Universal Display: Patent Cliff, Analyst Thumbs Down, And A Baseless Rumor

by Sonya Colberg, Senior Editor - 12/15/2015 9:54:40 AM

The essence – the thing that makes Universal Display what investors have come to believe it is – falls apart in 2017.

Universal Display trades under the symbol “OLED” and depends upon key patents for the technology that the company sells. This technology pertains to essentially an organic light-emission dust used in screens primarily for smart phones and television sets.

But here’s the key problem: The company’s fundamental patent is scheduled to expire in 2017.

And other patents appear to face an expiration date of 2018 and later.

Here is the pertinent information from Universal’s 1998 SEC filing: “In December 1997, the first patent, titled "Transparent Contacts for Organic Light Emitters", was issued to Princeton University by the U.S. Patent and Trademark Office …  In January and February, 1998, two additional patents relating to Multicolor Organic Light Emitting Devices were issued to Princeton University. Princeton University and USC have filed approximately 30 additional patent applications relating to the OLED technology in the United States, and have filed for intellectual property protection internationally.”

Patents typically expire 20 years after application:

So, when the Ewing, New Jersey-based company's technology begins falling off the patent cliff in December 2017, the patents hit the free-for-all known as the public domain.

Princeton technology licensing experts have not gotten back to TheStreetSweeper with a comment.

Likewise, the company has not responded to our request for comment but investors may find other viewpoints here.

Meanwhile, check out these additional killer risks poised to hammer Universal stock:

* Double-Whammy: Samsung Agreement Vanishing, Too

Universal shares rocketed Aug. 26, 2011 on news of agreements to supply a minimal amount of phosphorescent OLED material to Samsung.

There is a key line in the announcement that really matters today: “The agreements run through December 31, 2017.”

That’s right.

Just as Universal’s key patent expires, the company’s key agreement expires, too.

And Samsung, understandably, wanted to wiggle out of its deal with Universal early.

Read on to find out why …

*Samsung to Universal: No Thanks

Universal really needed – and still needs – what its filings call its “most significant commercial license agreement” with Samsung.

But Samsung has racked up over 9,000 organic light-emitting diode patents of its own, the Samsung Display CEO reportedly said in 2013 during a Tokyo investment forum. The executive proudly emphasized cost-cutting and investments in internal research and development. So it’s no surprise the company would want to cut ties early.  

Universal denied Samsung’s termination rights, saying that company was just stuck.

Indeed, Universal has devoted millions to try to keep its patents safe while the intellectual property still holds some value.

But today’s market has missed or forgotten something crucial in Europe…

*Analyst: Longer Term Story Is Broken

The European Patent Office issued a negative patent ruling on Universal, according to Barron's. The ruling prompted Canaccord Genuity’s Jonathan Dorsheimer to weigh into the ongoing controversy. The analyst smacked Universal with a sell rating and a $22 price target in December 2013.

While Canaccord upgraded the stock to “hold” in 2014 (just months before Oppenheimer downgraded it to “perform” from “outperform”), Mr. Dorsheimer justified its sell rating, according to Barron’s Tiernan Ray, by noting an irksome SEC inquiry into Universal:

“When the SEC inquired earlier this year about what some see as an unusual practice, the company stated that operating lease accounting (revenue recognized as collected) is appropriate treatment “because the agreement conveys the non-exclusive right to use our intellectual assets for a limited period of time that is less than the life of our intellectual property.” The company also went on to say that there are technological obsolescence risks that justify this accounting treatment.”

Mr. Dorsheimer continued, with emphasis on that Samsung agreement:

“From an investor’s perspective, we do not think it matters much, as we do not see upside beyond 2017 even if the current Samsung agreement holds up. We believe it is unlikely UDC will be able to extend an agreement with Samsung if Samsung feels “stuck” in the current agreement. A lack of extensions or new long-term license agreements supports our hypothesis of a business model transition beginning in 2018 from both a license/material supplier to just a material supplier.

So, no upside beyond 2017.

*Price Target: Below Today’s Price

Universal is actually trading above the mean price of $52.86 that analysts expect it to reach over the year.

This sell indication is even more distinctive because of the note to investors in mid-October from Goldman Sachs.

The venerable firm downgraded Universal from “buy” to “neutral.”  And it lowered the price target from the previous price of $50 per share to $40.

Following a $60 price target note from Cowen, Goldman analyst Brian Lee wrote that he expects TV volume to “disappoint meaningfully” into 2016, as planned manufacturing capacity additions for the sector “appear to be more weighted toward 2017 and beyond …”

Also, Summit Research initiated in September with a ho-hum “hold” and a price target of $35.

Keep in mind these are 12-month price targets. So the numbers further suggest it may be time to sell because $35 to $40 price targets represent about 30 percent or so below the present stock price.

*Earnings Dropping

One look at Universal’s woeful earnings trend helps explain any analyst pessimism. The company’s droopy earnings tumbled 28 cents per share in July to just 13 cents in September.

(Source: Nasdaq)

The graphic below gives investors additional trading insight into Universal:

(Source: Nasdaq)

*The Kicker: The Rumor Ripping This Stock Is Just That

Universal Display stock has recently ripped above even 12-month price targets on a rumor that Apple is considering OLED panels for its new product.

A DigiTimes story in July suggests Apple’s production problems with In-Cell technology in new iPhones has resulted in the company considering a return to G/G Touch panel technology. Some translated this as an opportunity for Universal’s OLED.

But the big boys are stepping up again, this time with rebuttals. For example, JP Morgan analysts wrote, “AAPL expanding OLED (organic light-emitting diode technology) by 2018 to its entire line-up would be very difficult … given massive investment requirements.”

Unless there’s a mid-2016 equipment order they “think the likelihood of AAPL’s full scale adoption is unlikely.”

Here's the relevant information written by J. P. Morgan: "Unless we witness any
meaningful equipment order placement by 2Q16, we think the likelihood of AAPL's
full scale adoption is unlikely.
"Instead, we think there is a high likelihood that AAPL be interested in rolling out
niche-market products using OLED (in the form of advanced flexible display). The
company has already moved from a single model strategy to dual model in 2014 and
possibly a three model strategy in 2016 (4”/4.7”/5.5”). Hence, we wouldn’t be
surprised to see new models using OLED coming out as AAPL starts approaching
the market with various segmentations. This would also alleviate capital expenditure
concerns for existing vendors and solve multiple stakeholders involved with the
display supply chain (JDI and HH are expanding LTPS capacity and glass polishers
have recently expanded capacity)."

J. P. Morgan analyst Rod Hall considered the rumor as just that, according to Benzinga. Mr. Hall said that an Apple backtrack to touch panel technology would be immaterial for Apple.

“From an Apple financial point of view, we believe a switch back would be immaterial and possibly positive given what we believe continue to be poor yields for In-Cell,” he explained. He also adds that JP Morgan typically applies “a fairly large grain of salt” to Digitimes stories.

Apple may someday investigate OLED panels. The evidence suggests that company could invest in OLED panels, but no one says it will necessarily be the company trading under the “OLED” symbol - yet another source of misunderstanding since OLED is a generic term for the technology.

*Insiders Hit "Sell!"

Just this morning, SEC filings reflect that a company director sold 25,000 shares of Universal stock in a transaction last Friday. Director C Keith Hartley sold at an average price of $54.74 and now owns 73,049 shares in the company. We've got to wonder whether insiders are losing confidence in the future of their company.

*Conclusion:

Universal has gotten all frothy as investors cooked in a big dose of rumor, a misunderstanding of the patent expirations and a disregard for top analysts’ warnings.

Our investigation thus far suggests that investors should think long and hard about chasing after a stock this expensive, offering this level of iffiness, ongoing controversy – and a 9-month net loss of $3.4 million.

Sure, it’s possible Apple will look at organic light-emitting diode panels. It’s possible Universal might be considered if so … in a year or two years or so. Or Apple may just as likely consider other OLED companies like DuPont, Sumitomo Chemical, EMD or BASF.

TheStreetSweeper fully expects a sudden drop in Universal’s stock price to about $30 per share – a very, very fair valuation.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in OLED and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

 

 

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