Universal Display: Buy The Dip
- Stock down more than 40% from 52-week high.
- Guidance deserves another look.
- The future of technology remains here.
It's been a rough couple of months for shares of Universal Display Corp. (NASDAQ:OLED). As seen in the chart below, shares are now down more than 40% from their yearly high as the narrative surrounding OLED technology has shifted quite a bit. While the latest leg down came after disappointing guidance at the recent earnings report, I think the name is definitely worth another look at these levels.
(Source: Yahoo! Finance)
When consumers think of organic light emitting diode ("OLED") technology, the first thing that comes to mind recently is Apple's (AAPL) iPhone X. The smartphone was a major shift for display technology for Apple, switching to an OLED screen from a traditional LCD one. As concerns have built that iPhone X sales may not have been as strong as some hoped, shares of Universal Display have sold off quite a bit. This year, some rumors suggest Apple may launch two new OLED powered phones.
However, it's not just smartphones that use this technology. As you can read from the latest conference call transcript, OLED technology powers tablets, televisions, etc. The company recently signed a new supply deal with Samsung (OTCPK:SSNLF) that will go through 2022. Sales of these products are soaring, which is why Universal Display saw record revenues in 2017. While 2018 will see a growth slowdown, things are expected to pick back up next year.
That gets me to the latest earnings report. The company blew away estimates, highlighted by a revenue beat of more than $15 million, while also reporting a solid 8 cent beat on the adjusted bottom line. Unfortunately, as the link in my opening detailed, sales guidance for 2018 was a bit light, with management calling for $350 million to $380 million versus the street at $397.30 million. That gets me to the following quote from the conference call:
Typically, the fourth quarter is seasonably soft but the recent quarter was a record high quarter. Based on our current order activity and prior projections we believe that about $15 million to $20 million of phosphorescent emitters purchased in the fourth quarter of 2017 maybe the result of pull-in activity from the first quarter of 2018. This estimated pull-in which we believe may be related to inventory building is anticipated to weigh on first quarter results and therefore impact our 2018 guidance.
If we were to adjust guidance upward by $15 million, a new range of $365 million to $395 million wouldn't look as bad, although that also means that Q4 would have been in line to barely above. The good news is that this allows us to reset expectations, with analysts now calling for less than $369 million, and that average still includes a few analysts that likely need to come down still. In the end, the company ended up with nearly 70% revenue growth last year, which was going to be a high bar for comparisons this year.
Another thing I like about this company is its strong balance sheet. As you can see in the 10-K filing, total cash of $132.8 million is itself more than the company's total liabilities of $120.9 million. That doesn't even include more than $287 million in short-term investments. The company had free cash flow of more than $100 million last year. This financial flexibility will allow it to continue growing, and management talked about substantially increasing production on the conference call.
In conclusion, Universal Display may have issued poor guidance, but I think that's just a short-term view of things. Some investors are hoping that management will raise its forecast throughout the year, kind of like what we saw in 2017. What I am telling you is that the stock has likely adjusted to the new forecast, as we are now trading for just $122 compared to a 52-week high of $209. Universal Display has a bright future ahead of it, no pun intended. I think the street has reacted a bit too much to the downside, providing investors an opportunity.
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