Revisiting PANL as Risk Mounts

Several weeks ago we published our initial view on Universal Display PANL - “PANL: Reaching Escape Velocity or Waiting for Gravity?” Since then, several items of note have come about, which along with the continued rise in PANL’s share price and therefore valuation (now 41x on an EV/2010 revenue basis, 21x using CY11 revenue; no EPS until 2012), has shifted the reward-risk profile more toward the negative in our view. These items of note include:
• Earlier today, HTC introduced Sony’s SNE Super LCD display (SLCD) technology into a variety of HTC phones (HTC Desire and the global Nexus One). Per HTC, the SLCD display offers exceptional natural balanced color, clear contrast, broad viewing angles and improved power efficiency, roughly 5x better power management than earlier LCD panels. As we mentioned in our initial PANL write up, we see the evolution of OLEDs very much like that of LEDs a decade ago and that PANL would likely be volatile as were CREE shares at the time. We would expect several bumps in the road for OLEDs including improvements in existing technologies and SLCD is one example. The more interesting question is whether or not this change to SCLD is a permanent one given supply shortages at Samsung’s AMOLED division amid overall strong consumer demand for smartphones. What makes this particularly interesting is PANL touted its AMOLED solution inside Google’s Nexus One, which is manufactured by HTC.
• DisplayMate Technologies tested the displays for Apple’s AAPL iPhone 4, Motorola MOT Droid X, HTC Droid Incredible and HTC EVO. As background the iPhone 4 uses what is called a retina display, while the Motorola Droid X and HTC EVO both use standard TFT LCDs and the HTC Droid Incredible uses an AMOLED display. DisplayMate’s findings showed the retina display used in the iPhone 4 to have the best resolution, good contrast ratio, and color depth while the "the HTC Droid Incredible is the master of contrast” but offered oversaturated colors and lack of brightness for outdoor viewing. To be fair, this is but one finding; however when married with HTC switching the display technology from AMOLED to SLCD, however, we find reason for greater concern.
• Dow Electronic Materials (DEA), a business unit of Dow Advanced Materials and the Dow Chemical Company DOW, recently inaugurated its new OLED Electronic Materials facility in Korea, which will supply leading-edge emissive materials to the active matrix OLED market. While we understand this bolsters enthusiasm for the overall OLED market, we would view the two as competitors in emissive materials for OLED displays and see DEA’s announcement as the start of an increasing competitive landscape for OLED materials. We saw this earlier in the decade with GaAs integrated circuits and material suppliers – our concern would be if one or more opt to adopt a market share driven strategy, which would pressure pricing and margins for most if not all the players as it did for GaAs based RF power amplifiers and related materials.

Also, PANL recently filed an extension on its OLED Patent License Agreement with Samsung, its largest customer. The extension extends the agreement through September 30, 2010 so as PANL and Samsung can “enter a new business arrangement that is expected to include a license agreement…” Two thoughts. First, as we have witnessed with many companies, customers do not like to be solely dependent on one supplier. Second, issues have arisen that have led device manufacturer switching display technologies (HTC above). Given these concerns as well as the ramping of Dow’s OLED material capacity, we have to wonder how that may factor into license agreement conversations between PANL and Samsung. More on that as it develops.