The latest Investorplace pitch for Matt McCall’s Investment Opportunities ($99/yr) promises that we can cash in by “joining the Foldable Phone revolution”… and that sounds both fun and lucrative, so let’s check out the ad and see if the Thinkolator can ID his investment ID for you.
The dream of a flexible phone screen has been around for as long as smartphones, we’ve seen plenty of science fiction-looking scrolls and roll-up phones and other origami ideas, maybe patented but not yet feasible, for most of the last decade… and apparently they’re now coming to real life now, and Matt McCall is super excited… here’s a taste of the ad:
“The next-generation smart device will fold into and out of virtually any device you need as easily and as effortlessly as folding a piece of paper.
“A smartphone. A tablet. A smartwatch. Even a laptop computer.
“Now, I know the thought of being able to fold a device into any shape might seem impossible…
“Like science fiction…
“But now, thanks to a groundbreaking innovation, the technology now exists to make this dream a reality.
“That’s why companies are rushing at breakneck speed to bring this technology to market.
“Apple, Samsung, Google, LG, Motorola, Lenovo, Huawei, Vivo, and Nokia.
“THIS is the future of mobile communication. One device to end all devices.
“PhocusWire calls it the single biggest shift in mobile devices since Steve Jobs introduced the iPhone in 2007.
“Time.com says it will ‘forever change how we interact with our technology and create and consume our favorite content.'”
OK, we’ve all seen the pictures of phones with folding screens, and maybe even snickered a little bit when Samsung rushed out their folding screen phone last year and ran into “um, the screen cracks in the middle!” complaints… but it does seem to be the clear direction we’re heading in, with my teenagers, at least drooling over the new Motorola Razr and Samsung Z Flip phones.
Screens that can fold in half to slip in your pocket, avoiding the dreaded “pocket dial” and helping to avoid cracked screens… that just makes sense. Even if the folding ones, so far, are probably too fat to be happy in most pockets — one assumes that, like everything else in technology, they will probably continue to get thinner and more powerful.
Of course, it was also clear 25 years ago, when the first flip phones were popularized (I still remember my Motorola StarTac fliphone, and the fact that stumbling through a text using the numeric keypad cost me $1 a pop), that the direction we were heading into was ever-smaller cellphones… and I confess that I personally joined the scoffing chorus when the first U.S. camera phone was released in 2002, and also thought the trend toward phones with massive screens was silly, and those all were hugely popular ideas that made billions of dollars, so one hesitates to speak with certainty about what the future holds.
McCall talks more about the current projects that are either available or planned…
“Samsung’s next foldable-phone initiative, dubbed ‘One Device to Rule them All,’ might be the biggest innovation in mobile technology to date…
“The massive $11 BILLION project features a patented display that can take the shape of anything you want.
“A smartphone. A tablet. A smartwatch.
“DJ Koh, head of the company’s mobile business says, ‘To those who say they’ve seen it all, I say, buckle your seatbelt, the future is about to begin.'”
Plenty of companies have talked about or even patented such “watch to tablet” flexible displays, including IBM in 2019, and Samsung is certainly taking the lead in foldable displays at the moment, but that DJ Koh quote is just from their relase of the Galaxy Fold last year.
And the rumors swirl, of course, about Samsung’s biggest competitor…
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“The iPhone is going foldable too.
‘Apple’s foldable new iphone is coming together’ — Forbes
“Apple’s pouring $3 billion into foldable technology. It’s already inking major deals with foldable-screen suppliers.
“The rumors on the inside are, the new folding iPhone prototype is even better than Samsung’s.”
There are always Apple rumors, of course, but it’s natural that they’re working on folding phone projects — not so likely for this year, but one never knows. They patented some folding designs last year, and there were rumors about a folding iPhone in 2017 and about new possibilities from Corning’s new foldable glass products… though the latest rumors last month were that Apple might first come out with a hinged design using two screens instead of a seamless fold.
Regardless, the technology continues to advance, and I guess the real world use of thew new folding phones from Samsung and Motorola will start soon to give us some idea of the durability of the technology… and, perhaps, some insight into whether this will really be a hot trend, or is a solution in search of a problem.
McCall is far more certain than that, though — as one has to be when trying to sell a newsletter, I suppose. Waffling and “on the other hand” thinking may fill up the column inches here at Stock Gumshoe, but it doesn’t sell. Here’s more from the ad:
“The bottom line: It may be decades before we get another chance like this, to get in at the very start of a major technological shift…
“For early investors, it presents the kind of moneymaking opportunity that could turn a tiny initial stake into an absolute fortune.
“So how can you position yourself to profit from this opportunity?”
And that’s when it becomes clear that he’s looking at component suppliers, not devicemakers — he wants to invest in the screen technology itself. As he puts it:
“Invest in the screens….
“Rather than trying to guess which one will win the foldable race…
“By far, the best way for you to capitalize on this trend is to invest in the company developing the one key component that all the phone makers must use.…
All the leading display-makers are working on curved and folding screens, of course, and have been for years… so which company is it that he thinks will lead?
We finally get into some clues from the ad, as McCall spins the story of the first folding screen:
“Over the years, you’ve probably heard a few terms being thrown around like liquid crystal, LED and plasma….
“But not too long ago, scientists working at one little-known company made an even bigger breakthrough in screen technology… called a flexible organic LED screen. Or F-O-L-E-D.
“It’s a display that is thinner, lighter and more durable than we could ever imagine.
“It can bend without breaking.
“In fact, some screens are elastic enough to be rolled around a pencil without any kinks or creases…
“And not too long ago, a lone engineer got a wild idea to build a phone using one of these bendable, indestructible marvels…
“The engineer’s early prototype could be folded and unfolded 200,000 times a year without breaking. That’s over 500 times per day!
“Which meant companies could bring the foldable phone to market.
“And that’s exactly what they’ve just started doing…”
So what is the company behind this FOLED folding screen? Here are the hints for you…
“It’s a company that currently holds over 5,000 patents for organic LED screen technology.
“It’s already inked deals with Samsung, Apple and LG. Three of the top smartphone manufacturers in the world.
“Those three companies make up over 25% of the global market share.
“In addition to that, other major electronics players like Sony, Panasonic and Sharp are all major customers of this company.”
And in imagining a lucrative future, McCall drops a hint about the current revenue number for this company….
“Today the FOLED screen maker I discovered is pulling in $250 million a year. Not bad for a company its size.
“But let’s say this company’s foldable screens capture just three percent of the $522 billion global smartphone market in the coming years…
“That would be enough to increase its revenue to more than $1.9 billion when production and sales are in full swing…”
He then goes on to further imagine more hypotheticals that sound possible, like “capturing just 10% of the smartphone market” and rolling in cash, with $13.8 billion in new revenue. Such daydreaming is generally not helpful, since you’re comparing the cost of one component to the entire value of all the products sold, but, well without daydreaming about future riches, all of us investors would get awfully bored.
And that’s about all the clues we get from McCall… so what’s the story? The Thinkolator tells us that he’s very likely pitching Universal Display (OLED) as this first buy for the folding revolution. The $250 million number is not a precise match, they’ve had revenue above that level since 2019 (most recently a bit over $400 million), and should have EBITDA of $270 million next year on $540 million in revenue if analysts are correct, but it’s in the range… and the 5,000 patents number matches exactly what the company claims. Check out their page on FOLEDs or their latest investor presentation if you’d like a little run-through of some of their technology. They see the market for OLED displays as growing from about $30 billion this year to nearly $50 billion in 2024.
Universal Display has been around for a long time, I owned the shares at one point many years ago, when their organic LED technology was just starting to displace the traditional backlit LED screens. I think the last time I wrote about it was 2017, when the Motley Fool was pitching it as the “one stock to buy before iPhone mania” (and yes, a version of that Fool ad is STILL running today).
The primary appeal for investors in OLED is the fat profit margins — the company primarily provides its OLED patents and chemicals/supplies (they call this “emitters”) to display makers, they don’t build the displays themselves, so the fact that a lot of the revenue is from licensing leads them to have 80% gross margins and almost 35% profit margins — which is what makes the company look downright cheap compared to some of the cloud stocks these days, even if it does trade at a pretty lofty 17X sales. The current price of about $150 means you’re paying something like 35X 2021 earnings estimates for a company that is expected to grow revenues by at least 20% a year. That ain’t bad, even if 2020 will be a little bit of a down year for them.
It wouldn’t be surprising if this area started to get more investor attention, not least because flexible screen maker (and OLED customer/partner) Royole has been contemplating an IPO (they filed with the SEC, but given the scrutiny on Chinese companies they might move their IPO to China now), but for Universal Display it’s really all about sales volumes — if more devices come out using their screen technology, they collect more licensing fees and sell more chemicals, and since their costs are minimal for supporting R&D and keeping a technology lead, most of those additional sales go to the bottom line. OLED is doing pretty well regardless, with their screen technology in most high-end smartphones, and I don’t know if their margins or licensing fees differ for any of the folding technology, but generally folding screens means larger screens… and larger screens are good for them.
I haven’t dug into OLED in any detail in years, but the basics all look strong right now — rapid revenue growth, strong growth in R&D spending but still excellent earnings growth, a very appealing licensing-based business model, and the possibility that a new wave of phone and consumer product upgrades for 5G could bring solid tailwinds, as would, of course, a massive push into foldable phones if that comes. Nothing is guaranteed, of course, and OLED has always carried a high valuation — but now the rest of the technology market has caught up a bit, so 50X earnings and 17X sales doesn’t seem so challenging any longer.
McCall also drops some hints about the other stocks he likes for this “foldable revolution,” so let’s see if we can name any others for you…
“One is a company that just came out with a new smartphone prototype that folds into thirds in a zigzag shape…”
That’s very likely TCL Electronics (1070 in Hong Kong, TCLHF OTC in the US), which has made its name in recent years by breaking into the US TV market building Roku TVs, but also makes a line of lower-cost smartphones and has displayed some new foldable prototypes this year, including a “zigzag” folding tablet/phone. Those are concepts, not ready for prime time, but who knows what the future holds.
TCL came out of nowhere, with some solid revenue growth and early indications of earnings growth from 2016 to 2018 or 2019, along with a dividend that has been impressive but is not particularly predictable… but things have flattened out a little bit since, and it’s likely that 2020 will be a year of declining revenue and earnings as trade has slowed. If they can really leverage their licensing deals (they’ve built their TV brand with Roku in the US and SEMP in Brazil, and have previously tried to rejuvenate the Blackberry brand in phones, and use the Alcatel brand in low-end phones), and become a brand in their own right with their next wave of phones, perhaps they’ll do great — I don’t know. There’s obviously risk, and they’re a fairly small company (about HK$9 billion) in an extremely competitive marketplace for phones and TVs and similar products, but they have held up well so far this year and the latest update was that their exports were growing in Q1 while competitors were shrinking.
I tend to stay away from commoditized manufacturers and assemblers, mostly just because it’s hard for any of them to hold onto a market position without just cutting prices… but if you can find one that’s reasonably valued and about to grow, and perhaps even to carve out its own brand, it’s certainly possible to make money. TCL has some interesting potential there, though there have been some mild concerns about its Roku business recently (I wrote about that here, FYI). Can’t say that I’m an expert on this one at all, and there’s obviously risk for a Chinese company that’s dependent on exports, but it’s pretty inexpensive at about 10X earnings.
How about other clues? We don’t really get any… this is from the ad:
“And the two other companies are major suppliers of this revolution. Both are off the radar of 99% of the investing public.”
And this is from the email that McCall sent, introducing the ad:
“A major supplier of these smartphone screens to Apple and Huawei…
“And smaller up-and-comer in China that could be a big winner over time…”
I would guess that this is hinting at South Korean leader LG Display (LPL) and the emerging OLED manufacturer BOE Technology, which is trying to get an Apple contract (and reportedly failing so far), but BOE really only trades in Shenzhen (at 000725) so it would be difficult to buy. Along with Samsung, the two are leaders in OLED displays… but they’re also competing each other to margin death, and the display business has been hugely challenging for suppliers for decades now as new competitors build out more and more high-capacity plants and cut prices. It could be that the “Chinese up-and-comer” is also a hint about Royole, with hopes that it will actually go public soon and become investable.
This is the chart for LG Display (annual revenue and total return) since it went public a decade ago, it pretty well tells the story of the “commoditized supplier” side of the industry:
Maybe that turns around with another big upgrade cycle, I don’t know… and on that front, TVs can be an even bigger deal than mobile phones (there aren’t as many sold each year… but each one has a far larger display so the annual “square footage” of displays for TVs is often larger than for mobile devices). If I were investing in this space, I’d very likely stick with the companies who have some technology leadership that might be defensible, like Universal Display (OLED) or perhaps Corning (GLW), which is getting closer to a viable folding glass solution that could really make folding phones more appealing if it works (having a folding screen with worse optics, and a crease, might not be all that great… glass could fix those problems, maybe) — though I assume it’s at least a year away still.
That’s just me, though, and I don’t own any of those companies involved (well, other than Apple and Roku, at least). With your money, it’s your call to make — so where do you see the future for folding phones? Who will be the winners? Let us know with a comment below.
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Disclosure: Of the companies mentioned above, I own shares of and/or call options on Alphabet, Nokia, Apple, and Roku. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.