Investing in the Future of OLEDs

Subject(s):
James Lee's picture

Margarine, prescription drug, or petroleum product? Despite the confusing name, OLEDs promise to be the most disruptive display and lighting technology of the next two decades.

Organic Light-Emitting Diodes have been around since the 1950’s. These are carbon-based materials that create light when electricity is applied. Unlike traditional display technologies, such as LCDs and LEDs, no separated lighting mechanism is required. Also, there is no need for a flat glass backing. This changes everything.

  • Displays are paper-thin
  • Screen refresh rates are lightening quick
  • Wider viewing angles are possible
  • Bright colors are more vivid, and dark becomes pitch black.
  • Less power is consumed, saving battery life

But, the technology is still about ten years behind conventional LEDs. Challenges to OLED technology include high production costs, longevity issues for some colors, and sensitivity to water vapor.

In Living Color

For the present, Samsung is the industry’s 800-pound gorilla. Last year, they doubled their production of OLED displays from 100 million to 200 million, including screens for their popular Galaxy S-series phones. They are currently the only manufacturer with any significant production capacity.

But this is changing.

At the 2013 Consumer Electronics Show, OLED TV’s were prominently on display from Samsung, Panasonic (ticker: PC), Sharp (SHCAY), and LG.

Later this year, LG will sell the first commercially available 55” TV for about $10,000. With improving technology, TV’s keep getting thinner – this one measures just 4 millimeters in thickness.

Meanwhile, Dupont (DD) has developed a process for inkjet printing OLED materials for mass production. This will significantly lower the production costs for large-sized displays. (Dupont also sells an encapsulation material that addresses the water-sensitivity issues common to OLED display panels.)

iSupply forecasts that the global market for OLED TV’s will be minimal to start – estimating that only 1,600 will be sold in 2013. However, they project that annual sales will rapidly increase to 1.7 million units by 2015.

The only “pure play” available for investment in this space is Universal Display Systems (PANL). Over half of their revenues come from the sale of phosphorescent materials. Their extensive portfolio of patents (over 2,000) also provides them with significant royalty income.

After earnings took a hit in the last quarter due to production delays, the company’s board approved a $50m stock repurchase plan.

Universal Display has a surprisingly conservative balance sheet, with no debt and $238m in cash. Shares currently trade at 44x 2013 earnings, which is reasonable given the company’s growth prospects. High gross profit margins at Universal Display mean that increases in sales tend to flow directly to the bottom line.

There is a significant risk here – Universal Display is heavily dependent on a handful of customers. In 2011 Samsung, LG, and Nippon Steel made 80%% of their sales. At this point, anything below $30 per share is a bargain. Between $30-$40 is reasonable. I’d avoid buying shares this year for anything over $40.

The Flexible Form Factor

OLEDs come in all varieties of alphabet soup. There are AMOLEDs (active matrix), used for cell phones, FOLEDs (flexible) for wearable computers and digital newspapers, and TOLEDs (transparent), on which images can be viewed from any direction.

These are already being made in small batches. Samsung is expected to produce the first flexible cell phone by the end of this year, and has demonstrated a 14” laptop with a transparent screen.

The qualities of thinness, transparency, and energy efficiency makes OLEDs a game changer for the lighting industry.

Seeing the World in a New Light

The evolution of electric lightening goes as follows: Bulbs (incandescent), tubes (fluorescent), and sheets (OLED). The future of lighting isn’t the light bulb in any form – it is the lamp shade, or perhaps the wallpaper. OLEDs will change interior design because they create light without heat. As such, they don’t need expensive fixtures. OLED sheets will be trimmed and applied to many interior surfaces, from ceilings to cabinets, to individual steps in a staircase.

This is easily a decade or two away, but imagine a transparent OLED film placed over conventional window. Light could come through the window during the day and from the window at night. Or, an OLED film could be placed over a shower door – providing visibility or (privacy) as needed.

DisplaySearch estimates that annual sales of OLED lighting materials will increase ten-fold to $1.5 billion by 2015.

Right now the leader in OLED lighting appears to be Philips (ticker: PHG). Currently, OLED panels for lighting are fairly small, with the largest being about 12x12 centimeters in size. Expect this to change over time.

Better Than Real

Going further out, these displays can transform the way that we see our surroundings. Specifically, we’re talking about augmented reality, where digital information is transposed over the visible real world.

The basic building blocks of augmented reality are already here.

Google Goggles is a free program for Android phones that adds object-recognition capabilities to cell phone camera shots. It is an easy to use app that recognizes places, and even people’s faces – and it is getting better all the time. Just last year, the company introduced Google Glasses, which provides some of the same functionality within a wearable headset.

There are some fantastic demonstration videos on augmented reality being put out by Microsoft, Corning, and Google (in addition to independently-produced short films such as Sight). Watch these again -- and identify how many of these technologies rely on OLEDs.

Given their likely role as the transparent, flexible, and inexpensive display of the future, OLEDs will help extend our senses into the digital.

It all reminds me of a classic 80’s song by Timbuk 3…

I study nuclear science
I love my classes
I got a crazy teacher, he wears dark glasses
Things are going great, and they're only getting better
I'm doing all right, getting good grades
The future's so bright, I gotta wear shades
I gotta wear shades, I gotta wear shades

(Information contained herein is for educational purposes only and is not to be considered a recommendation to buy or sell any security or investment advice. Mr. Lee is the founder of Strategic Foresight Investments, a registered investment advisor, and owns shares of PANL as of February 12, 2013.)

Comments

Investing in OLED

Hi my name is Donovan Maldonado and I have been trying to get into investing and I wanted to find a trend that will change how we look at things in the future. I thought OLED is an awesome innovative idea and I want to know how exactly how I can jump in this any advise would be great. Great article, thanks!