED TVs, Universal Display's growth could suffer in the near term.
Now what: For perspective, last month Korean news outlets reported LG Display is preparing to sign agreements to supply OLED TV panels to several Chinese TV vendors, which would serve to jump-start the industry and supplement demand for its own OLED TVs. And thanks to increased manufacturing yields, LG continues to rapidly reduce the prices of OLED TVs to make them more competitive with higher-end LCDs.
In the meantime, though -- and while he remains bullish on UDC shares over the long term -- Lee believes Universal Display Corporation will reduce the high end of its current 2015 revenue guidance when it reports third-quarter results next month. As it stands, that guidance calls for 2015 revenue of $200 million, with a downside range of 5% (to $190 million) and "upside potential" of 15% (to $230 million).
But as a longtime Universal Display shareholder myself, whether Lee's near-term prediction comes true isn't particularly relevant. I certainly don't take pleasure in seeing the stock pull back like this, but as long as Universal Display's long-term growth story remains intact, I'm content holding my shares.
