There are lots of different “story” pitches you can make about a stock, but one of the most compelling ones is the “next big thing” that will destroy a product that we already know and love, and that is extraordinarily profitable.
And, not coincidentally, a product made by the company that has the most popular stock in the world — when you write about Apple and their products, you get attention … a fact which has not, I’m sure, gone unnoticed by Nicholas Vardy. He’s pitching his “iPhone killer” idea to potential subscribers of Global Stock Investor. The letter is “on sale,” as every letter seems to be almost all the time, for about $100 a year.
But this “iPhone killer” idea? Let’s see if we can’t sniff it out for a price that’s a bit more free-ish, shall we?
Here’s the enticing pitch from Vardy:
“Invest Today in the ‘iPhone Killer’ and Watch As the Company Expands Production, Revenue And Your Profits by as Much as 8X…
“Secret new technology makes Apple’s phone look as ancient as dial-up ….
“It’s not often I get this excited — but I’ve discovered a company set to release a secret technology that blows away the iPhone.
“And it’s got Apple sweating. Because as advanced as the iPhone and the iPad are, Apple would give their eye teeth to get screens this vivid, battery life this long, and functionality they can only dream of.
“But the competition’s beat them to it.”
OMG, you think, even if I can’t buy the stock I must have this phone, right? So what is it? What is this advanced secret technology?
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Here’s some more from the tease:
“But a few years back, this company started experimenting with fusing carbon — an organic compound — to LEDs. They called them OLEDs, or Organic Light Emitting Diodes.
“Everyone else ignored OLEDs. Why?
“Some 75% of the energy produced by them was wasted as heat. But this small company believed in the process, and licensed or registered over 1000 issued and pending patents.
“But in a recent stroke of genius, they perfected a process called ‘phosphorescence’ which enables OLEDs to produce the same amount of light, consuming 75% less power! This means they have incredible applications in a whole new generation of flat-panel screens.”
Vardy doesn’t mention it in his tease (probably because it would make it too easy to sniff out the company), but these phosphorescent OLEDs are commonly referred to as PHOLEDs.
So how does this company make money?
We’re told that this screen is going to be in new Droid phones, but not in the iPhone. And that the company will be earning big royalties. Here’s how Vardy puts it:
“…this company is going to ride the new Droid phones to record revenues. Production is about to ramp up from 5 million units per quarter…
“…to an amazing increase of 90 million per quarter, or a 1600% jump!”
The royalty thing is apparently key, we’re told that it’s the mainstay of “their ultra-lucrative business model” … here’s the explanation for the Droid business:
“Fundamentally, it’s a high-recurring revenue, high-margin business.
“In the case of the Droid iPhone killer, they get paid a royalty of about 2%, based on the prices of a mobile phone’s screen. Which amounts to about $30. So, with an increase of 85 million units per month, even with 50% costs or discounts, it’s not unreasonable to expect an eventual corresponding revenue increase of some $1.27 BILLION per quarter – or 8-times the revenue they receive today!”
Vardy tells us, in fact, that the revenues are ready to ramp so quickly with more companies licensing their technology that this stock “could be like getting Microsoft stock in 1988.” Adjusted for splits, that would mean you bought Microsoft at a buck or two, not bad.
More clues for us? We’re told that they’ve nearly doubled their revenue in the last year, and that they have “0ver 30” agreements with manufacturers in Korea and Japan.
And we’re told about some more of the applications for their technology that might catch fire:
“Solid state lighting — no more light bulbs or irritating fluorescent replacements!
“Organic Vapor Jet Printing, a dramatic development that allows solvent-free technology in high-resolution direct printing
“Ultra-efficient solar panels, which have gotten attention of the green energy crowd.”
And then, finally, one last clue:
“… last February, the U.S. Department of Energy honored them for their innovations. Along with the U.S. Department of Defense, they’ve entered an agreement for a variety of customized technology prototypes.”
All that, and it trades on a US exchange. So who is it?
Toss all that info into the mighty, mighty Thinkolator … and we find that this must be …
Universal Display (PANL)
Which makes me mad. Not because of anything to do with Nick Vardy, but because I owned this stock years ago and gave up on it far too early — this is why I strive to be a patient long-term investor, because too many of the stocks I give up on or sell for better opportunities turn into world beaters years later, when I’m no longer even paying attention.
Universal Display may or may not turn into a real world beater, but their stock has certainly been on a tear — the company has been around for a long time, losing money hand over fist every year since the mid-1990s, and the stock has bounced around quite a bit on news of research deals, grants from the government, or sexy convention demonstrations of the flexible video screens that get everyone so excited about their OLED technology (even if no one is completely sure how they would actually want to use a roll-up screen). For most of their first 15 years, however, they stock traded in a wide range centered around $10 — bouncing down to $5 when news was bad, up to $18 or $20 when it was exciting. Starting in 2010, though, the enthusiasm turned from research potential and “someday” revenue to actual growing revenue, and deals for real products, and the stock has a droolingly beautiful chart for the last 12 months or so, going from the low teens up to about $60.
The shares are off that $60 peak, down just under $50, but it does seem that PANL has entered a new realm where we can expect real revenue growth and real profits someday soon. Revenue has actually more than doubled year over year, and though they’re not profitable now analysts are predicting a small profit for 2011 (7 cents per share … which means that the current year PE would be about 700. The estimated forward PE for 2012 is about 50, with analysts predicting that they’ll earn about a dollar a share). I’d take all of this estimating with a big grain of salt, since analysts often have a terrible time predicting profits for a company that is just transitioning to profitability and has very lumpy and sharp revenue growth … but it does seem like PANL is morphing from a research shop and a patent portfolio into a real company.
Universal Display for most of the last 15 years has made its revenue, limited as it has often been, by winning research grants from the government and by selling materials for OLEDs — their proprietary chemicals and compounds that fuel the phosphorescent OLEDs.
The two major businesses that are likely to drive PANL’s results are LED lighting (well, OLED lighting) and displays, with the two main drivers of OLED display technology being televisions and mobile devices. Smart phones get probably the most attention and will be the biggest part of this business for a long time, in part because it’s easier to get the technology to work in smaller devices and in part because the strengths of OLED versus traditional LED technology are more important in handheld devices (more battery efficient, and less heat).
As to the other clues? Well, PANL does work with 30 or so manufacturers, including most of the display developers you’ve heard of (LG Display, Samsung, etc.), and they did win an award from the Department of Energy for their progress in developing White OLED technology (WOLED) for lighting (they’ve won a similar “award” from the DOE each February at the annual lighting conference for at least three years in a row).
I hadn’t looked at PANL for a long time, dangit, but that’s the basic story — they still get a large portion of their revenue from R&D agreements, including some cool ones for wrist video screens from the Department of Defense, but they are seeing more of their technology make it into phones, particularly from Samsung, Motorola and HTC, who are forced to sell phones that look pretty spectacular in order to compete with the iPhone’s cachet and built-in fan base. I don’t know if the earnings will ramp as quickly as Vardy and the analysts expect, but if you’re one who likes to pay up for breakthrough growth companies then paying 50X next year’s earnings for revenue that’s growing at more than 100% a year probably sounds pretty reasonable … even if it is likely to bring occasional bouts of hearburn along the way.
If you’ve been holding PANL all this time as it went from $10 to $60, well, I really don’t want to hear about it.
OK, fine, go ahead and brag.
Or if you know anything else about the company or have been following their progress, feel free to shout out with a comment below. If you’re looking for other companies in the advanced OLED display research business the main competitor for many years was Cambridge Display, which was bought by Sumitomo Chemical a while back, and Samsung, the big company that seems to have invested the most in next generational LED displays, is probably both PANL’s biggest potential customer and a possible competitor (or, perhaps, acquirer).
I don’t know enough about the technology to tell you how important PANL’s patents are, or what competition can sidestep them, but I’m sure there’s a Gumshoe scientist out there somewhere who could illuminate us — if so, opine on!