Universal Display (OLED 96.44, -33.21, -25.62%) is trading lower today after reporting disappointing Q3 results and
lowered Q4 guidance. Investors have been betting on a turnaround in the OLED
market and it seems like it's going to take longer than expected. The company
specializes in what's known as organic light emitting diode (OLED) technology
for the display and lighting industries. It licenses its technology to makers
of TVs and consumer electronic devices, including smartphones and tablets.
2017 was a record year for revenue thanks to a multitude of new agreements and new OLED consumer electronic products. Fast forward to 2018: Demand has been weaker than expected for OLED products. The hope had been that 2H18 and 1H19 would mark the turning point in the industry, but that's still unclear. Let's dig into the quarter a bit.
Turning to the Q3 results, EPS rose 71% Yr/yr to $0.48, but that was well below market expectations. Revenue rose 25.7% yr/yr to $77.6 mln, but that also was well below market expectations. The guidance was disappointing also as OLED expects 2018 revenue of just $240-250 mln vs prior guidance of $280-310 mln. That computes to Q4 revenue of just $63-73 mln, so expect a sequential decline in Q4.
So what's going on at OLED? Management did say it "saw a pick-up in the smartphone market, driven by a number of new OLED display launches, including mobile products from Apple, Google, Huawei, LG, Samsung and others. However, the magnitude of the second-half pick-up in material sales is not shaping up to the degree that OLED had earlier forecast."
Looking into 2019, OLED "expects it to be a meaningful year of growth. With the continued proliferation of OLEDs across the consumer electronics market, the introduction of new form factors that will pave the way for new ideas and applications, and new production capacity that is expected to expand the panel maker landscape, coupled with billions of dollars committed to advancing the commercialization of OLEDs, the company believes that OLEDs are poised to become the dominant display technology in the long-term."
There are some lessons to be learned here with OLED. First, it seems that OLED technology itself is not the problem. OLED technology produces a much higher quality picture than LCDs. It also allows for vibrant colors, thinner screens, and less power consumption. This is very popular with consumers in mobile phones and TVs, in particular. The problem is that this is a difficult market to forecast.
Whenever there is a major shift in technology, there are some fits and starts. There are a lot of moving parts: OLED needs suppliers for raw materials, OLED must build capacity, their customers like Apple have to be set up to receive OLED screens etc. It's harder than it sounds and when there is a new technology, there are disruptions.
Bottom line, OLED technology will continue to take more and more market share in the display market. When it will all come together is proving to be difficult to predict. OLED says 2019 will be a nice growth year and it probably will, but that may be because they are lapping a rough year in 2018. The good thing about OLED is that its day will come, not exactly sure when but it will come. Also, it's profitable and has a stellar balance sheet with $494 mln in cash/inv, or $10.52 per share, with no long-term debt. The company is not going out of business and that balance sheet should help protect on the downside.
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