Universal Display (NASDAQ:OLED) is causing a lot of headlines lately. While some analysts are very bullish on this small-cap OLED developer due to the OLED market's fast projected growth and the company's strong IP and solutions, other analysts are much more cautious, citing concerns about IP challenges, expiration of certain patents in 2017 and slower-than-expected OLED growth.
There are many articles that explain the company's business and try to forecast the future. In this article, I aim to do something different. Here I will explain the outrageous potential of this investment. This will be a very rough sketch trying to understand what Universal Display will be worth if everything goes according to plan - or even better. As every investment is a bet, here I will try to compute what the jackpot looks like - what will happen if flexible displays and OLED TVs grow really fast? Yep. This is going to be a fun article.
Before we begin - this article does not represent the most likely scenario, or even a very likely one at that. There are many risks factors but here I will ignore them all. I know they exist and I'm sure that some of them will actually hit UDC, no need to remind me of that. Even though I'm trying to be as optimistic as I can, I tried to stay close to reality and not go too wild. I'm not a financial analyst and I'm even not a very good investor, but I have been following the OLED market for over 10 years, so at least there's that.
The OLED market in 2013
I decided to try and estimate the best OLED market scenario for 2018. To calculate the effect on UDC, I will use 2013 as the basic OLED unit.
In 2013, UDC generated $146.6 million in revenues. Samsung Display (SDC) paid a license fee of $40 million. The rest is material sales, out of which SDC probably bought about $85 million worth of red and green emitters and green host materials. During 2013, SDC produced about 200 million OLED displays. Most of these were 5" in size (for the GS3, GS4 and GS5 mobile phones). Some were larger (the 5.7" one in the Galaxy Note for example) and some were smaller. To make things simple, I assume that the total SDC output in 2013 was equivalent to 150 million 5" displays, all using red and green emitters and green host materials from UDC.
For the sake of my analysis, I assume that UDC's revenue per OLED meter produced in 2018 will be the same as in 2013. This is not an easy assumption to make. On one hand, volume discounts will kick in, which will lower the green materials revenue (the red materials will not be discounted further, according to UDC in 2013). It's also possible that some companies will adopt green host materials not produced by UDC. On the other hand, by 2018 it's possible that UDC will have developed and commercialized a blue PHOLED (UDC's proprietary and highly-efficient phosphorescent OLED materials). UDC may also earn revenue from other OLED materials by that time (for example encapsulation materials, HIL/HTL materials, etc.). Some of those OLEDs panels will probably be based on soluble OLED materials by 2018. The processes used to make such displays are more efficient than evaporation processes, but we do not know how much UDC will charge for those soluble PHOLEDs.
The OLED market in 2018
So let's look at 2018. What will the OLED market look like, compared to 2013?
SDC small/medium OLED capacity in 2018 will be much larger than what it used to be in 2013. The Korean company now produces displays for phones, tablets and wearable products. OLEDs are also being used in laptops and monitors - so average display size is getting larger.
In November 2013, SDC presented slides in which they expect flexible displays to reach 40% of the mobile display market, which will be valued at $50 billion, in 2018 (these numbers originated from DisplaySearch). Let's assume DisplaySearch and SDC were right, so at $20 billion, it will represent about 2X the 2013 capacity (which is about $10 billion in revenue). I still think this is overly ambitious, so let's assume that SDC's flexible OLED capacity in 2018 is similar to its regular capacity in 2013.
When Samsung (OTC:SSNLF) launched their new OLED tablets, a market research firm said they expect them to ship 10 million OLED tablets in 2014. That's 14% of Samsung's total tablet sales of 80 million in 2014. Let's say the percentage grows to 50% in 2018, and Samsung's tablet sales will grow to 100 million. So it's 50 million OLED tablets in 2018. At an average size of 9", this is equal to 160 million 5" displays - or 1X 2013 capacity.
By 2018 it's safe to say that Samsung will also adopt OLEDs for laptops and monitors, which should bring another 1X as these are very large displays. When OLEDs start to enter the medium display market for real, it will require a large increase in capacity.
Of course we should expect mobile phone display shipments to increase too, let's say to double in 4 years. So it's another 1X. Wearables will also increase dramatically by 2018, but this will probably not be meaningful in terms of display area. Finally, foldable OLEDs (that should appear next year) may change the game here completely. Perhaps the mobile-phone and tablet market will converge by 2018, as everyone will use foldable OLED devices. This is great news as it means that everyone will have a 10" display in his pocket instead of a 5" mobile phone.
In total we have five times the 2013 capacity (1 from current capacity, 1 from tablets, 1 from new mobile phone capacity, 1 from flexible displays, 1 from laptops and monitors). But I'm being conservative, so I'm assuming the capacity in 2018 will be 4X the capacity in 2013.
LG Display is also mass producing flexible OLEDs, used again in mobile phones, tablets, wearables and the automotive market. LGD's flexible capacity is the same as SDC's OLED capacity in 2013.
Several new companies are also mass producing OLEDs. In Taiwan and Japan, we have AU Optronics, Japan Display and Innolux - with a capacity that is similar to SDC in 2013.
In China, we have many companies that mass produce small/medium OLEDs - including EverDisplay, Tianma, Visionox, BOE and Truly and perhaps other players too. In total, the whole Chinese industry's small/medium OLED capacity is double SDC's capacity in 2013.
To summarize, in 2018, the OLED small/medium display capacity has grown to become eight times larger than in 2013. As I said before, most of the growth came from flexible displays, tablets (including foldable tablets), laptops and monitors.
|Capacity (2013 OLED units)||Source|
|1||SDC flexible OLEDs|
|1||SDC tablet displays|
|2||SDC mobile phone displays|
|1||LGD flexible OLEDs|
|1||AUO, JDI, Innolux|
In 2015, the OLED TV finally took off, with LG taking the clear lead. By 2018, OLED TVs are priced pretty much on par with LCDs, so OLEDs are quickly taking over the TV market. LG Display is making 25 million 55" OLED TV panels, after converting half of its LCD fabs to OLED ones. Samsung is also mass producing OLED TVs, making 10 million OLED TVs in 2018. All other makers combined (Panasonic (OTCPK:PCRFY)? Sony (NYSE:SNE)? AUO (NYSE:AUO)? Chinese players?) are producing another 5 million OLED TVs.
While most of these TVs go to the consumer market, there are many other applications that take advantage of the OLED image quality, light weight and thin profile. In addition, foldable and transparent OLEDs are starting to appear on the market.
So in 2019, in total, 40 million OLED TV panels are produced worldwide. If I assume the average size is 55-inch, then this is similar in display area to 4 billion 5-inch panels - or 26 times SDC's capacity in 2013. While most of these TVs use an WRGB structure, I assume UDC's revenue per square meter is the same compared to the RGB displays sold today.
OLED lighting has finally emerged in 2016, following Konica Minolta's and LG Chem's mass-production efforts in 2015. Following this several other players joined in full force - including Philips (NYSE:PHG) and OSRAM (OTCPK:OSAGF) and other players in China, the US and Japan. In total, in 2018, 300 million OLED lighting panels are being produced. Each is about the same size as a 5" display panel and so this represents a capacity that is double SDC's capacity in 2013. This market is projected to continue growing quickly, and represents new customers and license fees for UDC.
Universal Display's revenue and income in 2018
License and royalty revenue: It's very difficult to estimate what royalties will look like in 2018. SDC royalties in 2013 were $40 million, and this will grow to $50 million in 2014. I assume SDC's royalties in 2018 will grow to $110 million. That's a faster growth rate than we've seen before - but according to our scenario, the OLED capacity growth will accelerate as well. SDC's capacity grows to be over ten times higher compared to 2013, so a growth in royalties by less than 3X seems fair. UDC will have signed a new license with SDC as the current one ends on 2017.
I think other companies will sign a different structured agreement than SDC did, but it's easier for our calculation to split royalties and material sales completely. If we take SDC as a lead, we can assume the following royalty payments in 2018: SDC - $110 million, LGD - $110 million, AUO+JDI+Innolux: $50 million, Chinese companies: $80 million, Lighting related licenses: $50 million. In total: $400 million in royalties in 2018.
Material sales: Total production capacity in 2018, is 36 times higher than in 2013. This represents revenues of a little over $3 billion to UDC (SDC's material sales in 2013 were $85 million).
Expenses: Let's say general expenses are $200 million in 2018. The company will probably increase its R&D dramatically, face more litigation, etc. But most of the growth will go to the bottom line.
The projected profit in 2018, then, is about $2.1 billion. Again, very rough estimate. Royalties have a 97% profit margin - UDC pays a 3% out of the royalties to a couple of Universities who developed the original technologies. In 2013, the company had a material-sales margin of 67%. I assume the margin in 2018 will be 65%.
|Revenue ($millions)||Profit ($millions)||Source|
|180||174||Royalties from AUO, JDI, Innolux, Chinese producers and lighting companies|
|680||442||Material sales to small/medium displays|
|170||110||Material sales to OLED lighting panels|
|2210||1436||Material sales to OLED TV panels|
You may say this analysis is overly optimistic. It surely is, quite wildly. But on the other hand, there are several wild cards for UDC that I did not take into account here. So these may help to support the revenue and profits I estimated:
- UDC will continue to progress with more efficient and longer lasting red and green emitters, and green host material. UDC will be able to charge more for these materials and this will negate volume discounts for each new material.
- As I said, UDC introduced a commercial blue PHOLED system, which was adopted quickly as it boosts the efficiency dramatically. While this may negate the green host sales loss to other players, this may actually increase UDC's revenue per OLED meter compared to 2013. It's likely that the new blue PHOLED emitter will come coupled with a blue host as well.
- UDC will commercialize and recognize revenues from new technologies, such as encapsulation, deposition (OVJP/OVPD), display architectures (RGBB, RGB monochrome striped, etc.), other process technologies, etc. UDC may also move to develop different OLED stack materials.
- UDC may acquire companies to offer complementary technologies and enhance its IP portfolio.
- UDC will also develop technologies for different industries, using their experience with organic devices. For example UDC may develop and commercialize technologies for organic solar cells (OVPs), quantum dots, printable and flexible devices (a recent company patent described a flexible antenna for example) and other areas.
UDC share value in 2018
As we said, UDC will have a profit of $2.1 billion in 2018. There are 46.5 million shares outstanding as of the end of 2013, so this means an EPS of $45. The company has already generated a huge cash pile of $2 billion by 2018 (even after several acquisitions), or $40 per share. Assuming a P/E of 15, UDC's share price is $40 plus $45 x 15, or $715. That is over 20 times higher than the stock price today.
Note about P/E: UDC's current P/E ratio is about 18. If this scenario plays out, it means growth rate has been phenomenal, and the P/E ratio should go up. On the other hand, by 2018 the P/E may decline due to patent expiration, concerns over further growth and market saturation. So I used a P/E of 15 in my calculations.
If you're a UDC long, this is my highest scenario. I'll say this one last time - I'm sure that my estimates are too high, don't take this forecast seriously. But then again, why not be optimistic for a change? Didn't I say this is going to be fun?
Oh, and one final request - please do not quote this article in 2018 as it might be embarrassing for me... unless of course, I was spot on.
Disclosure: The author is long OLED. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.