Samsung And LG Move To ALD For Flexible OLEDs, Could Push Applied Materials Out Of The Market

| About: Applied Materials, (AMAT)
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Summary

Samsung Electronics and LG Display have indicated a move to atomic layer deposition for encapsulation of flexible OLED displays.

Applied Materials makes competing equipment and the move by these OLED titans will eliminate the need for equipnent from Applied Materials.

Veeco may be the main beneficiary as Samsung has been developing its encapsulation process on Veeco equipment.

Both Samsung Electronics (OTC:SSNLF) and LG Display (NYSE:LPL), market leaders in OLED displays for smartphones and TVs, respectively, have completed R&D on the use of ALD (Atomic Layer Deposition) as the technology choice to encapsulate OLEDs, usurping PECVD technology offered by Applied Materials (NASDAQ:AMAT), according to a September 23, 2016 report in Korea IT News entitled "Samsung and LG Planning to Apply ALD Technology into Flexible OLED."

The report notes that Korean companies Jusung Engineering, WONIK IPS, AP System and TES have ALD technologies and equipment for displays. However, Samsung has been developing encapsulation on Veeco's (NASDAQ:VECO) FAST-ALD system since 2013, so it's unclear to what companies the orders will go.

What's clear is that the PECVD encapsulation orders placed with AMAT will be pushed out or more likely cancelled. In its Q2 2016 earnings call, AMAT reported that it had received $700 million in orders. I discussed this in a May 24, 2016, article in Seeking Alpha entitled "Applied Materials Stock Bounced On Display Orders - But Is It Sustainable?"

I also noted in a September 21, 2016, article in Seeking Alpha entitled "Capex Cuts At Samsung Could Cause Pushouts In Display Equipment," indicating that Samsung would be cutting capex spend in the display section. It is apparent to me that Samsung will be cutting orders for PECVD to finalize the development of ALD coatings.

Samsung is the only supplier of flexible OLEDs for smartphones and encapsulation coating is required on these displays to protect OLEDs from water and oxygen (glass barriers are used in rigid OLEDs). LG Display is Apple's (NASDAQ:AAPL) supplier of flexible OLEDs for the Apple Watch.

ALD offers advantages over PECVD. ALD-deposited thin films offer better water and oxygen protection and a thinner film is needed to provide the same protection as thicker PECVD-coated films. The fact that ALD film is a slower coating process is balanced by the need for a thinner film.

Investor Takeaway

There are several Chinese companies making OLEDs, but they are in the early stages of production and are rigid, not requiring encapsulation. By the time these companies have moved up the development and production schedule for rigid OLEDs and are ready to move to flexible, ALD will be a well-tuned technology, eliminating PECVD.

VECO may be the main beneficiary of the move by Samsung. Veeco's equipment was first purchased by SSNLF in 2013.

In AMAT's Q3 2016 conference call, CEO Gary Dickerson stated:

"We're still in the early innings and this smartphone transition to OLED. And the display is a key differentiator for mobile devices. So in the near term, near term being over the next couple of years, this is going to be a great driver for us."

CFO Bob Halliday noted:

"We think in OLED, they're in pretty early innings on the transition to OLED on the phones. In fact, the orders we're showing that we've been booking and we have some more to come, those things will ship through 2017 and to early 2018."

Unfortunately for AMAT, although OLED is in the "early innings," it's game over for its products.

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