Universal Display Is A Pure Play For A Secular Trend That Has Only Just Begun

Deutsche Bank initiated coverage of Universal Display Corporation OLED at Buy with a $135 price target.

Analysts Sidney Ho and Ross Seymore sees Organic LED, or OLED, as one of the fastest growing segments in hardware technology and that Universal Display is a pureplay in this trend, having been positioned with a strong IPO portfolio as well as a supplier of patented OLED materials.

Broadening Adoption

Deutsche Bank pointed out that Chinese OEMs have also started adopting OLED in the past year. The firm thinks the reported adoption of OLED by Apple Inc. AAPL in 2017/2018 in its next-gen iPhone will accelerate the trend.

The firm now believes smartphone as the key application over the next few years; beyond that it thinks TV would be the next big opportunity. Additionally, the firm sees notebooks, tablets, automotive and wearables as niches.

Deutsche Bank also noted capacity of OLED manufacturing is being added quickly, with Samsung's Display unit accelerating its OLED capacity addition plans. Additionally, other display makers such as BOE, Tianma and CSOT are planning to ramp production or start pilot lines over the next few years.

Despite technical challenges, the firm expects very strong growth for display equipment suppliers and OLED materials suppliers.

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Momentum to Sustain

On Universal Display's fundamentals, Deutsche analysts noted that revenues are reaching an inflection point in 2017, with revenues rising 70 percent year-over-year in the first half of 2017. The firm expects the growth to continue in the coming years, as OLED capacity ramps into volume production.

Specifically, the firm estimates the company's revenues to grow 50 percent in 2017, about 30 percent in 2018 and about 25 percent in 2019. Foreseeing tremendous operating leverage at this stage, the firm expects strong revenues to drive earnings per share to $2.10 in 2017, $3 in 2018 and $4 in 2019.

Further Upside Likely

Notwithstanding the doubling in share price this year, Deutsche Bank said further upside is likely, given its belief that the Street is underestimating several factors that would positively impact the company.

The positives include increasing screen sizes, including foldable phones, new products such as blue emitters and rapidly declining price premium of OLED.

"We also think the Street does not fully appreciate that UDC's business is tied to OLED production level rather than equipment purchases," the firm added.