We're Resetting Our Price Target for This Tech Holding After Earnings
Here's why a conservative outlook with upside potential keeps us interested owners. Oh, and let's talk about the dividend hike.
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Last night Universal Display OLED reported results for its December quarter. The company topped Wall Street’s revenue and EPS expectations but also brought what we view as overly conservative top-line guidance for the coming year.
We flag that based on a combination of expected device volumes and larger display sizes as well as Universal’s penchant for being conservative. We saw that "conservatism" once again with the December-quarter results, which topped the company’s revised 2024 outlook it shared in late October.
Looking past the next few quarters, ramping organic light-emitting diode display capacity at Samsung, LG Display, and others tell us medium-to long-term adoption across a wider array of devices continues to track. The sweetner to all of this is the latest dividend increase to $0.45 per share per quarter from $0.40. This marks the eighth consecutive annual dividend increase since Universal started paying a dividend back in 2017.
In recent weeks, when asked about our OLED price target, our position has been we would revise it subject to what is learned from the company’s December-quarter earnings report and initial comments about the coming year. While we continue to think there is upside to Universal’s guidance as outlined below, we do not need to be heroes with our price target. Dialing it back to $200 from $250 still offers ample upside from current levels and as the company makes announcements about its blue solutions, we can revisit that target.
Similar events like the announcement of more foldable consumer devices and adoption in other applications outside of smartphones are catalysts that could trigger a price target review. The key for us remains the longer-term opportunity as organic light-emitting diode display technology follows the path of light-emitting diodes and the upside that should bring.
We suspect others on Wall Street will be resetting their targets, using the conservative outlook for this year to do so and we expect that will ultimately lead to longer-term investors coming back into the shares.
December Quarter Reviewed, More on Blue
For the last three months of 2024, Universal booked $162.3 million in revenue, well above the $150 million consensus forecast. Material sales rose 13%, year over year, to $93.3 million (57% of revenue), while royalty and license fee revenue shrank 12% to $64.4 million (40% of revenue). Given the mix shift away from the higher-margin royalty and license fee revenue, margins for the quarter dipped year over year, but this revenue stream is lumpy quarter to quarter. For the year in full, Universal posted double-digit revenue gains at both its material sales and licensing segments, reflecting the growing volume of devices utilizing organic light-emitting diode displays.
In terms of Universal’s December quarter EPS, excluding the impact of an $8.9 million restructuring cost, it came in at $1.11, also beating the market consensus of $1.06. Given our comment above about the revenue mix skewing toward lower-margin material sales for the quarter, we are not surprised by the margin performance. Here too, however, looking at the company’s full-year margin performance, which eliminates lumpy quarter syndrome, gross margins ticked higher as did Universal’s operating margin.
That expansion came even as the company continued to work toward commercializing its blue materials solutions. While that commercialization was targeted for 2024, that timetable was pushed out in August of last year, and on the earnings call, management shared that effort is “months” away. That effort should result in lower R&D spending in the coming quarters, but we are likely to see SG&A efforts rise in response.
When it comes to its blue solutions, there will be some developments to watch. First, similar to the light-emitting diode market, blue is needed color mixed with existing red and green solutions to produce white light. That means the commercialization of blue brings progress toward a much wider addressable market. Second, Universal has royalty contract renegotiations coming due in 2025 with LG Display and in 2027 with Samsung. The commercialization of blue should help foster those negotiations and expand the array of devices covered under the agreement, but it could also lead to an incrementally better royalty rate.
2025 Guidance
For the coming year, Universal shared it currently sees revenue in the $640 million-$700 million range, flat to up 8% year over year, and a tad shy of the $702 million market forecast. As we mentioned above, several factors point to that outlook being conservative:
- Smartphone shipment volumes are expected to rise 4%-6% depending on the source.
- Smartphone display sizes continue to trend larger and we are seeing incrementally more foldable models.
- Organic light-emitting diode displays are moving into mid-to lower-tier smartphone models. Apple’s iPhone 16E announcement this week should only hasten that, which means the display technology should close the remaining 45% of the smartphone gap before too long.
- Adoption outside the smartphone market into tablets, notebook PCs, monitors, automotive, and other devices. We are already seeing the shift to organic light-emitting diode displays in those and other markets mimicking the one in smartphones with Apple (AAPL), HP (HPQ), Dell (DELL), Lenovo, and others bringing models to market.
How conservative Universal’s 2025 revenue forecast will be determined by what we see in the coming months, but it’s hard to see how its revenue growth would decelerate from the 12% posted in 2024.
Catalysts we’ll be watching will be new model introductions from smartphone and other vendors at Mobile Word Congress between March 3-6, as well as other new product announcements for models that will ship later this year.
The New Dividend
Universal announced a first-quarter 2025 cash dividend of $0.45 per share, payable on March 31 to shareholders of record as of the close of business on March 17. Mark your calendars!
While this is not the biggest increase compared to the prior $0.40 per share quarterly dividend, we like the bent of a rising payout at the company. As its addressable market expands and the higher-margin royalty revenue stream grows, we suspect further dividend hikes will be in the cards. Just like we’ve seen at Qualcomm QCOM and others with similar business models.
At the time of publication, TheStreet Pro Portfolio was long OLED, AAPL and QCOM.
