In both 2014 and 2015, we recommended Universal Display Corp. (OLED), impressed by the company’s prospects and valuation; as its valuation appeared to leap ahead of the fundamentals in March 2017, we recommended selling the shares and reaping the rewards, notes Doug Gerlach, editor of Small Cap Informer.
Since then, Universal Display has matured considerably and made further strides in capturing a larger share of the OLED market. Recently, the stock has pulled back to a 52-week low, and our interest is again piqued. Given the company’s prospects, this may be a time to buy back in to Universal Display’s shares.
Universal Display is a leader in the development and manufacture of OLEDs. An Organic Light Emitting Diode (OLED) is a series of thin films set between two conductors that react to electrical current by emitting bright light. OLEDs can be used for displays or lighting.
OLEDs are thin and efficient, and can also be flexible and transparent. This enables their use in folding smartphone screens, curved television panels, and wearable devices. OLEDs use less power, deliver brighter and higher quality displays, and are more cost effective and less toxic to manufacture than LEDs.
Universal Display currently holds more than 5,000 global patents related to OLED technology. The company doesn’t make products, but works with manufacturing partners and issues royalty licenses to customers. This helps the company maintain a low-debt, high-cash balance sheet.
A benefit of the company’s proprietary technology is that its manufacturing does not require so-called “conflict minerals,” raw materials extracted in regions torn by strife that may fund the perpetuation of violence. For these reasons, Google, Samsung, LG, Apple, Huawei, Motorola, Sony, Vizio, Lenovo, Mercedes-Benz, and many others are adopting OLEDs from Universal Display.
As companies continue to increase their use of OLEDs, Universal Display is a likely beneficiary. Innovative technologies being developed by the company’s research and development efforts will surely add to its results.
Since 2011, Universal Display has grown revenues at an annualized average of 22.1% a year. EPS have grown at a less consistent but higher 38.9% a year. For the third quarter of 2021, Universal Display missed analysts’ estimates but still delivered 14.1% growth year-over-year. Revenues were up 22.7%.
The share of the market for OLED screens has expanded more than 45% since 2019, with 45% of new smartphones expected to ship with an OLED screen in 2021. Only 3% of televisions produced today currently use OLEDs, but increasing demand for new 4K ultra-high-definition televisions may help drive this number higher. Similarly, only about 2% of laptops care using OLED technology.
Analysts expect EPS to grow at 30% a year over the next five years, with sales growth in the next two years pegged at 23.5% annually. We are targeting revenues growth of 20% and EPS growth of 25% through 2025. Based on a high P/E of 30 and future EPS of $11.06, we see Universal Display as capable of reaching $331 in five years. The current P/E ratio is 35.8, well below the highs the stock has reached in the last six years.
On the downside, a further 80% drop from the current price of $144.44 is $116. This equates to a maximum buy price of $170, and a reward/risk ratio of 6/5-to-1 from the current price. A total annual return of 18.7% is possible if the stock reaches our projected high price.