Universal Display (OLED) is now over 17% below its 52 week high. Uncertainty surrounding the company's future income from licensing and royalties persist and a recent downgrade from Canaccord adds fuel to the fire. Is the material makeup of this company akin to gold dust or saw dust? Will it burn? I think so.
Check Your Premises
"Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong." -- Ayn Rand
Of concern is the possibility that many OLED investors are buying the ticker under false premises. They are mistaken in their belief that Universal Display single-handedly created the technology that will change the way we view our world. Universal's recent marketing tactic successfully adds glamour and mystique: in June, they changed their ticker from PANL to OLED and also launched a new domain, udcoled.com.
Without being aware of the following facts, new investors may be mistaking OLED the ticker and company for being the entire OLED industry. While savvy investors are leaving the scene, new investors are purchasing on weakness under the wrong premise.
- Universal did not develop all their technology in-house and did not single-handedly create the market. Universal purchased over 1200 OLED patents from Japan's Fujifilm in July 2012. Fujifilm was in the OLED business for over 10 years.
- The ticker "OLED" used to belong to the U.K.-based Cambridge Display Technology. Japan's Sumitomo Chemical bought CDT in July 2007. Universal recently took over CDT's old ticker.
- The OLED industry is a growth industry with many players. It should be thought of as a world filled with mom and pop dollar stores before Dollarama shows up on the scene. It is still akin to the wild west and the complexity and future developments in this industry are still uncertain. There are no clear winners. This can be confirmed by a visit to oled-info.com. The "Companies" menu along the top of the website will lead you to a listing of assorted subcategories. A quick perusal will show the reader that Universal Display is not a key player in any one area. Consolidation has yet to happen in the OLED field.
- Universal is not behind all the display developments out there. Samsung (GM:SSNLF) and Universal Display are working closely together and it has often been suggested that Universal's revenue is over 70% dependent on Samsung. However, there are other competitors in the hosts and emitters market. To name a few: Merck (MRK) and Dow Chemical (DOW). In Universal's most recent quarter, royalties and licenses accounted for $21.2 million and $20 million was attributed to the relationship with Samsung. If Sammy chooses to go elsewhere, Universal is toast.
- Samsung's success may translate to sales and revenue for Universal but they in no way guarantee that Universal will be able to grow beyond Samsung's reach. China's most popular cellphone and TV brands are all domestic. The Top 12 Mobile Brands in China and the Top 10 Most Popular TVs do not show Samsung coming near the top. This forces the conclusion that Samsung's sales clout will depend on its visibility in North America, Europe, and other parts of Asia. Universal needs to find other partners or forever be the dependent "Yes Man" unable to negotiate a good licensing or royalty deal as it may be the more needier one in the seemingly symbiotic relationship with the Korean powerhouse.
- In future, Samsung may be less dependent on Universal for technology or IP licensing. Its recent purchase of Novaled puts it on par with LG (LG) for being a large Korean mobile phone and display technology firm with considerable in-house OLED knowledge. LG had purchased Kodak's (EKDKQ.PK) OLED patents a few years back. The two companies have been going head-to-head and suing each other over OLED patents. This further confirms that the industry is still in development and while IP is a valuable weapon, its actual firepower is difficult to gage and will be battled in court amongst various parties to the OLED game.
- The color balance of an OLED is worse than an LED due to the blue diode's short lifespan. Also, more power is consumed for white backgrounds (3x the power usage of LCDs). There is still room for improvement. Universal's best selling products are the red and green materials. The company to come up with a solution to increase the blue's lifespan or to tame the power usage of a white background may gain the upper hand. If it is not Universal, we may have trouble ahead. While these problems persist, coupled with the high price tag for the TVs, there is a barrier to widescale adoption.
Understanding the cause of Universal Display's volatility is important. Some may choose to discount Manuel Asensio's articles on SeekingAlpha given the level of technical detail or the author's track record as a short seller. I choose to pursue the truth wherever it may be discussed. Asensio's solid track record as a short gave me reason to do further research on Universal and to draw my own conclusions. It just so happens that though we may have walked down different paths in our research efforts, my conclusion aligns with Asensio's and also Canaccord's.
FRAGILE: Handle With Care
Cellphones and TVs fall under two categories: technology and consumer discretionary. In good times, all stocks that fall into these categories experience a meteoric rise that sometimes make them overvalued. A threat of recession forces consumers to pay more attention to food and shelter and consequently, spend less on fun and games. There is nothing like the threat of job loss to curtail spending. Under fragile economic conditions, a stock such as Universal with a PE of 144.94 is a bubble waiting to pop. With its high institutional ownership of 74.14%, the movement down is swift due to the high volume of sell orders. Yesterday's market action is a case in point. Money managers making changes to asset classes to lower risk and anticipate client withdrawals can make a fool of anyone trying to catch a falling knife.
No Taste for Big Ticket Items Like TVs
A $15,000 Samsung or LG OLED television now going for $9,000 to $10,000 is still no bargain. People do not have plastic with unlimited elastic. A mainstream 55" LED TV is now under $1500 and selling with sufficient volume, especially during holidays. Until prices fall below $2000, there will be no sufficient uptick in purchases. Demand may be there, but the cash or credit to facilitate the purchase at $9,000 and above is not.
While plenty of indicators show the U.S. is experiencing a boom in home and car sales, the trend is not being carried over to things like clothing and electronics spending.
Federal Reserve data shows consumer credit is up and revolving credit is down. While credit is improving, people are also thinking twice about swiping the card. As Reuters reports, credit card use declined for a third straight month.
Consumers across the 10 biggest economies have little confidence in the economy, low tolerance for risk, little interest in borrowing, and hoard cash. This is not good news for businesses looking to make a sale and chalk up another good earnings quarter.
Investors in Universal Display are like modern alchemists. They are trying to make a bundle from OLED. Perhaps, in time, there will be money to be made in OLED (the technology). The concern in the shorter term has to do with the seemingly incorrect choice of vehicle for OLED wealth-building. Universal Display has many competitors, the market is still developing -- and if any money is to be made, more is probably to be made by those who get to name their price. That is, the manufacturers such as Samsung, LG, Panasonic, and Sony. Tread with care: while looking for gold, you may end up with something without value -- saw dust.