Universal Display (NASDAQ:OLED) Misses Q4 Sales Targets

Full Report / February 22, 2024

OLED provider Universal Display (NASDAQ:OLED) missed analysts' expectations in Q4 FY2023, with revenue down 6.3% year on year to $158.3 million. The company's full-year revenue guidance of $650 million at the midpoint also came in 2.8% below analysts' estimates. It made a GAAP profit of $1.29 per share, down from its profit of $1.36 per share in the same quarter last year.

Universal Display (OLED) Q4 FY2023 Highlights:

  • Revenue: $158.3 million vs analyst estimates of $161 million (1.7% miss)
  • EPS: $1.29 vs analyst estimates of $1.15 (12.5% beat)
  • Management's revenue guidance for the upcoming financial year 2024 is $650 million at the midpoint, missing analyst estimates by 2.8% and implying 12.8% growth (vs -6.1% in FY2023)
  • Free Cash Flow of $29.49 million, down 16.6% from the previous quarter
  • Inventory Days Outstanding: 444, down from 447 in the previous quarter
  • Gross Margin (GAAP): 77.2%, down from 80.7% in the same quarter last year
  • Market Capitalization: $8.70 billion

Serving major consumer electronics manufacturers, Universal Display (NASDAQ:OLED) is a provider of organic light emitting diode (OLED) technologies used in display and lighting applications.

Universal Display Corporation was founded in 1994 by Sherwin Seligsohn after he visited the electrical engineering school at Princeton University and observed research on self-emissive organic materials. In 1996, Universal Display went public with a research contract with Princeton, 3 part-time employees, and one patent pending.

Organic light emitting diodes or OLEDs are thin, lightweight devices that emit light that can be manufactured on both flexible and rigid substrates, which make them suitable for color displays and other lighting products. OLED displays have been capturing market share from inorganic light emitting diodes or LEDs due to superior power efficiency, contrast ratio, video response time, and manufacturing cost. As such, OLED technology is commonly employed in mobile phones, TVs, wearables, AR/VR devices, and automotive markets among others.

Universal Display generates revenue by entering into long-term agreements with our customers through (1) commercial supply agreements for the purchase of specific OLED materials and/or (2) patent license agreements related to the manufacture of display and lighting devices. Commercial supply agreements often involve multi-year purchase commitments for mass production facilities, which gives customers volume discounts and preferential pricing.

Competitors offering OLED or competing lighting technologies include Sumitomo Chemical (TSE:4005), Idemitsu Kosan (TSE:5019), and Cynora.

Sales Growth

Universal Display's revenue growth over the last three years has been mediocre, averaging 15.8% annually. But as you can see below, its revenue declined from $169 million in the same quarter last year to $158.3 million. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Universal Display Total Revenue

Universal Display had a difficult quarter as revenue dropped 6.3% year on year, missing analysts' estimates by 1.7%. This could mean that the current downcycle is deepening.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

Universal Display Inventory Days Outstanding

This quarter, Universal Display's DIO came in at 444, which is 84 days above its five-year average. These numbers suggest that despite the recent decrease, the company's inventory levels are higher than what we've seen in the past.

Pricing Power

In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Universal Display's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 77.2% in Q4, down 3.4 percentage points year on year.

Universal Display Gross Margin (GAAP)

Gross margins have been trending down over the last year, averaging 75.2%. However, Universal Display's elite margins are some of the best in the semiconductor industry, driven by strong pricing power from its differentiated, value-add products.


Universal Display reported an operating margin of 50.7% in Q4, up 1.6 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.

Universal Display Adjusted Operating Margin

Universal Display's operating margins have been trending down over the last year, averaging 36.5%. However, the company's profitability remains one of the strongest in the industry, driven by its solid gross margins and economies of scale generated from its highly efficient operating model.

Earnings, Cash & Competitive Moat

Analysts covering Universal Display expect earnings per share to grow 18.9% over the next 12 months, although estimates will likely change after earnings.

Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Universal Display's free cash flow came in at $29.49 million in Q4, up 437% year on year.

Universal Display Free Cash Flow

As you can see above, Universal Display produced free cash flow of $94.99 million in the last year, a decent 16.5% of revenue. This FCF margin puts Universal Display in a position to reinvest, but we wouldn't mind seeing its cash flow conversion improve a little.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Universal Display's five-year average ROIC was 61.1%, placing it among the best semiconductor companies. Just as you’d like your investment dollars to generate returns, Universal Display's invested capital has produced excellent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Universal Display's ROIC over the last two years averaged 42.6 percentage point decreases each year. The company has historically shown the ability to generate good returns, but they have gone the wrong way recently, making us a bit conscious.

Key Takeaways from Universal Display's Q4 Results

Revenue missed this quarter, although operating income beat slightly. Full-year revenue guidance missed analysts' expectations, which is a major driver of why the stock is down. Overall, this was a mediocre quarter for Universal Display. The company is down 4.2% on the results and currently trades at $179.2 per share.

Is Now The Time?

Universal Display may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

There are numerous reasons why we think Universal Display is one of the best semiconductor companies out there. While we'd expect growth rates to moderate from here, its revenue growth has been solid over the last three years. Additionally, its impressive gross margins indicate robust pricing power, and its stellar ROIC suggests it has been a well-run company historically.

Universal Display's price-to-earnings ratio based on the next 12 months is 38.2x. Looking at the semiconductors landscape today, Universal Display's qualities really stand out, and we really like it at this price.

Wall Street analysts covering the company had a one-year price target of $195.45 per share right before these results (compared to the current share price of $179.20), implying they saw upside in buying Universal Display in the short term.

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