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Upgrade Sends Universal Display Stock Soaring: 3 Things You Need to Know

With a ticker symbol like OLED, you can rightly assume that Universal Display Corp. (NASDAQ: OLED) is working hard to become the biggest name in organic light-emitting diodes -- the next new thing in flat screen displays. Already, Universal Display counts major industry players including Samsung, LG Display, and AU Optronics among its customers.

This long and varied list of customers hasn't done much good for Universal Display shares, however, which up until this morning, were at negative levels for the past 52 weeks. But according to one analyst, Universal Display is set to become "a key beneficiary of Apple's (NASDAQ: AAPL) adoption of OLED displays for iPhone" as well -- and this could change everything.

"A key beneficiary." That's how StreetInsider.com summed up Goldman Sachs' big upgrade of Universal Display stock this morning. Here are three things you need to know about that upgrade.

Image source: Universal Display.

Thing No. 1: Goldman Sachs predicts a 22% profit

Upgrading Universal Display stock from neutral to buy this morning, Goldman Sachs assigned a $75 price target to the shares. That implied a 35% potential profit at the time the recommendation was made.

Now, Universal Display stock is already soaring in response to the upgrade -- up 9% so far today. But even so, if Goldman is right about its price target prediction, it implies the shares still have a potential 22% profit left in them.

But why exactly does Goldman Sachs expect the shares to go up so much?

Thing No. 2: A seismic shift in tech

There's a "shift to next-gen displays" underway in devices, monitors, and yes, televisions, too, says Goldman. And while many analysts have opined lately regarding the slowing upgrade cycle in smartphones and TVs, Goldman says the "key" to its recommendation is not "end market growth" (people buying more smartphones for example), but rather "penetration" of OLED into the products themselves (i.e., Universal Display grabbing market share away from traditional LED technology).

To the extent that Universal Display is the dominant provider of OLED tech, any switch from LED displays to OLED will redound to Universal Display's benefit.

Thing No. 3: How big of a benefit are we talking?

Currently, Goldman estimates that about 10% of handsets use OLED display technology. In the U.S., Apple has better than 40% market share among smartphone users; in China, 25%. A wholesale shift in screen tech by Apple, therefore, has the potential to as much as triple or quadruple the number of OLED screens in the market over time (as smartphone users upgrade their devices to new units featuring OLED screens).

Goldman expects to see the first signs of this shift in 2017. The transition will gain speed over time, ultimately becoming "ubiquitous" as all smartphone users -- not just Apple, but Samsung, LG, and AU Optronics and others -- adopt and increase their use of the technology. For every 100 million OLED-equipped Apple iPhones sold, Goldman sees $0.35 to $0.40 in extra profit for Universal Display. And once ubiquity is reached, Goldman believes Universal Display could be earning as much as $6 a year in extra profit from smartphones alone -- or "$15+" if OLED becomes the standard in tablets and TVs as well.

The most important thing: Valuation

Goldman calls this latter hypothesis its "blue sky scenario." But before we get carried away with it, and take prediction for fact, let's first take a quick look at where Universal Display stands today -- because priced at 191 times trailing earnings, Universal Display stock looks really, really expensive right now.

It's not quite as expensive as it looks, granted. In fact, valued on free cash flow data provided by S&P Global Market Intelligence, I put Universal Display's price-to-FCF ratio at just 45 currently. That still seems pretty dear based on the current consensus forecast of 22% long-term annual earnings growth -- but at least it's not triple-digit-P/E expensive, and in Goldman's view, at least, there's the potential for Universal Display to grow a lot bigger, and a lot faster, than most other analysts are forecasting.

Goldman Sachs' prediction of a $75 price on Universal Display stock isn't entirely out of the realm of possibility if the company grows much faster than most analysts currently believe possible. But that's a still big if.

Caveat investor.

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