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Why Universal Display (PANL) is a SHORT !

|Includes: Universal Display Corporation (OLED)

Why PANL is a SHORT .


Due to false and misleading rumors about OLED being the technology that was to go into the new Apple iPad, Universal Display(NASDAQ:PANL) was up 40% over a 2 month period. We would take this opportunity to sell a long position or build a short position.



  1. Why was the rumor false and misleading.
    1. First off, Apple introduced the iPad yesterday, and the iPad uses IPS, a variant of LCD, not OLED


    1. Second, and most importantly to anyone who does fundamental research, and who is not a wild speculator, is of course the truth. Channel checks indicated what the Managing Director of the OLED Association, Barry Young, told the press two weeks ago,


 “The problem with the recent rumor that Apple is hoarding 10-inch OLEDs, Young explained, is that "there's no real production of 10.1-inch panels" for anyone to hoard. If anyone were to produce a 10.1-inch panel, then it would have to be for a specific order. "I haven't seen any of the OLED suppliers commit to that yet," Young said of a hypothetical 10.1-inch panel production run.”


The rumor was a complete fabrication, and as we said above, a reason to sell PANL. 


  1. Valuation: - Now that we’ve put the rumors to bed, what’s this worth. Here’s where it gets interesting.


    1. There have been two comparable companies purchased. The first was Cambridge Technology (Symbol OLED). Cambridge was purchased in 2007 by Sumitomo Chemical for $285m. Cambridge’s license revenue was slightly greater in 2007, than PANL’s license revenue is NOW.


    1. But that was 2007, what about now….LUCKY US….Kodak just sold its OLED business to LG in December 2009. Kodak actually just disclosed the sale price today (1/28/10), so this is hot off the press. According to KODAK


                                                               i.      “…agreed to sell assets of its OLED group to Global OLED Technology LLC, an entity established by LG Electronics, Inc., LG Display Co., Ltd. and LG Chem, Ltd…Fair value of the assets sold was estimated using other competitive bids received by the Company. Accordingly, $100 million of the proceeds was allocated to the asset sale” (Exhibit 99.2, 8k 1/28/10)


So $100m is what the comparable business went for TODAY. Seems like the 2007 asset bubble was popped.


PANL is trading at a valuation of $428m today. We think its at least 50% OVERVALUED.


  1. Patents and Partnerships and THE CATALYST
    1. Samsung is PANL’s largest customer and their contact ends THIS JUNE. For those of us who want a catalyst, watch for the end or restructuring of their contract with their largest customer.

                                                               i.      “8.1     Term. Unless otherwise extended by mutual written agreement of the parties, the term of this Agreement (the “Term”) shall commence on the Effective Date and shall continue until June 30, 2010, or through the date on which this Agreement is terminated as permitted hereunder, whichever occurs sooner. Unless otherwise expressly agreed in writing by the parties, all licenses granted under this Agreement shall expire immediately at the end of the Term.”


PANL has to renegotiate terms with their largest customer. While only a few million in license to show for it, and now a potential need to renegotiate that, we expect PANL’s numbers will get worse.


    1. Patents expiring: PANL’s first set of patents from MOT expire 2012:


“In September 2000, we entered into a License Agreement with Motorola whereby Motorola granted us perpetual license rights to what are now 74 issued U.S. patents relating to Motorola’s OLED technologies, together with numerous foreign counterparts in various countries. These patents will start expiring in the U.S. in 2012”


The second set expire in 2014:


“We exclusively license the bulk of our patent rights, including our key PHOLED technology patents, under an Amended License Agreement we executed with the Trustees of Princeton University and USC in October 1997. Based on Dr. Forrest’s transfer to the University of Michigan, in January 2006 the University of Michigan was added as a party to this agreement.  As of December 31, 2008, the patent rights we license from these universities included 214 issued and pending patents in the U.S., together with numerous counterparts filed in various foreign countries. These patents will start expiring in the U.S. in 2014”


The final set of PHOLED patents  expire in 2017:


 “…PHOLED technology patents licensed from these universities will not start expiring in the U.S. until 2017”


With 2, 4, and 7 years left on their patents, we can’t see how any company would pay more than $100m for a money losing business, whose revenue and earnings will NEVER generate a rate of return to even cover the $100m.


Risks: OLED’s will certainly grow in popularity, and the potential for PANL to earn license revenues has the possibility of increasing. Unfortunately, PANL is a small bit player in an industry that will be commoditized almost immediately. 


Author is short PANL.

Disclosure: Short PANL