Source: Universal Display Corporation.
Earlier this week, shares of Universal Display Corporation (OLED +0.22%) fell after a website called TheStreetSweeper released a troubling new report on the OLED specialist.
To its credit, TheStreetSweeper fully disclosed that it held a short position in OLED at the time of publication, which meant it stood to benefit from any subsequent share-price declines in the stock. Similarly, the Fool's disclosure will show that I've held a long position in Universal Display Corporation since the middle of 2010, so I stand to benefit when its share price rises.
But while I'm all for considering a well-rounded bearish argument for any given stock, even a cursory glance at TheStreetSweeper's research shows it doesn't hold water.
Let's break down the main points of the article, titled "Universal Display: Patent Cliff, Analyst Thumbs Down, And a Baseless Rumor," piece by piece.
The (old) patent-cliff argument ...
First, TheStreetSweeper claims, "The essence -- the thing that makes Universal Display what investors have come to believe it is -- falls apart in 2017."
More specifically, it says Universal Display's "fundamental patent is scheduled to expire in 2017," and then goes on to cite a 1998 SEC filing describing Universal Display's first patent issued through its past collaboration with Princeton University.
Because patents typically expire after 20 years, TheStreetSweeper reasons, Universal Display's future as a technology licensing company faces the "killer risk" of having its core patents fall into the public domain thereafter.
As further evidence of this cliff, TheStreetSweeper notes that Universal Display's long-term license and material supply agreement with Samsung (NASDAQOTH: SSNLF) Display expires on Dec. 31, 2017 -- something it believes couldn't possibly be a coincidence.
Finally, TheStreetSweeper cites a "sell" rating and $22 price target set by Canaccord Genuity analyst Jonathan Dorsheimer issued in December 2013 -- that's right, an opinion voiced almost exactly two years ago -- after the European Patent Office revoked UDC's broad-reaching Organometallic Iridium Patent. It also quotes Dorsheimer as writing at the time, "[W]e do not see upside beyond 2017 even if the current Samsung agreement holds up."
... debunked by newer opinions, a new deal
So what's the problem?
TheStreetSweeper also ignores that after the European patent decision, Universal Display Corporation quickly filed two narrower divisional patents in its place to provide substantially similar protection of its IP. And roughly two months later, Dorsheimer raised his price target by 50% to $33 per share, effectively reversing his earlier opinion by stating, "We believe that the recent negative IP ruling against UDC has not altered UDC's current contract with Samsung."
At the same time, speaking in February 2014 at the Goldman Sachs 2014 Technology and Internet Conference, Universal Display CFO Sidney Rosenblatt explained:
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.
Even then, however, Dorsheimer maintained his concerns about 2017 -- that is, at least until this past January, when Universal Display signed a long-term license and material supply agreement with LG Display (LPL +4.53%) good through the Dec. 31, 2022.
Sure enough, Dorsheimer issued a note later that day reiterating what had by then changed to a "hold" rating and $23 price target on Universal Display stock, writing, "We believe the duration of this contract removes some risk to our patent cliff concerns associated with the 2017 termination of the Samsung Agreement and coincident expiration of early core patents."
Selective analyst ratings
Fast-forward to earlier this month, when Dorsheimer reiterated his "hold" rating on Universal Display Corporation stock, but also raised his firm's per-share price target from to $52 from $41. But that figure is nowhere to be found in TheStreetSweeper's report.
Speaking of which, TheStreetSweeper briefly mentions a $60 price target on shares that analysts at Cowen recently set, good for an 18% premium over this past Friday's close. But the report has no elaboration on that bullish note. For perspective, you can read more on Cowen's upgrade here.
Instead, StreetSweeper focuses primarily on Goldman Sachs' subsequent downgrade of Universal Display in October from "buy" to "neutral," and a per-share price target reduction from $50 to $40. Goldman analyst Brian Lee worried at the time that OLED TV volumes would "disappoint meaningfully for the rest of 2015 and into 2016, especially given planned manufacturing capacity additions that appeared "to be weighted toward 2017 and beyond."
Again, however, TheStreetSweeper ignores newer information that negates those worries. Following Universal Display's stellar third-quarter results in early November, last month Lee moderated a Q&A session with Rosenblatt at the 2015 Goldman Sachs U.S. Emerging/SMID Cap Growth Conference. In it, Rosenblatt stated not only that there will be growth in 2016 thanks to significant capacity additions early in the year at LG Display, but he also clarified that the OLED TV unit sales guidance reductions that spurred Lee's worries were primarily because LG Display is selling more 65-inch and 77-inch OLED TVs in place of smaller 55-inch models.
"So they haven't reduced their numbers," Rosenblatt elaborated. "It's just the actual way they cut the glass and what they sell that's changed."
Falling (sequential) earnings?
Next, TheStreetSweeper criticizes Universal Display because its "droopy earnings tumbled 28 cents per share in July to just 13 cents in September."
However, is fails to mention that Universal Display recognizes a $30 million lump-sum license payment from Samsung Display in the second and fourth quarters of this year -- up from biannual payments of $25 million last year and $20 million in 2013 -- which makes TheStreetSweeper's sequential earnings comparison virtually useless. Also, even without that payment in the September quarter, Universal Display's GAAP net income rose 62.8% year over year to $7 million, or $0.15 per share. On an adjusted basis, net income in the most recent quarter actually increased 44.4% to the $0.13 per share referenced in the bearish report.
On the Apple rumor mill
Finally, StreetSweeper attempts to rebuke recent speculation that Apple (AAPL +2.65%) is thinking about transitioning its various iDevices away from LCD and toward OLED.
Apple Watch already uses an OLED display provided by LG Display.
To do so, it cites J.P. Morgan analysts earlier this year when they cautioned, "Unless we witness any meaningful equipment order placement by 2Q16, we think the likelihood of AAPL's full scale adoption [by 2018] is unlikely."
That was fair enough. Heck, shortly before Apple's keynote this past September, I felt the need to temper expectations by telling investors Apple was unlikely to introduce an OLED iPhone this year. Then earlier this month, after shares skyrocketed on renewed speculation that Apple would broaden its adoption of OLED, I once again tried to shift investors' focus toward several of Universal Display's non-Apple catalysts in the coming years.
But that also doesn't mean we should completely ignore the writing on the wall with regard to Apple's expanding use of OLED. For one, Apple already uses an OLED display in its Apple Watch, and Universal Display customer LG Display provides that display. And just last month, LG Display announced plans to build an $8.7 billion factory to provide OLED displays for TVs, smartphones, and wearable devices, with a targeted opening in the first half of 2018.
In addition, at the Goldman conference, Rosenblatt highlighted the fact that longtime Apple supplier Foxconn (NASDAQOTH: FXCNY) recently placed exactly the kind of "meaningful equipment order" J.P. Morgan analysts had described, with a targeted date for mass production of "2016 or 2017."
What's more, Rosenblatt himself matter-of-factly stated of Apple and OLED, "Realistically, based upon the number of phones that they sell, capacity won't be in the marketplace until 2017 if they decide to do it."
Short and distort?
In the end, the intent of TheStreetSweeper's latest report on Universal Display is unclear. But if there's one thing that's sure, it's that given its consistent use of old information, out-of-context quotes, and selective facts, the report isn't deserving of the attention it has received.
