Could Universal Display Be Among the Next Huge Apple Supplier Winners?

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The field of organic light emitting diode (OLED) technologies and materials may be a huge market in the years ahead. The use of OLED in flat panel displays and solid-state lighting could grow exponentially. Universal Display Corp. (NASDAQ: OLED) has been considered one of the de facto winners here. The company has been public for many years, but until 2015, revenues remained under $200 million per year.

With so much interest in Apple Inc. (NASDAQ: AAPL), one strategy investors use to win off of Apple is to invest in the companies that either are Apple’s top iPhone component suppliers or the companies that could be Apple’s next top suppliers. Universal Display might be one of those winners.

However, there are some serious risks to consider in Universal Display and emerging technologies. This stock has been public since before 2000 and has been range-bound mostly from $30 to $55 over the past five years. Its $2.5 billion market cap also gives Universal Display a massive valuation of about 13 times past sales and 100 times trailing earnings.

That being said, Universal Display is expected to grow sales 15% in 2016 and 25% in 2017, with estimates at $275 million in 2017 on earnings of $1.13 per share for 2016 and $1.68 per share for 2017, rising to $326 million in 2018 and $2.15 in 2018.

So, the reason Universal Display may be a huge winner here may stem from a Cowen upgrade of Apple. That upgrade was based on the move into OLED technology for its iPhone 7 or for phones beyond 2017. Universal Display was not a feature of Wednesday (March 30), but Cowen did feature Universal Display with an Outperform rating on March 21 — and it raised the price target to $65 from $58 in that call.

Before thinking the reference above on valuations and 2018 to 2019 is too far, note that Cowen’s March 21 report is based on the firm’s valuation of 22 times 2019 per-share earnings estimate and then discounted for three years. We must also consider that Cowen had a $70 prior price target on Universal Display before dropping it to $58 back in February.

When Cowen raised its price target in March, the most focus was on LG’s March 17 announcement of a new Gen 5 (1,000 × 1,200 mm, 39.4 × 47.3 inch) facility with initial capacity of 15,000 per month. The Cowen investment thesis said:

Universal Display is a leader in Organic LED (OLED) display technology, deriving high margins from technology licensing and materials sales. Multi-year license and supply agreements with Samsung and LG validate the technology. OLEDs are shipping in high volume in smartphones and other small/medium sized display applications. OLED TV, flexible displays, lighting, advanced encapsulation and deposition technology should be L-T drivers.

The Cowen report also cited forthcoming catalysts for its bullishness on Universal Display as follows: Apple iPhone supply deals; LG OLED TV volume ramp; Samsung new phones, larger displays; and New mobile and wearable products and OEM customers.

When we looked elsewhere for top analyst or boutique research firms covering Universal Display we found the following.

Gabelli rates Universal Display at Buy and its private market value is cited as $60 for 2018 estimates. Gabelli called it a multiyear industry expansion company. Gabelli’s report did comment on Apple and potential expansion:

Superior display performance and low energy consumption of OLED displays continue to gain increasing recognition and favorable reviews. Speculation that Apple will consider OLED displays for its future iPhone in 2017-2018 continues to grow. We are taking a cautiously optimistic view on Apple iPhone’s potential adoption as it will require huge industry capacity that still does not exist today and there is always a risk of delays in making viable mass commercialization of new display technology… Universal Display can further expand its production capacity at its secondary production site in Ohio. It may take 16 months to build out new capacity.