A Closer Look At Universal Display (PANL)

Transparent displays have had a bit of airtime lately. Let's take a look at the public company mentioned by Gizmodo:

The Story: Universal Display Corporation (PANL) is an outgrowth from Princeton University centered on OLEDs (Organic Light Emitting Diodes). OLEDs are one of the three big replacement technologies coming on now and in the next few years for televisions and other light sources (The other two are LCD's and SEDs). You are probably familiar with LEDs (Light Emitting Diodes). OLEDs differ in that the light source is an organic polymer. The technological virtue of this is that organic chemistry has a very rich set of controls that chemists have been working with for many years. The disadvantage is that so far the compounds have been difficult to make, and have had limited lifetimes. The promise is easily customized colors with long lifetimes, low power consumption, easy manufacturing, and tailored physical properties. Some of that promise is starting to come true.

Universal Display Corporation has a number of interesting products in this regard, including transparent OLED displays (allowing a transparent window to be an information display), Phosphorescent based OLED displays (allowing greater color control and lower power consumption), and flexible OLED displays (allowed displays in non-traditional places such as hats and shirts, or roll-up sheets). All of these products are in various stages of development ranging from commercialization to research phases.

This is a hot sector, but like fuel cells and solar cells, the basic idea has been around for 25 years or so with lots of failure. Promise counts for nothing, the only thing that matters is actual production. What this means is that sinking money into display R&D is as good as burning it. One has to look for proof that all obstacles have been overcome, i.e. production. So, their story sounds good, but is there any meat to it?

The Company: We'll have to use the 10-Q ending on 30 Sep 2005 as the latest available, although I would expect Q4 2005 available soon. For Q3 2005 they had $3.3M revenue and $6.8M operating expenses. Of that revenue, none of it was from commercial enterprises. It was 45.5% contract research, 40% chemical development, 13% other development, and 1.5% royalties and licensing. These guys are a research lab with no history of commercially exploiting their developments (as evidenced by their tiny royalty payments). They may have good products, but 1) that is not reflected on their income statement, and 2) nothing on their income statement demonstrates that they can profit from their products.

In addition, their expenses are just about double their income. They have a big ol' chunk of cash (ca. $33M) on their balance sheet, so their operating loss doesn't endanger their survival, it just shows they are not a business, but rather an R&D outfit. Some people like betting on these sorts of things (the whole biotech sector is like this), I don't. Mostly what happens in research is things don't work. Plus there is a huge difference between having products and having a business.

The Stock: At a Y/Y decreased net loss $0.08, and a Q3 2005 net loss of $0.39, the current improvement rate implies 5 years till break even ($0.39/$0.08). There are a bunch of other ways to look at their numbers, but none point to anything compelling as an investment. At a current (1/30/06) stock price of ca. $13.50 (editor's note: PANL now trading at $12.20), I have no idea what people are paying for, and they probably don't either. The only reason to pay that is on the promise of some imminent commercial breakthrough. If they were the only one in this field, and it was a new field, a certain portfolio allocation may be justifiable for a risky upside. Given the actual situation, this stock is all story, with lots of competitors. Pass or short.

By the way, their public float increased 7% Y/Y - that is, they gave away 7% of the company in one year. The only thing I can figure is that these guys are public in order to use their stock for employee incentive/enrichment.

[Article originally published on 1/30/06.]

PANL 1-yr chart:

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