The stock price of OLED emitter materials provider Universal Display Corporation (ticker symbol: <OLED>) jumped last week on new analyst coverage from Susquehanna’s Mehdi Hosseini. Hosseini rated the stock a “Positive” with a price target of $100, helping the stock jump nearly 5% on Wednesday, February 14th. <OLED> shares were priced at $72.15 at market close on Friday, up 13% for the week, and up 28% year-to-date, and close to their all-time high of $73.82 which they hit on August 1st of last year.
Perhaps it’s not a coincidence that <OLED> is again hitting a peak just ahead of its earnings release on February 24th: last year <OLED> hit all-time high just before it’s 2nd quarter earnings release on August 4th. As I related in a prior story on this company (“Cubs Finally Win But For OLED It’s Still Wait ‘Til Next Year”, DSCM 11.07.2016), UDC has a history of disappointing investors in its earnings calls. In order for UDC to avoid this history repeating, they will need to show that they can take advantage of the great wave of OLED capacity coming online to drive growth in revenues and earnings. In that context, what UDC says about 2017 will be much more important to investors than their results in Q4 2016.
In its Q3 earnings call in early November, UDC maintained their full-year revenue guidance of $190-200 million. The mid-point of that guidance implies a Q4 revenue of $71 million, which includes $37.5 million of royalty revenues from Samsung’s licensing agreement. Considering the various sources of revenue to UDC, the Q4 revenues might look like the figure below:
UDC Revenue by Source 2015-2016 (Q4 mid-point of guidance)
Such a picture would represent 14% year-over-year revenue growth, a tremendous improvement from the 23% Y/Y decline reported in Q3. Unfortunately, though, the biggest part of that revenue growth comes from the Samsung licensing royalties, increasing 25% Y/Y from $30 million in Q4 2015 to $37.5 million in Q4 2016. Take out the Samsung royalties, and revenue growth is only 4% Y/Y.
There are many reasons to be optimistic about the prospects for OLED, and almost as many reasons to be optimistic about the prospects for <OLED>. As subscribers to DSCC’s Quarterly OLED Supply Demand and Capital Spending Report will know, panel makers will be installing and/or ramping 16 different fabs for the production of OLED in 2017 alone, with additional fabs starting in 2018-2021. While some of these are merely research and development lines, many of these fabs will add substantial capacity to the industry, and industry capacity for OLED will grow at a CAGR of 52% from 2016 – 2021, as shown in the figure below
OLED Input Capacity 2016-2021
As the figure shows, input area in 2017 alone will increase more than 50% Y/Y. It is charts like these for OLED that have industry analysts optimistic about <OLED>. Even at its current price, the company’s stock has a price/earnings ratio of 84; obviously at the Susquehanna target price of $100 the P/E would be over 100. In order to justify the rarified air of such a stock, UDC will need to translate the potential for OLED growth into real revenues and earnings.
Breaking down some of the revenue numbers in the chart above, UDC’s 2016 revenues can be grouped as follows:
The opportunity for upside lies in new phosphorescent emitter products with higher prices, which could drive revenue growth higher than area growth. Against this the downside is the relentless price pressure faced by all companies in the display materials industry. One other item to watch is the Samsung royalty agreement, which expires at the end of 2017. DSCC sources indicate that the main components of a new agreement have been in place, but until they announce the new agreement, the expiration will remain a concern.
UDC issues its Q4 earnings report with a conference call on Thursday, February 24th. Subscribers to DSCC’s Quarterly Display Supply Chain Financial Health Report will see a full analysis of the results in a weekly update on Friday.