"It seems like new cell phones are released every month with marginal improvements. Furthermore, it appears that most new technologies are bought from small companies, not created by the big guys at Apple and Samsung. What's going to be the newest mass-produced technology and from what company will it come?"
Introduction/Company Profile
Universal Display Corporation is engaged in the research, development and commercialization of organic, light emitting diode, or OLED, technologies and materials to display and lighting industries. The company provides customized solutions to its clients and partners through technology transfer, collaborative technology development and on-site training. The company had entered into more than 30 business agreements with leading manufacturers in Japan, Korea, Taiwan, China, Europe and the U.S. including with companies such as Chi Mei EL, DuPont Displays, Konica Minolta, LG Display, Samsung SMD, Seiko Epson, Sony, Tohoku Pioneer and Toyota Industries. Universal Display was founded by Sherwin I. Seligsohn in April 1985 and is headquartered in Ewing, New Jersey. Source: yCharts.com
Technology
The company’s core technology projects can be broken down into 4 categories: PHOLEDs, TOLEDs, FOLEDs, and WOLEDs (don’t worry… descriptions to come). Perhaps the company’s most important product for near-term consumer electronics devices is their PHOLED, or Phosphorescent OLED technology. A central theme in mobile electronics over the past few years has been minimizing the overall profile of the devices. A fundamental roadblock to this theme has been the conflict between the growth in size of cell phone displays and the limited capacities of lithium-ion batteries. PHOLED focuses on the former-half of this conundrum – reducing power consumption. Universal Display’s PHOLED technology consumes about 150mW of power, versus about 325mW for a traditional LCD screen and about 375mW for an OLED screen (based on a 4” diagonal display). Not only does this help with power efficiency (possibly allowing for a smaller battery), the reduced profile of the actual PHOLED screen will help electronics manufacturers continue the trend of thinner profiles.
Universal Display’s TOLED (transparent OLED) technology, which is still in early stages of design, provides the user with a screen that is nearly as clear as the glass or plastic substrate when powered off. While this technology is certainly further off from mass-commercialization, it is reassuring to know that the company has more ammunition than its basic OLED technology. A more appropriate solution to near-future consumer technologies (did someone say iWatch?) is the FOLED technology (the ‘F’ stands for “flexible”). This is exactly what it sounds like – OLED technology on a flexible substrate. As Google, Apple, and Samsung continue to tout their new “wearables”, there appears to be an apt suitor for their curved display challenge.
Finally, Universal Display’s WOLED technology (white OLED) is a product of the company’s PHOLED technology. It provides an alternative to the standard incandescent and fluorescent bulbs, providing more than twice the power efficiency of an average fluorescent bulb. The US Department of Energy initiated a program in 2000 to fund the research and development of inorganic LEDs and OLEDs as prospective next-generation lighting sources. Since then, the company has gone from 20 lumens per watt to 102 lm/W (compared to 12 lm/W for incandescent and 40-70 lm/W for fluorescent). Their goal is to reach 150 lumens per watt before fully licensing the technology.
Business Strategy
While initially skeptical of Universal Display’s use of the “design and license” business model, I’ve come to believe that it will work well for the foreseeable future. There are two main reasons for this: First, the company has a whopping 125 employees worldwide. This means that their strategic advantage lands squarely in the “designing only” realm, especially because many large electronics assemblers already retain the necessary infrastructure to efficiently mass produce the technology created by Universal Display. The company gets its intellectual property from three sources: in-house, sponsored University research, and Motorola, Inc. Universal Display’s more recent patents have come from in-house and company-sponsored University research, with the most recent patent from Motorola completed in early 2002.
Valuation/Company Fundamentals
From a revenue standpoint, the company is trading at valuations well below its 3-year average P/S ratio of 31.61 at its current level of 7.1. While still an extremely rich valuation, its current price may present an attractive entry point, especially considering the company’s 1Q2014 performance and explosive revenue growth. Although the company has provided positive accounting profits over the past 4 quarters, it has struggled to remained FCF positive in 4 of the past 8 quarters. This has caused Universal Display to burn through over $100 million over the past 2 years, $35 million of which occurred in 1Q2014. While most companies have discrepancies between accounting profits and FCF due to depreciation and prepaid expenses, Universal Display’s discrepancy comes from ballooning account receivable – up to $24.51 million from $10.53 million the same quarter last year. Look for this number to stabilize in future quarters, or at least remain in-line with revenue growth.
Final Thoughts
Due to the company’s high reliance on intellectual property, it is generally unwise to use balance sheet accounting ratios for valuation because the market value for these patents is generally much higher than the intangibles listed. Nevertheless, the company’s current ratio of 17.11 and Altman non-manufacturers z-score of 18.15 (TTM) show liquidity and solvency are not of concern. Due to the stock’s higher volatility, it is hard to weigh any technical movements. However, knowing the stock is near a 52-week low after a solid quarter with triple-digit YoY revenue growth, Universal Display’s sub-15 P/E ratio and current price of $25.82 present an attractive entry point to what could be one of this year’s biggest winners. I wonder if any large technology firms looking for an acquisition are thinking the same thing…
Universal Display Corporation is engaged in the research, development and commercialization of organic, light emitting diode, or OLED, technologies and materials to display and lighting industries. The company provides customized solutions to its clients and partners through technology transfer, collaborative technology development and on-site training. The company had entered into more than 30 business agreements with leading manufacturers in Japan, Korea, Taiwan, China, Europe and the U.S. including with companies such as Chi Mei EL, DuPont Displays, Konica Minolta, LG Display, Samsung SMD, Seiko Epson, Sony, Tohoku Pioneer and Toyota Industries. Universal Display was founded by Sherwin I. Seligsohn in April 1985 and is headquartered in Ewing, New Jersey. Source: yCharts.com
Technology
The company’s core technology projects can be broken down into 4 categories: PHOLEDs, TOLEDs, FOLEDs, and WOLEDs (don’t worry… descriptions to come). Perhaps the company’s most important product for near-term consumer electronics devices is their PHOLED, or Phosphorescent OLED technology. A central theme in mobile electronics over the past few years has been minimizing the overall profile of the devices. A fundamental roadblock to this theme has been the conflict between the growth in size of cell phone displays and the limited capacities of lithium-ion batteries. PHOLED focuses on the former-half of this conundrum – reducing power consumption. Universal Display’s PHOLED technology consumes about 150mW of power, versus about 325mW for a traditional LCD screen and about 375mW for an OLED screen (based on a 4” diagonal display). Not only does this help with power efficiency (possibly allowing for a smaller battery), the reduced profile of the actual PHOLED screen will help electronics manufacturers continue the trend of thinner profiles.
Universal Display’s TOLED (transparent OLED) technology, which is still in early stages of design, provides the user with a screen that is nearly as clear as the glass or plastic substrate when powered off. While this technology is certainly further off from mass-commercialization, it is reassuring to know that the company has more ammunition than its basic OLED technology. A more appropriate solution to near-future consumer technologies (did someone say iWatch?) is the FOLED technology (the ‘F’ stands for “flexible”). This is exactly what it sounds like – OLED technology on a flexible substrate. As Google, Apple, and Samsung continue to tout their new “wearables”, there appears to be an apt suitor for their curved display challenge.
Finally, Universal Display’s WOLED technology (white OLED) is a product of the company’s PHOLED technology. It provides an alternative to the standard incandescent and fluorescent bulbs, providing more than twice the power efficiency of an average fluorescent bulb. The US Department of Energy initiated a program in 2000 to fund the research and development of inorganic LEDs and OLEDs as prospective next-generation lighting sources. Since then, the company has gone from 20 lumens per watt to 102 lm/W (compared to 12 lm/W for incandescent and 40-70 lm/W for fluorescent). Their goal is to reach 150 lumens per watt before fully licensing the technology.
Business Strategy
While initially skeptical of Universal Display’s use of the “design and license” business model, I’ve come to believe that it will work well for the foreseeable future. There are two main reasons for this: First, the company has a whopping 125 employees worldwide. This means that their strategic advantage lands squarely in the “designing only” realm, especially because many large electronics assemblers already retain the necessary infrastructure to efficiently mass produce the technology created by Universal Display. The company gets its intellectual property from three sources: in-house, sponsored University research, and Motorola, Inc. Universal Display’s more recent patents have come from in-house and company-sponsored University research, with the most recent patent from Motorola completed in early 2002.
Valuation/Company Fundamentals
From a revenue standpoint, the company is trading at valuations well below its 3-year average P/S ratio of 31.61 at its current level of 7.1. While still an extremely rich valuation, its current price may present an attractive entry point, especially considering the company’s 1Q2014 performance and explosive revenue growth. Although the company has provided positive accounting profits over the past 4 quarters, it has struggled to remained FCF positive in 4 of the past 8 quarters. This has caused Universal Display to burn through over $100 million over the past 2 years, $35 million of which occurred in 1Q2014. While most companies have discrepancies between accounting profits and FCF due to depreciation and prepaid expenses, Universal Display’s discrepancy comes from ballooning account receivable – up to $24.51 million from $10.53 million the same quarter last year. Look for this number to stabilize in future quarters, or at least remain in-line with revenue growth.
Final Thoughts
Due to the company’s high reliance on intellectual property, it is generally unwise to use balance sheet accounting ratios for valuation because the market value for these patents is generally much higher than the intangibles listed. Nevertheless, the company’s current ratio of 17.11 and Altman non-manufacturers z-score of 18.15 (TTM) show liquidity and solvency are not of concern. Due to the stock’s higher volatility, it is hard to weigh any technical movements. However, knowing the stock is near a 52-week low after a solid quarter with triple-digit YoY revenue growth, Universal Display’s sub-15 P/E ratio and current price of $25.82 present an attractive entry point to what could be one of this year’s biggest winners. I wonder if any large technology firms looking for an acquisition are thinking the same thing…