Universal Display Stock Could Be Weak in the Near-Term

It’s been a really good year for  Universal Display (NASDAQ:OLED) stock. The company develops organic light-emitting diode  (OLED), which  gained significant traction and momentum in 2019, largely thanks to increased demand from mobile and tablet makers. As it did, Universal Display’s revenues and profits surged higher, boosting OLED stock.

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OLED stock has soared 114% in 2019. That compares very favorably to the S&P 500‘s 23% rally in 2019. Naturally, the big question now is: will the red-hot rally in OLED stock continue or will the shares finally start to cool off?

I think the latter scenario will unfold.  The fundamentals of Universal Display stock are strong and do indicate that its profit growth could accelerate tremendously over the next several years. But since OLED’s forward earnings multiple is hovering north of 60, all of that potential is arguably already fully priced into OLED stock today.

Continuous profit-growth tailwinds will push OLED stock higher in the long run. But in the near-term, the high valuation of OLED stock may short-circuit the shares’ huge 2019 rally.

OLED Is the Future

The long-term bull thesis on OLED stock boils down to a few observations:

  1. Consumers are spending all of their time on digital devices. Everywhere you look, consumers are digging their heads into their phones, tablets, smartwatches, smart TVs, etc. Indeed, data shows that consumers spend essentially half of their day in front of digital screens.
  2. In the digital channel, consumers are increasingly spending time  watching video content. When those consumers are glued to digital screens, what are they doing? Watching YouTube videos, watching Netflix (NASDAQ:NFLX) shows, watching clips on their Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) feeds, so on and so forth. Nielsen estimates that consumers spend about 25% of their days watching videos.
  3. OLED display is the future of digital video. When it comes to video displays, OLED has certain aesthetic (it can be put into super thin devices), performance (it can display perfect blocks), and flexibility (it can be put into bent and curved screens) advantages over LCD. These advantages have  paved the path for OLED displays to become the norm across the industry one day.
  4. Universal Display is the king of the OLED industry. Universal Display owns a broad array of patents which span across the entire OLED universe. The company is essentially the intellectual property backbone of the OLED market. As a result, it will grow side-by-side with the OLED market for the foreseeable future.

The implication of these four observations is obvious. OLED is a continuous growth market, and Universal Display is a leading player in that market. Consequently, in the long run, Universal Display’s revenues, profits, and stock price will all march higher.

Universal Display Stock Is Fully Valued

Although Universal Display stock is supported by favorable long-term growth prospects,  OLED stock is fully valued at its current levels.

OLED stock trades at a whopping 63 times the company’s forward earnings multiple. That’s a mega-rich valuation, and after evaluating the company’s fundamentals, it becomes clear that OLED stock may not deserve that rich of a multiple today.

Take a look at the numbers. Due to increased mobile and tablet penetration,the OLED display market is expected to grow at an annualized pace of about 15% over the next several years,  As a leader in that market, Universal Display’s revenues will increase at a pace slightly north of 15%. Its gross margins are already around 80%, so they probably won’t increase much more. Meanwhile, its sustained 15%-plus revenue growth will increase its profitability, but its operating-spending rate, at roughly 40%, is already pretty low. As a result, the company’s profitability won’t rise too much.

Given these points,  Universal Display’s top line should increase 15%-20%, with good (but not great) positive margin catalysts. Ultimately, its earnings per share can reach the $10-$15 range by 2025.

Even at the high end of that range, the company’s EPS won’t  justify today’s OLED stock price.  Based on a forward price earnings multiple of 20, which is average for the tech sector,  EPS of $15 in 2025  and an annual discount rate of 10%, my 2019 price target for OLED stock is under $190. That’s below where the stock trades today.

The Bottom Line on OLED Stock

Universal Display is a great company with wonderful long-term growth prospects. But it seems that everyone already knows that, so that reality is already more than fully priced into OLED stock.

Consequently, while the shares should run higher in the long-term, they will likely not climb much in the shorter term due to concerns about the stock’s valuation.

As of this writing, Luke Lango was long NFLX and FB. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/11/universal-display-stock-could-be-weak-in-the-near-term/.

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