I’ve had a bunch of questions from readers this week about the latest ad from David Gardner’s Motley Fool Rule Breakers, so that’s our target today — what are they talking up as the “little known company” that is “allowing Apple to radically reshape the future of the iPhone?”
Here’s the part of the email ad that got my attention:
“… a tiny component is already taking the tech world by storm.
“It’s already powering products made by Google, Samsung, and LG…
“And now, Apple has gone all-in with this tech with their new game-changing iPhone.
“And the smartest minds on Wall Street are already sprinting to take advantage.
“JPMorgan is urging clients to act immediately, ‘before iPhone mania begins in earnest.’
“Because one small American company holds the key patents to this remarkable tech.”
Apple is a stock I’ve owned for a long time, and it has surprised me a bit with its continuing share price strength over the past few months — with shipments of the expensive new iPhone X being watched closely for possible disappointment, I thought we might see more weakness in the shares as folks take some profits ahead if folks begin to worry about the company’s continuing inability to exceed those peak earnings of 2015.
That hasn’t really happened, perhaps partly because of the tax benefits for Apple in the new tax reform bill (both the lower rate and the low-rate “tax holiday for repatriation” will likely provide income boosts for Apple, though they don’t pay anything close to the current corporate tax rate now), and Apple has bought back so many shares over the past few years that they’ve been able to keep some modest earnings per share growth rolling despite the relatively flat top-line numbers, so the shares are holding pretty steady near their all-time highs. And though analysts continue to sift through the tea leaves to and try to insert caution about whether demand is high enough to create another “supercycle” for the iPhone X, others remind us that demand still seems awfully robust (for what it’s worth, I bought an iPhone X and am very pleased with it so far).
So Apple sticks in my portfolio as a reasonably priced dividend-growth company, with a strong brand built on the world’s most successful consumer product, but it’s probably not a stock that’s likely to double in short order or provide dramatic returns from this price simply because of the challenge of discovering new growth avenues (though I wouldn’t have guessed at a 50% surge for AAPL this year, either, so that may be just me being too conservative). All Apple shares have to do now is rise another 12%, and they’ll be a trillion-dollar company, and that makes people worry about how much growth is still possible (though they had the same worries when it was a $300 billion company… people are emotional about such things).
Apple stock is no longer wildly cheaper than the market on a PE ratio basis, as it has been for most of the past five years, but it’s still about 25% cheaper (a forward PE of about 15, versus 20 for the S&P)… and, of course, because of it’s massive size, to some degree it is the market, and everyone owns shares (Apple is close to being 4% of the S&P 500, the index that most passive investors use and the measuring stick used to evaluate almost all money managers).
Which is all a long way of saying that those who are looking for exciting growth or the next stock that can move up hundreds or thousands of percent from here often look to the little suppliers who make Apple products possible, not to Apple itself. That has often worked in the past with these Apple “supercycles,” when new products create spikes in demand for particular components or chips — and over the past five years even the broad semiconductor index (as represented by the iShares PHLX Semi ETF) has dramatically outperformed Apple, led in part by some rapidly growing Apple suppliers like Broadcom, Skyworks Solutions and NXP Semiconductors.
So which supplier is David Gardner pointing the finger at for his Motley Fool Rule Breakers subscribers? Let’s check out our clues…
“A growing chorus of Wall Street insiders are calling for a once-in-a-decade Apple opportunity.
“Forbes is calling it an ‘iPhone tsunami.’
“And JPMorgan is urging investors to ‘stock up now before iPhone mania begins in earnest.'”
All that chatter is from before the new iPhone was released, which is usually when optimism is highest, so we shouldn’t take it as all that current right now… but yes, part of the argument is that investors are underestimating the “iPhone super cycle” … here’s some more of the ad, which is about a David Gardner pick but is signed by Rex Moore, a Fool analyst:
“… one tiny American company is allowing Apple to radically change what the iPhone is capable of.
“And if you missed out on buying Apple stock before the iPhone… you need to hear this story.
“Because you’ll find out why this same remarkable company may be our second chance to get in on the ground floor of a smartphone revolution.”
And they mention the China aspect of the story as well — China is what fueled the last huge surge for iPhone sales, back in 2015, so that’s important:
“… a new study from the Maxim Group found ‘significant pent-up demand’ for the new iPhone in China.
“It doesn’t always get the attention it deserves, but China is actually the world’s largest mobile phone market. And analysts are predicting a 170% increase in iPhone sales in China next year.”
And they make the same argument you’ll see quite often, that Apple is too big to grow as fast as the little guys:
“Apple is already an enormous company….it has the largest market cap on the S&P 500 by a significant margin. And that makes it really hard for Apple to generate the growth rates necessary to propel it to 10x returns over the next 10 years.
“And that’s why I’m so excited to tell you about a potentially more lucrative way to bet on the coming iPhone tidal wave….
“This under-the-radar powerhouse is more than 100 times smaller than Apple. So it still has plenty of room to run.”
And finally, we’re told that this time the supplier is not a chip company…
“… this company is the key behind the brand-new screen that has Apple insiders raving.
“This new screen has 3 huge advantages over previous iPhone screens.
“First, these screens are much thinner than the previous screens…which means that the new iPhone can have a bigger screen without taking up as much space in your pocket.
“Second, these screens are able to light individual pixels… which means that they don’t use as much power as LCD screens. And that means that you won’t need to charge the new phones as often as you had to charge previous iPhones.
“And finally, the new screens simply have higher picture quality. And that becomes more and more important as more and more people watch videos on their phones.”
And it’s not a brand-new company:
“David has been closely following this company for years. He first wrote about it publicly way back in 2005.”
What else are we told? That this little player has some kind of monopoly on the technology…
“It is the king of the mountain in a market that we think is about to explode.
“But the best part is that its dominant market position is protected by an enormous moat.
“And the company has two ways to cash in on this expanding market.
“Because it not only provides the parts, but it also controls a wide range of patents related to this remarkable screen technology.
“And that means that even if a giant player like Apple doesn’t want to buy products directly from this remarkable company…they would still have to pay a licensing fee.”
And like most royalty and license-earning companies, they’re pitched as being “toll road” owners in this space… and as suppliers to everyone else, too, so they are collecting fees from Alphabet and Samsung, too, not just Apple.
And, according to the pitch, they’re “predicting annual growth of 21% through 2020.”
So what’s the stock? Thinkolator sez we’re again being teased with Universal Display (OLED), the organic light-emitting diode company that is behind those fancy OLED screens, both supplying their patented technology and supplying the chemicals that make it possible.
And, of course, it’s not a surprise to Wall Street that these patents and the growing OLED marketplace of new phones are valuable… so OLED is not a cheap stock. It’s trading at about 88X trailing earnings, and the stock is within about 5% of its all-time highs. To ease your heart palpitations, you might have to go out a year or two — the forward PE is about 56, and the PE on 2019 forecasts is finally gets below 40 (just barely, at 39).
That makes it hard to buy for most of us, though certainly the business is growing rapidly (the 2018 revenues are expected to be double 2016’s), and high and rising margins mean each additional dollar of revenue adds substantially more to the profit.
And, frankly, it’s one of those stocks that has pretty much always been expensive — that’s not unusual for companies who get a lot of their earnings from license revenue or royalties, those “go straight to the bottom line” revenue inputs are adored by Wall Street (for good reason), and they mean that good revenue growth becomes dramatically better earnings growth.
They’ve had plenty of missteps along the way, largely related to adoption of their technology going slower than was hoped back in 2005… I owned a few shares of this one around then, too, but unlike David Gardner I didn’t hold on — his ability to sit through huge losses to eventually get those giant gains is one reason for his very successful overall record… you don’t get 10,000% winners without risking a lot of 90% losses, sometimes even in the same stocks (I’m looking at you, Amazon).
The stock has come up several times in the pages of Gumshoe — Nicholas Vardy was pitching them as an “iPhone Killer” stock back in 2011 in the $50s, after which the stock really floundered for about five years, and then it started to come back to life last year as more OLED phones came out — it was also teased by a different Motley Fool newsletter in the Spring of 2016, when the shares were in the $60s, and more recently it was touted by Michael Robinson over at Nova-X Report (I went more into OLED technology when covering that teaser, but was, unfortunately, too cautious about the valuation as I hoped for a weak earnings report… the stock has doubled since I wrote that piece in April).
So I’ve not been particularly brilliant at choosing the right price to buy this one, so take my “gosh it’s expensive” caution with a grain of salt… all I can really tell you is, yes, Motley Fool Rule Breakers is indeed pitching Universal Display in these ads, as they’ve been doing off and on for years, and it is a fast-growing company with an admirable business in OLED screen technology.
And with that, I’ll pass the baton to you, dear readers — perhaps one of you has followed this firm more closely, or understands it well and wants to opine… maybe you’ve already made millions on it and want to tell us that the ride is over, or is just beginning? Share your thoughts with a comment below.
Disclosure: I own shares of Apple, Amazon, Alphabet and Skyworks Solutions among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.