Why Universal Display Shares Dropped Today

By Evan Niu, CFA Markets Fool.com

Samsung is one of the most prominent OLED display manufacturers. Image source: Samsung.

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So much of Universal Display's (NASDAQ: OLED) valuation is predicated on a path to mainstream OLED adoption that its shares are no stranger to volatility. Shares currently trade at over 15 times sales, so yeah, it's safe to say that the company's current fundamentals are of relatively lesser importance compared to future potential. That also means that the timing of the adoption curve will have dramatic impacts on Universal Display's financials.

Well, one Street analyst thinks the ramp might be pushed out a little bit, which is very likely the culprit for today's 6% sell-off.

All about that ramp

There's been an expectation that a certain iPhone maker will adopt OLED technology starting in 2017, which would potentially serve as a major catalyst toward mainstream adoption within smartphones. Many major smartphone manufacturers like Samsung and LG already use the technology in flagship devices, but costs still need to come down before true mainstream adoption can occur, and the iPhone drives such significant volumes within the smartphone market that the subsequent economies of scale would inevitably impact manufacturing costs throughout the industry -- particularly beyond smartphones and into other, larger display categories.

However, Needham analyst James Ricchiuti is now forecasting that the bulk of the industry's ramp up will be pushed out to 2018 or 2019, according to Tech Trader Daily. As a result, the analyst is cutting his forecasts for 2017, and now expects the company to bring in just a hair under $250 million next year, resulting in $1.24 per share in net income. Compare those estimates to his prior forecasts of $263.7 million in sales and a bottom-line EPS of $1.34.

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More than half of that top line -- $129 million -- is expected to come from the materials business, where Universal Display sells the organic materials that make their way into OLED displays to manufacturers. To be clear, Universal Display is still expected to put up healthy revenue growth of 28% in 2017, which would represent a meaningful rebound from 2016's stagnant top line. But again, at current valuation multiples, the bar is already pretty high.

When Universal Display reports fourth-quarter earnings in a couple of months, investors will absolutely want to keep an eye on full-year 2017 guidance. The company had previously cut 2016 guidance on two separate occasions, so it's quite possible that management will play 2017 guidance conservatively, in Ricchiuti's view. Overall, the analyst is maintaining a hold rating while reducing his estimates.

It's very likely that 2017 will end up being a year of investment for the OLED industry, as display vendors -- particularly those that don't currently make OLED displays in meaningful volumes -- expand capacity and manufacturing infrastructure. Universal Display investors have already been patiently waiting for years for their investment thesis to play out; what's a couple more?

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Evan Niu, CFA owns shares of Universal Display. 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.