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    Wednesday
    Feb062019

    Buy OLED

    It was a slow night at the Franklin Institute. Three of us watched astronomer Derrick Pitts explain the importance of Galileo’s telescopes to George Takei who played Mr. Sulu on the original Star Trek. When we learned that Sulu would be speaking, I said to my wife, “Let’s see  what an actor who played a space man has to say,” but the room was sold out.

    How strange, I thought, that you can hear an intimate lecture on the end of the geocentric theory, but you can’t get near a talk on a fictional space program. People like simple, futuristic ideas more than fact-based fare. It’s one reason that Tesla, a company that in the last four quarters lost $1.8 billion on $17.5 billion in sales, is worth almost twice as much as Ford, a company that earned $6.2 billion on $118 billion in sales. Another reason is that Tesla is run by a visionary entrepreneur and Ford is run by suits. More on that later.

    At the 2016 Philadelphia Legacies Awards, Derrick Pitts said, "If there is anyone who was born in Philadelphia who has both the imagination and the intelligence of Albert Einstein, it is Sherwin Seligsohn." Seligsohn founded Universal Display Corporation in 1994, and took it public two years later with three employees. It lost money for 17 years. Today, UDC has no debt, $496 million in cash and 220 employees. Headquartered in Ewing, New Jersey, UDC has a market cap of $4.6 billion.

    I first ran into UDC when I met a physicist who worked there. He loved the challenges of organic light emitting diodes (OLEDs) and was incredulous at their low power consumption. OLEDs are the singular theme of UDC: they say their mission is to enable an entire industry. Their web address and their stock symbol are oled.com and OLED.

    OLED has three sources of revenue: (1) licensing their 4800 patents (2) selling organic materials to panel makers and (3) conducting contract research through a company they bought in Delaware. Getting paid to do research in your core competency is good, but that was only 4% of sales in the most recent quarter. Licensing was 30% of sales; material sales were 66%.

    The materials ship to manufacturers of “panels” used for smart phones, TVs, lighting, watches and virtual reality devices like Facebook’s Oculus. Two of three iPhone models now use OLEDs, and the stunning screens of Samsung’s Galaxy S9+ and Google’s Pixel use OLEDs.

    Two flat screen technologies are produced in quantity today: LED LCDs that back-light LCDs with LEDs, and OLEDs that light up each pixel. Designers might say that OLED is a more elegant solution: one layer of pixels can discretely turn on and off instead of requiring several layers of lights, dots and filters that interact to produce a picture. This also makes OLEDs thinner, blacker, and flexible.

    Competitors to OLED have introduced variants of older technologies like QLED and MicroLED, but have so far failed to produce a better system. Reviewer Digital Trends notes, “OLED is the clear winner, even though QLED represents a significant advancement over the LED TVs of old. OLED offers the best viewing angle, the best black levels, better contrast, and is also lighter, thinner, and uses less energy.”

    OLED lighting is also superior. When Wegman’s recently installed OLED lights, the press release noted, “OLED lighting is a uniquely naturally diffused light source with unparalleled light quality.  OLED lighting creates an atmosphere that promotes well-being from healthy light without glare.”

    Universal Display says that its 4800 patents ensure that “Essentially, every commercial OLED product uses UDC.” So…if UDC has a more elegant solution, and costs will decline as volumes grow, and OLED lighting and screens will consume less power in a greener world, then UDC may benefit from a vast global market.

    One more thing: while UDC believes its licensees are all decent people, I like that they collect revenue by selling materials. Developing countries often play fast and loose with intellectual property. This was true even in the U.S.: Mark Twain’s books were sometimes pirated before his own publisher could print the first edition. Charles Dickens was lionized on his American tour until he began lecturing audiences about copyright law. If Twain and Dickens had controlled the ink necessary to print their books, they would have been well rewarded.

    Is UDC a good value? From January 2017 to January 2018, the price climbed from $65 to $203; today, it stands at $97. In the last four quarters, OLED earned about 2% on enterprise value; by comparison, Aumann AG earned 4% and Apple earned 8%. On the other hand, OLED is a bet on the worldwide growth of a fundamental technology, and it is still run by the entrepreneurial team that established it. OLED is extraordinary because, if it had been financed by venture capital, it would have been shut down and sold for parts 15 years ago. However, UDC had a vision that, despite 17 years of losses, led to today’s enviable perch for future growth.

    Virtually every great American company has continued to be led by its founding entrepreneurs: Google, Facebook, Amazon, Netflix. Apple failed under professional managers, and, when the founder returned, became the world’s most valuable company. Berkshire-Hathaway is a collection of entrepreneur-led companies financed by an entrepreneur with a strong cash flow from insurance. Elon Musk is peculiar, but his intensity seems to drive results and inspire confidence in investors. Rapid growth is led by entrepreneurial teams and a vision. Stephen Satell was a fascinated young neighbor of Sherwin’s in Philadelphia. He remembers, "People could not see the future as clearly as Sherwin." Investors in OLED are betting that Sherwin’s vision is still growing, and will double, double, and double again, which would be $37 billion – still a modest valuation for a core technology company.

    While Universal Display is enabling the OLED industry, it does not get much credit. The Wegman’s press release celebrated OLEDWorks, a lighting manufacturer and UDC customer. There is no “Intel inside” for Universal Display, and it is hard to gather as an outsider how thoroughly UDC apparently controls OLED technology.

    This lack of a public persona is also an opportunity for investors. As the OLED market grows and Universal Display becomes more widely known as the industry driver, it may transform from a competent Derrick Pitts to an idolized Mr. Sulu.

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