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SPECIAL ALERT: Calling this Disruptive Technology Company back up to the Select List

SPECIAL ALERT: Calling this Disruptive Technology Company back up to the Select List

 

  • We are issuing a Buy on shares of Universal Display (OLED), a Disruptive Technology company, with a $175 price target.

This morning I am calling shares of Universal Display (OLED) back up to the Tematica Investing Select List on reports from South Korea’s ETNews that Apple (AAPL) intends to fully transition its iPhone line up to organic light emitting diode displays with its 2019 models. As the organic light emitting diode  industry continues to ramp capacity in order to meet full demand by Apple and others, I expect to see pricing become more favorable for Apple and others, which should help restrain iPhone price creep in 2019 and beyond. As a reminder, the price of the iPhone X is one of the most cited reasons for its high price point, with one of the key reasons for that price tag being the cost of the organic light emitting diode display that is currently sole sources from Samsung.

As a reminder, Tematica’s Disruptive Technology investment theme focuses on companies that upend existing business models as new technologies come to market. I see Universal Display and its organic light emitting diode technology doing just that to the display industry and eventually the lighting industry as well, just the way light emitting diode displays did. These disruptions can take time and are often filled with setbacks that punish stock prices, much like we have seen with OLED shares over the last several months. As those setbacks fade, however, the adoption resumes and the Apple news suggests that is about to happen for organic light emitting diode displays, a major positive for OLED shares.

Being cautious as OLED shares may get ahead of themselves in the near-term

I expect OLED shares to jump on this news, perhaps even get a tad ahead of themselves in the near-term, but I will keep in mind the ramp for Apple’s 2019 iPhone models will begin in earnest in roughly 12 months from now. During that time, I expect current industry capacity issues to be digested and additional capacity added, which will also be a positive for the display equipment business at our Applied Materials (AMAT) shares.

I point this out because it’s still widely expected that Apple will introduce three new iPhone models this year with some combination of organic light emitting diode and liquid crystal displays (LCDs). Some reports suggest Apple has scaled back volume expectations for iPhone models with organic light emitting diode displays this year in favor of lower cost LCD ones, likely to help it regain share with more affordable models.  In my view, the push-pull between the lineup display choices between this year and 2019 likely reflects a combination of sufficient organic light emitting diode capacity for Apple’s full iPhone lineup and near-term pricing for the displays.

What this means is there are likely to be fits and starts for Universal Display along the way as other smartphone and device manufacturers incrementally chew up existing industry ahead of the 2019 Apple ramp. Should this pan out, it will give us the opportunity to scale into this OLED position, potentially at better prices.

In terms of sign posts I’ll be watching over the coming quarters, organic light emitting diode industry capacity utilization data, new order metrics from Applied and smartphone display choices by other top competitors such as Samsung, Huawei and others.

A conservative price target… for now

With the add back of OLED shares, I am instilling a price target of $175, but as we did before I will continue to monitor the speed of organic light emitting diode adoption and adjust that target accordingly in the coming months.

While some may ask questions over that 51x price to earnings multiple on currently expected 2019 EPS of $3.42 per share I offer two thoughts. First, as the Apple ramp unfolds, odds are 2019 EPS expectations will move higher. Second, even if those 2019 expectations don’t move higher, which is unlikely, OLED shares are currently trading at a price to earnings growth (PEG) ratio of 0.35 based on the compound annual earnings growth rate of 82% over the 2015-2019 period. My $175 target equates to a PEG ratio of 0.6 on current 2019 EPS expectations. In my view, the Apple news is the catalyst that will move shares higher, but it will take the expected ramp becoming a reality that will push the shares closer to a PEG ratio of 1.0 over the coming several quarters.

  • We are issuing a Buy on shares of Universal Display (OLED), a Disruptive Technology company, with a $175 price target.

 

OLED: This technology will be a marathon, not a sprint

OLED: This technology will be a marathon, not a sprint

Shares of organic light-emitting diodes display chemical and intellectual property company Universal Display (OLED) have been hard hit this past week, falling more than 17% through last night’s market close from a high of $208 per share back on January 18, 2018. While a drop such as this can be hard to swallow, maintaining context and perspective is always important and the reality is the shares have simply retraced back to their mid-December level. Clearly, OLED shares were a strong performer closing out 2017 and the first few weeks of 2018 as data showed robust iPhone X sales in the December quarter.

The recent drop in OLED shares, however, reflects growing chatter across Wall Street over lower iPhone X shipments to be had in the coming quarters. While we are less than thrilled with the pullback in OLED shares, we also recognize that suppliers, direct or indirect, that live by the Apple, can be hit by the Apple. It’s also quite true that the late December-early January move pushed OLED shares into over bought territory.

Here’s the thing, while many are focusing on Apple as the main thesis behind the push in Universal Display share price, the reality is we are still in the early innings of organic light emitting diode display adoption. Other devices and applications — TVs, smartphones other connected devices interior automotive lighting, and eventually general illumination — are still just beginning to incorporate this Disruptive Technology. Rather than focus on quarter to quarter moves by a well-known adopter, we will continue to play the long-game when it comes to organic light emitting diode display adoption and in turn, OLED shares.

For subscribers that have missed the run in OLED shares thus far, I suggest holding off adding the shares until Apple reports its December quarter results on Feb. 1 so any and all bad news to be had is priced into the shares. If the group think on iPhone X shipments is right, it will offer a great long-term entry point for OLED shares.

  • Our long-term price target ahead of any tax reform benefit to be had remains $225.
Applied Materials serves up a better than expected 2017 Analyst Day

Applied Materials serves up a better than expected 2017 Analyst Day

Yesterday was a big day, and while you may be thinking about the headlines surrounding the revealed GOP tax plan I’m talking about the very upbeat 2017 Analyst Day held by Disruptive Technology company Applied Materials (AMAT). I expected the company to deliver a bullish take on the health of its end markets, but candidly it was even stronger than expected as the company offered not one, not two, but three-year guidance. That’s right it offered its take on 2020 with earnings of $5.08 per share and announced a new $3 billion share repurchase program.

As we are fond of saying here at Tematica, context is key and that 2020 EPS of $5.08 compares to consensus EPS of $3.20 this year and $3.60 next year. Continuing the context, adding the new $3 billion buyback program to the mix brings the total outstanding buyback to roughly $4 billion. At current share price levels, ls the company could buy up to 81.6 million shares, roughly 7.5% of the total outstanding share count. As one might suspect, the underlying strength of this outlook lies in robust chip demand not only due to smartphones but also ramping Internet of Things applications, big data and artificial intelligence (A.I.) that are part of our Connected Society and Disruptive Technology investing themes.

Inside its multi-year forecast, Applied is calling for a compound annual growth rate of 23% for its Display business. In our view confirms the growing adoption of organic light emitting diode displays (OLEDs) and reinforces our bullish stance on Universal Display (OLED) shares. When we first introduced Universal Display shares, we compared it to the transition to light emitting diodes that took several years and also started in mobile phones but expanded into other applications as industry manufacturing capacity rose and prices declined. We continue to see the same evolution happening with OLEDs, and that should drive demand for Universal’s chemicals as well as expand its high-margin intellectual property business.

In sum, what was expected to be a positive development for both Applied Materials and Universal Display was even stronger than expected. On the back of this more than favorable outlook, we are boosting our price target on AMAT shares to $60 from $55. For now, our price target on OLED shares remains $175.

  • On the back of this more than favorable outlook, we are boosting our price target on Applied Materials (AMAT) shares to $60 from $55.
  • Our price target on Universal Display (OLED) shares was recently raised to $175 from $135, and we remain quite comfortable with that revision.