OLED: What is it?

This technology, already present in our TVs, smartphones and computers, features simpler operation than conventional LCD screens. OLED pixels, composed of organic materials, emit their own light under the effect of an electric current, enabling each pixel to operate independently. This characteristic delivers more vivid colors and superior contrast, surpassing LCD screens where the image depends on constant backlighting. What's more, the streamlined design of OLED technology enables the production of thinner, lighter, more energy-efficient and even foldable screens.

A winning business model

Universal Display Corporation is a pure player in a disruptive market still in its infancy. Competition comes mainly from LCD manufacturers, where progress is just as remarkable (QLED, MiniLED, SLED, MicroLED, NanoCell, etc.), but without matching the quality of OLEDs. The market - estimated at $46 billion by 2024 - is seeing growing demand from electronics giants to integrate this technology into a variety of consumer devices. The great potential of this market lies in the democratization of OLED displays, which should move from a high-end segment to a more accessible market as production ramps up.

Backed by 30 years' experience and nine strategic acquisitions, UDC has consolidated its position thanks to a proven business model. Focusing on research and innovation, the company delegates production to its long-standing partner, PPG Industries, while ensuring product reliability and securing patents. Revenues come mainly from the sale of materials (56% of sales) and royalties from its 6,000 active patents (41% of revenues for only 4% of expenses). This super-profitable, low-cost model enables the company to remain independent of its customers' financial difficulties, thanks to long-term contracts and recurring revenues. Nevertheless, it does present a risk: being supplanted by its customers as they gain the autonomy to develop OLED technology on their own, thus becoming potential long-term competitors.

To respond effectively to international demand while keeping costs under control, UDC is adopting a strategy of short circuits. It has recently established a presence in Ireland, South Korea, Japan, China, Hong Kong and Taiwan. This presence in Asia-Pacific is strategic to serve its three main customers: BOE (Beijing Oriental Electronics), LG Display and Samsung. The three account for around 10% of revenues, reflecting a diversified customer portfolio.

A constant instinct for innovation

UDC is not resting on its laurels, and continues to innovate with OLED-derived technologies:

  • PHOLED (Phosphorescent Organic Light Emitting Diode), developed by its subsidiary UniversalPHOLED, is an improved version of OLED using phosphorescent materials for almost total luminous efficiency compared with just 25% for fluorescent OLEDs, offering greater energy efficiency, longer life and brighter colors.
  • FOLEDs (Flexible Organic Light Emitting Diodes) are characterized by their flexibility, thanks to the use of flexible plastic or metal substrates instead of traditional glass, enabling the creation of foldable, curved or rollable displays.
  • OVJP (Organic Vapor Jet Printing) is a method of manufacturing OLED screens that deposits organic materials with great precision, improving image quality and reducing material waste.

The figures: Highly profitable!

UDC is on a linear and stable growth trajectory. Over the 2014-2024 cycle, sales are expected to triple to $661 million, representing a CAGR of 13%. Profitability is even better, with EBITDA up 15% and net income up 18.5% over the same period.

The medium-term outlook is even more promising. According to forecasts, these three metrics should grow by 19.7%, 30.2% and 28.2% respectively, with net margins vacillating around 40%, and operating margins around 48%!

Expected cash flow for 2024 is in surplus at $182.4 million, double year-on-year. Revenue-to-cash conversion is expected to be 27.5%, reflecting a successful business strategy confirmed by the figures, and a remarkable level of profitability. This outlook is logically accompanied by a gradual increase in debt to 3.5 times FCF in 2024, rising to 5 times FCF in 2025, and a heavy CAPEX at 62% of FCF in 2023. The latter is nevertheless set to be halved by next year.

Stock market indicators

UDC has a market capitalization of around $8 billion on Wall Street. Over the past 10 years, the company has performed well on the stock market, with a share price performance of around 450%!

The company has high valuation multiples, given its promising future prospects. Its PER is estimated at 36 times expected earnings for 2024, below the 10-year average of 68.2 times.

The company has a habit of exceeding expectations on quarterly earnings releases, with double-digit surprise rates - with one exception, in Q2 2024, which led to a depreciation of a quarter of its capitalization in one week. A justifiable penalty given its size and valuation. However, with earnings on the rise and a bright outlook, the price correction should not be long in coming.

In conclusion, Universal Display Corporation is a fast-growing small cap. Its business model, based on patenting and royalties, enables it to generate staggering profitability. What's more, OLED technologies are already being adopted in all types of display devices, with productivity among major manufacturers on the rise. These factors could make OLED technology more accessible, and potentially the new standard. This, combined with a payout ratio of around 30% - excellent given the company's growth phase - and the current price position, make UDC an attractive stock to include in a portfolio for investors wishing to position themselves in modern technology. However, a number of risks should be noted:

  • Small cap + high valuation = no room for error in earnings releases
  • Dependence on the smartphone and electronics market
  • Royalty model entails risks, including turning customers into future competitors.
  • Strong customer base in Asia-Pacific, where the current economic situation is uncertain, in addition to currency risk.