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Sterne Agee's Explosively Misguided Take On Universal Display

Sep. 23, 2013 11:47 AM ETOLED6 Comments
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Today Sterne Agee released a report saying that saying that Universal Display Corporation ("UDC"; NASDAQ: OLED) "is expected to be a beneficiary of explosive growth in OLED adoption in the next few years" and that OLED "materials are the most profitable part of the OLED supply chain."* However, Sterne Agee's extremely brief, unsupported statement of a simplistic thesis on its UDC's expectations utterly mischaracterizes UDC's actual position. Despite these "most profitable" and "explosive" labels, recently revealed data shows that UDC is a technologically insignificant player in the OLED supply chain, and UDC's financials should be alarming in their own right, even without an understanding of the precariousness of UDC's "key patent" claims. UDC is experiencing declining year-over-year sales of its central red emitter material (on which it has a supposed monopoly). UDC management's attempts to explain this deterioration in its business have been more and more confusing and repeatedly inadequate.

UDC exists now only as an outgrowth of what happened between 1998 and 2005, based on government-funded DARPA experiments in the 1990s that led to UDC's key patents and UDC being able to wrangle Samsung into an initial multi-year licensing deal in 2005. The only economic value here rests on the perceived value of UDC's key patents to Samsung, which are private and reflect dated unique circumstances. Furthermore, we believe that UDC's most important key patent claims, the basis for its so called "dramatic breakthrough," will be completely revoked after a hearing this November at the European Patent Office Boards of Appeal.

Importantly, Sterne Agee highlighted the new competitive risk for UDC from highly efficient fluorescent OLED materials, which have the same efficiency as phosphorescent materials at "1/10 of the cost," according to Sterne Agee. We believe this is the first sell-side commentary acknowledging this new competitive threat for UDC.

* The Sterne Agee report states:

"UNIVERSAL DISPLAY. As the only publicly traded pure-play OLED company in the U.S, Universal Display is expected to be a beneficiary of explosive growth in OLED adoption in the next few years. POSITIVE DATAPOINT. Organic materials are the most profitable part of the OLED supply chain and represent ~10% of display costs. NEGATIVE DATAPOINT. Dr. Chihaya Adachi from Kyushu University in Japan has invented and is looking to commercialize highly efficient delayed fluorescence materials. Dr. Adachi's technology has been proven to achieve ~100% production efficiency and ~20% external EL efficiency, which matches Universal Display's phosphorescence materials, but at 1/10 of the cost. Usage of Universal Display's phosphorescence materials and exclusive IP are currently key to OLED display technology. Dr. Adachi has the patents to the delayed fluorescence technology and is looking to partner with international chemical companies to commercialize the materials. A startup company is expected to be organized by April 2014."

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