Since topping out in January, shares of Universal Display Corporation (NASDAQ:OLED) is trading at nearly 50 percent lower at a recent price of $107. Despite reporting a solid revenue growth number for its OLED materials, investors are fretting over the risk of Apple Inc. (NASDAQ:AAPL) abandoning suppliers and building its own display. Putting aside that fear for the moment, did the drop in Universal Display stock create an entry point for investors?
Universal Display’s (OLED) 2017 Results
Universal Display reported a 102 percent year-over-year increase in materials sales. In addition to licensing revenue growing 32 percent, these two data points more than offset the 29 percent increase in the cost of sales. The company’s earnings per share is even more impressive: net income more than doubled, from $1.02 to $2.18 (diluted).
Unfortunately for stockholders, markets started questioning the sustainability of its growth this year. It may be due to concerns over valuations (P/E is around 45 times) or the markets may just be nervous. After all, the DOW fell over 700 points on Mar. 22. Higher interest rates are forcing markets to re-price high-valuation stocks.
Threats of a trade war, through excessive and blanket tariffs, may slow demand. Lower phone sales would hurt the Universal Display’s royalty stream. Even if new, flashy smartphones spurred demand, it would not be enough to offset a drop in sales. Smartphone prices have, in general, an inelastic demand curve but at a certain price, consumers will hold off on upgrading.
Strong Fourth Quarter
Seasonal strength may have helped Universal Display report a 55 percent year-over-year increase in revenue. Material sales rose 105 percent and helped the company report record revenues. Green emitter sales accounted for $40.9 million in revenue while Red emitter sales topped $18.3 million.
The strong quarterly results is unusual for the company. The period is typically a soft quarter due to seasonality. Management suspects customers are building up inventory in the current first quarter. This implies the next quarterly report will not impress markets as much and may partly explain why the stock is down following its Q4 report.
Factoring in a slower first quarter management is forecasting revenue of between $350 million to $380 million with growth strength resuming in the second half of this year. Gross margin will top up to 75 percent. Universal Display’s capacity growth of 50 percent signals the volume of demand is also outside of the phone display market.
LG’s TVs will sell in the range of 2.5 million or more this year. That drove Universal Display’s revenue higher last year.
Last year, the business generated $133 million in cash flow. Give the gross margin levels will stay strong, investors may expect another year of positive cash flow. It ended the year with around $9 a share in cash. That translates to a share price to cash multiple of around 12 times.
The Market forUniversal Display Stock Growth
The growing popularity of OLED TVs is beneficial to Universal Display’s bottom line but the addressable market for OLED materials does not stop there. Wearable devices, albeit a small market, has the potential to add to Universal Display’s revenue stream. Its investments in the R&D for blue materials will also expand the company’s market size.
Near-Term Catalysts Absent
Stock markets are impatient, so when the company said on its conference call that current order levels will slow due to an industry slowdown, investors sold. By ignoring the rebound in the second half, the stock now trades at a discount to its future cash flow. Still, without a catalyst for the stock price at this time, shares may continue trending lower.
This may be made worse with the stock market starting to enter a bear phase.
Valuation of Universal Display Stock
The average Wall Street consensus estimate is $182 a share. By comparison, users on finbox.io believe the fair value is below $90 a share, depending on the financial model used. The average fair value estimate for Universal Display stock is $93 a share.
Disclosure: Author does not own shares in any of the companies mentioned.