Universal Display Corporation (PANL) is involved in the research, development and commercialization of organic light emitting diode (OLED) technologies. The stock has been fairly volatile over the past couple of years, as it's been somewhat difficult to place a fair valuation on the company and the future of the OLED industry. This is particularly seen in the different analyst ratings that have been given to PANL, as many analysts are bullish on the company, while others say PANL's main revenue stream is in serious risk and that it should therefore be sold. For now, it's worth looking into whether PANL's recent move (where it lost over 17% of its value in one day) was justified, or an overreaction.
The catalyst to set the ball rolling for PANL's drop was its Q1 2013 earnings release. PANL earned $15 million in revenues in Q1 2013, with a net loss of $4.8 million. PANL had a substantial increase in material sales from Q1 2012, with commercial material revenues largely being up due to PANL shipping both green emitter and host materials. Operating expenses were also up substantially, largely due to patent amortization expense and research and development costs (cost of materials was up $2 million from Q1 2012).
PANL's Q1 2013 results do not appear to be disappointing (CEO Steven V. Abramson says "The first quarter was a great start to what we believe will be another record year for Universal Display Corporation"), and guidance for fiscal 2013 is in a healthy range of $110 million to $125 million (substantially higher than total revenue in 2012, which came in at around $83 million), which begs the question of why PANL had a substantial sell-off upon releasing earnings. In my view, the main considerations PANL investors should take into account now are the following:
- The majority of PANL's revenue is dependent on Samsung, as PANL supplies material for screens in Samsung phones. Samsung pays PANL in the second and fourth quarters, which is why Q2 2012 and Q4 2012 revenues for PANL were over twice as high as Q1 and Q3 quarters. The fact that PANL's Q1 2013 revenue was substantially below Q4 2012 revenue is immaterial, as the Samsung payment disrupts the numbers. PANL is expected to receive payment from Samsung again in Q2 2013, and thus next quarter will have far higher revenues.
- As previously mentioned, there is substantial uncertainty surrounding the future of the OLED industry, which PANL operates in. DisplaySearch (an industry analyst firm) expects the AMOLED market to grow 60% in 2013 to $11.3 million, with revenue growth mostly coming from the mobile phone. However, I wonder if OLED displays in televisions will also be a substantial driver of growth in the industry.
- While OLED televisions have been released (most notably from LG), they have yet to become commonplace, and it looks like Samsung will continue to be the primary revenue source for PANL in 2013.
- Samsung says orders for its new Galaxy S4 phone (which uses OLED technology, has an extremely sharp display and is brighter than the S3) have been so strong that it has had difficulty meeting the demand, and up to 100 million units of the phone could eventually be sold. This is beneficial for PANL.
- Host material (used in conjunction with emitter material) has lower margins than emitter material, and it would seem that the rate of adoption for PANL's green emitter material is one of the most important indicators for whether the company will flourish in the future. In Q1 2013, green emitter sales increased by $3.1 million, while red emitter sales (used by Samsung) decreased by $1.9 million.
Given PANL's rather steady drop on Friday May 10, of nearly $4, at its current price PANL appears to be an excellent speculative buy. While there are uncertainties, PANL has plenty of room for growth in the next couple of years as the OLED industry continues to thrive, and after reading through its recent results I do not see any major concerns that were not already present.