Universal Display Falls on Fears Apple Might Not Switch to OLED Next Year

By Markets Fool.com

iPhone 7 uses an LCD display. Image source: Apple.

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The increasing likelihood that Apple (NASDAQ: AAPL) will finally switch to OLED displays in the 2017 iPhone have helped boost Universal Display (NASDAQ: OLED) shares higher in recent weeks, following a series of reports to that effect. The small-cap stock is accustomed to volatility, and it doesn't help that the Apple rumor mill often changes its mind.

The latest report comes from The Wall Street Journal, which says that Apple is already asking OLED suppliers to increase their output and deliver prototype displays for evaluation. Naturally, Apple wants the iPhone display to outperform Samsung, which is a tall order to fill given Samsung's expansive experience with OLED technology. OLED displays are costlier to manufacture, so if Apple does follow through with an OLED transition, you can expect it to charge more for an OLED iPhone.

Here's the kicker for Universal Display investors who have started to price in an OLED switch: Apple is prototyping over 10 different iPhone models, and only one includes an OLED display.

Playing the odds

Lacking any other company-specific news today, this report is almost certainly why Universal Display shares fell 3% today. The OLED iPhone storyline has persisted for many years, and created plenty of volatility in its own right due to the huge financial implications such a device would have on Universal Display's business.

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However, it's common knowledge that Apple incessantly prototypes new ideas and new designs, so in itself the idea of Apple prototyping over 10 different models should not come as a surprise. Apple's design team usually creates numerous prototypes to physically experience the designs, which shouldn't necessarily have a direct implication on what underlying technologies are chosen provided the technologies can still operate within the form factor. It should be theoretically possible for Apple to implement OLED in one of the other designs if it really wanted to, and it has about a year before the next launch.

Furthermore, while one model out of more than 10 prototypes doesn't sound like good odds, it's not as if Apple is arbitrarily rolling the dice here. All of the fundamental advantages that OLED displays offer should not be undermined by this report.

The answer, my friend, is blowin' in the wind

The bigger challenge will be securing the supply chain, as none of Apple's three primary display suppliers -- LG Display, Sharp, and Japan Display -- are as good at OLEDs as Samsung. LG Display is pretty close, but Sharp (now owned by Foxconn) and Japan Display have little to no meaningful experience. Even if Apple decides to source OLED displays from Samsung, it will want more suppliers for diversification and negotiating leverage purposes.

This could be why Apple is reportedly only going to offer one OLED iPhone, if at all. Ultimately, the WSJ report is more of the same, and the new details aren't all that pertinent. All things considered, I still think there's a strong chance that 2017 will be the year of the OLED iPhone.

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Evan Niu, CFA owns shares of Apple and Universal Display. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Universal Display. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.