Quick Summary

Universal Display - Nasdaq OLED - designs and develops organic light-emitting diode (OLED) products. OLED is the latest and greatest technology used to create consumer electronics displays in smartphones, TVs, smartwatches, tablets, laptop computers, etc. OLED provides several advantages over traditional LCD technology: better power efficiency, wider viewing angle, expanded contrast ratio (particularly blacks), etc.

Universal Display makes revenue in 3 ways. Material sales for manufacturing OLEDs makes up about 54% of revenue. 43% of revenue is from patent licensing and royalty revenues from the OLED manufacturers (Samsung, LG, etc.). The final 3% of revenue is from contract research agreements.

Does The Company Have Rising and Recurring Revenues?

YES. Universal Display's average 3 year revenue growth rate may not look particularly attractive, at 8.5%. But this includes the pandemic year of 2020, which saw dramatic disruption to manufacturing output, and a 26% revenue decline in 2018 due to a one-time accounting basis change. However, Universal's sales are set to rebound in 2021 (projected 30%+ growth), and 5 year growth rates are expected to be closer to that figure. This is a massive market. In smartphones alone, OLED penetration is still only about 50%. In TVs it is under 15%, and in solid state general lighting applications, OLED is in its infancy. Overall, the OLED panel market is worth $38 billion today, and expected to reach $73 billion by 2026 - an excellent 13.5% compound growth rate. Universal Display's revenues are recurring, with royalties on each device with an OLED screen sold, and consumable materials that need to be purchased over and over again to produce new devices.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. Universal Display's primary competitive advantage is its portfolio of over 5,000 licensed patents in the OLED space, giving it a REGULATORY BARRIERS moat. While this protects sales, regulatory moats are one of the weaker forms of protection, as they can often be circumvented and even disappear entirely if a court case goes the wrong way. Customer concentration is also a concern, as Samsung, LG, and BOE as a group comprise the vast majority of the company's revenue (close to 85%). A loss of one of these customers to a competing display technology would be very impactful. While Universal Display has a strong moat in the OLED space, new and competing display and lighting technologies continue to pop up, including new variations on established LCD and LED techs (QLED, microLED, miniLED, etc). In the technology space, new inventions can lead to massive disruption of established firms like Universal, over the long term. Finally, consumer electronics sales can ebb and flow with economic conditions and product cycles, leading to a somewhat "lumpy" revenue growth rate that results in a volatile stock price.

GreenDot Rating: YELLOW

Universal Display is a leader in a large and rapidly growing market, with a nice recurring revenue business and some protections in the form of a large patent portfolio. If OLED continues on its trajectory to dominate the wearable, smartphone, and TV markets, the company should perform quite well. If OLED makes any kind of inroads into solid state lighting, the sky is the limit! But there are good reasons for a YELLOW (somewhat attractive) rating. The customer concentration risk is real, as is the risk of technological disruption from novel display offerings, which are always under development. Universal is a great example of a YELLOW stock - very good potential, but a lot of question marks and uncertainty over a long-term holding period.