Image source: Universal Display Corporation.
It seems an understatement to say November was good to investors in Universal Display Corporation (OLED 1.08%). Shares of the OLED technologist rose more than 50% last month, largely following renewed speculation and comments from management suggesting that Universal Display's flagship technology will find a place in future iterations of Apple's (AAPL +0.56%) iPhone line.
Specifically on the latter, during the 2015 Goldman Sachs U.S. Emerging/SMID Cap Growth Conference, Universal Display CFO Sidney Rosenblatt stated he believes "it's only a matter of time" before Apple introduces an OLED iPhone. After all, he noted, longtime Apple supplier Foxconn has ordered equipment for OLED manufacturing in 2017, and earlier this year, Apple chief design officer Jony Ive contrasted the "old"-looking LCD display technology in his iPhone 6 with what we now know is an OLED display in the Apple Watch.
Still, however exciting the prospect of an OLED iPhone might be for Universal Display investors, we must keep in mind Apple's expanded use of OLED is primarily a long-term catalyst for Universal Display stock. In the meantime, that's why I think Universal Display investors would be wise to focus on the company's other massive opportunities for growth.
In fact, Rosenblatt spent the bulk of his time speaking at the Goldman conference on exactly these kinds of non-Apple developments. Here are three key points he discussed.
There will be growth in 2016
One of the primary concerns of analysts following Universal Display is that, while we wait for a large ramp in confirmed OLED manufacturing capacity to occur in 2017, there could be a lull in growth between now and then. According to Rosenblatt, however, this won't be the case as Universal Display's two largest customers, LG Display (LPL +1.75%) and Samsung Display (NASDAQOTH: SSNLF), ramp their own respective OLED manufacturing efforts.
You will see LG has stated that 50% of their [2015] output will be in Q4. [In 2016], we expect LG will be at a much higher capacity all year long. ... On the Samsung side, you have Samsung Display who pays a fixed license fee. That license fee will go up in 2016. But they also have stated that they are going to be much more of a merchant of displays, and they expect more than a third of their output to go to non-Samsung Electronics customers. ... And it's anticipated that 30% of all smartphones in 2016 will have OLED screens. So I think that Samsung's factory utilization will be at a much higher level for all of 2016. ... So between those two, it isn't the giant step function that you think for 2017 -- when you'll probably see at least three or four new players entering the market -- but there will be growth in 2016 over 2015.
Long story short, while we can certainly expect to see significant growth from new customers in 2017, it seems investors' concerns over lagging growth on a relative basis next year are likely overblown.
More to come from China
Speaking of new customers, recall that just over a year ago, Universal Display entered into an evaluation agreement with China-based display juggernaut BOE. At the time, I argued while BOE was still a small player in the OLED space, investors shouldn't overlook the promise of this agreement to grow into something of significance in the long term.
At the Goldman conference, Rosenblatt not only confirmed that's still the case, but also suggested there's much more to come from the budding Chinese market:
We started out with Samsung and LG going through evaluation agreements, material supply agreements, and then full license agreements once they start high-volume production. I don't expect this to be [much] different in China. Dealing with BOE, which is a multi-national company, they pay royalties, they respect intellectual property. And so we're confident that working with them we can work out an arrangement with them. And there's probably three or four others in China that we're talking to that will allow us to move into that market -- because you can't ignore it -- and be able to get paid and get what we believe is a fair return.
The key takeaway, here? Though the timeline remains unclear, Universal Display should be able to use its long-term agreements with Samsung Display and LG Display as a framework to set up similar deals with BOE, and the "three or four" other Chinese display producers with which it's currently communicating. As the Chinese electronics market continues to grow, so too should Universal Display's coffers.
LG's 65-inch OLED TV. Image source: LG Electronics.
OLED TV is just scratching the surface
Finally, arguably the most exciting catalyst for Universal Display lies with OLED TVs, the physical size of which obviously requires a much larger volume of Universal Display's OLED emitter materials than smartphones do. But Universal Display investors remained worried in October after LG Display -- the clear leader in the OLED TV space -- reduced its OLED TV unit sales guidance for this year and next.
Again, however, Rosenblatt confirmed those worries were largely unfounded, and at the same time highlighted the growth opportunity set before them with OLED TV:
There are 235 million LCD TVs sold each year. They're going to sell 400,000 to 500,000 OLED TVs this year. We're not even talking about 1% of the market. And they're talking about selling about one million OLED TVs in 2016. They were originally talking about 1.5 million, but that's 55-inch equivalents. And they have stated that almost 40% of their demand will be 65 and 77 inch TVs. They can't keep 65 inch TVs in stock. So they haven't reduced their numbers, it's just the actual way they cut the glass and what they sell that's changed.
Universal Display's material sales benefit from the larger size of each display, effectively negating the fact LG Display expects to sell fewer smaller-sized units. And as the price of OLED TVs continues to fall and become more competitive with high-end LCDs, consumers should increasingly flock to the superior picture, energy efficiency, and novel form factors offered by OLED TV. With Universal Display's technology set to play a central role as OLED TV takes market share, investors should be poised to reap the rewards.
