Motley Fool Rule Breakers pick Universal Display (NASDAQ:PANL) reported earnings for Q2 2006 last night, and as I write this the morning after, the stock is trading more than 15% lower than yesterday's market close. While the report was a bit disappointing, it certainly wasn't worthy of such a sizable stock smackdown.

The company reported a net loss of $4.3 million, or $0.14 per share, while the analyst community wanted to see a smaller $0.11 loss per share. Sales also lagged expectations of $3.8 million, at just $3 million. But before you sell off your shares in a panic, consider the reasons behind the underperformance.

Universal Display is still a small company, and it doesn't take much of an unexpected or unpredictable development to materially affect its revenue and earnings. I recently explained the concept of lumpy revenues in the context of Cray (NASDAQ:CRAY), but in short, a short-term shift of sales from one quarter to another shouldn't change the fundamental business outlook, even though it makes one quarter look bad.

In this case, the company said that payments from a government contract had been delayed, but that the deal should still bring in a total of $4 million to $4.5 million in sales this year. Only $1.4 million of that sum has been paid to date, so the contract research segment should see a significant boost in the next two quarters. Assuming fixed costs, that revenue shortfall explains the entire earnings "miss."

The revenue stream has become less dependent on such research grants anyhow, since Universal Display is starting to see some commercial chemical sales and license payments now. Operational costs did increase, but it was all due to a bigger research staff and a new development facility that is now running at full speed. The sooner the company figures out how to make long-lasting blue phosphorous organic LEDs (OLEDs), the sooner we'll see OLED TVs in our living rooms and lots of cash in Universal Display's coffers.

You have to spend money to make money, and it's not easy to stay ahead of qualified competitors like Cambridge Display (NASDAQ:OLED), Eastman Kodak (NYSE:EK), and Philips (NYSE:PHG), all of whom are working on competing technologies. Universal Display already has an impressive patent portfolio, but you just can't rest on your laurels -- and the company isn't trying to. It's doing all the right things, and the market will eventually see the light. Consider today's drop a buy-in opportunity.

Further Foolishness on display:

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Fool contributor Anders Bylund is a Universal Display shareholder, but holds no other position in any company discussed here. You can check out Anders' holdingsif you like. Foolishdisclosureis well-lit and highly defined.