How Could OLED Screens Shake Up Smartphone Supply Chains?

The evolution of technology is breathtaking, going beyond the imagination of even the most brilliant human minds. One technology used for creating digital displays in devices ranging from TVs to computer monitors (to mobiles to hand-held consoles to PDAs, etc.) is now making waves and is adopted by many technology giants, as they warm to its innovative, cost-effective and utility appeal.

The Technology

OLED, which is the acronym for Organic Light Emitting Diodes, are made from organic materials that emit light when electricity is applied through these. This technology has an edge over LCD, because they do not require backlight and filers unlike LCD displays.

Consequently, they are:

• Simpler to make.
• Thinner.
• More efficient.
• Have great picture quality.
• Brilliant colors.
• Infinite contrast.
• Fast response rate.
• Wide viewing angles.

For those hard pressed for space, there is salvation in sight. These are in fact flexible and foldable.

Commenting on the technology, UBS said in a research note released last Friday that OLED is at a tipping point for revolutionizing consumer interfaces. The firm expects rapid OLED propagation within the broader smartphone market.

OLED To Rejuvenate Apple's Products' Design

Analyst Nicolas Gaudois sees Apple Inc. AAPL's adoption of OLED displays in 2017 as rejuvenating Apple products' designs and providing the impetus for a re-accelerating replacement cycle. The analyst sees substantial upside to his forecasts, given the emergence of virtual reality, which OLED is best suited to, and the possibility of foldable devices branching into a totally new product category. The analyst also believes flexible OLED will be used significantly in automotive, commercial and other applications.

OLED-Boost To iPhone

UBS expects an above-consensus OLED-induced re-acceleration in the iPhone cycle for Apple. Specifically, the firm expects 10–13 percent year-over-year iPhone unit growth in calendar year 2017 and 2018 following 8 percent growth in calendar year 2016. The firm estimates a 3–5 basis point-boost from OLED to its smartphone shipment estimates, with component suppliers benefiting by $4 billion to $7 billion per year.

Assuming a 67 penetration for OLED smartphone shipments in 2020, up from 20 percent in 2015, the firm estimates shipments of 1 billion for these smartphones. UBS also noted that the bulk of the OLED manufacturing equipment orders are from Samsung, with the company to be Apple's sole supplier in 2017. In 2018, Apple will have LG Display Co Ltd. (ADR) LPL as its second source, the firm added.

Long Investment Cycle For Equipment Makers

Based on this assumption, UBS expects Apple might come out with two iPhone models in 2017 using OLED. Although Chinese panel makers are expected to contribute to the bulk of OLED investment, the firm is of the view that competitive gap with Samsung/LGD will remain for some time. UBS estimates that OLED panel makers have a long investment cycle before them, as they might have to expend another $40 billion in manufacturing equipment by 2020, which is not being currently discounted by equipment stocks.

Winners Vs. Losers

• UBS recommends Apple and suppliers, including Taiwan Semiconductor Mfg. Co. Ltd. (ADR)TSM, Pegatron, Sony Corp (ADR)SNE, Alps, Sumitomo Chemical and Largan into 2017.
• Among OLED equipment suppliers, the firm recommends Applied Materials, Inc. AMAT and Wonik IPS.
• UBS initiated Viatron with a Buy rating.
• The firm initiated AP Systems at Neutral, citing valuation.
• Among panel makers, UBS termed Samsung and LCD as winners.
• LCD panel vendors such as AUOM Innolux AND JDI may lose out in the transition, according to UBS.

Apple: Buy, $127 Price Target

Steve Milunovich estimates 2017 earnings per share of $9 for Apple, and for 2018, he estimates $10.50, representing 16 percent growth. The analyst believes Apple shares do not discount potential 2018 growth, capturing OLED refresh cycle for the iPhone.

UBS Remains Positive On Samsung Shares

UBS estimates production of 120,000 sheet per month in Samsung Display's A3 fab by the end of 2017. The firm expects OLED to contribute 14 percent of Samsung Electronics' profit in 2018.

The firm remains positive on Samsung, given its expectations that Samsung can execute well enough to recover its smartphone business in the longer term, its competitive lead in NAND flash, favorable DRAM cycle in 2017 and shareholder returns will continue to improve.

Ratings And Price Targets

• Apple: Buy, with $127 Price Target.
• Applied Materials: Buy, with $35 Price Target.
• LG Display: Buy, with Won39,000 Price Target.
• Samsung: Buy, with Won1,850,000 Price Target.

Image Credit: By Bin im Garten (Own work (own picture)) [CC BY-SA 3.0], via Wikimedia Commons