February 1, 2023
This Tech Dividend Development Inventory Is Shaking Off Weak Smartphone Gross sales

For a lot of high-growth tech shares, the bear market of 2022, as vicious as it has been, has merely unwound good points from the final two to 3 years. The bear has been significantly merciless to Common Show (OLED -0.09%). After peaking in early 2021, the supplier of OLED display supplies and licensor of display manufacturing expertise has coughed up extra than simply a few years of good points. The inventory is down 39% within the trailing-five-year interval.  

Any inventory tied to extremely cyclical manufacturing companies goes to exhibit above-average sell-offs. Even the asset-light Common Show isn’t any exception. And but, whilst traders fret over a weakening marketplace for smartphones that’s more likely to final into 2023, the corporate continues to be rising. Is the inventory a purchase after a stable third-quarter earnings replace?

An ideal storm for the smartphone trade

Corporations with an outsize reliance on the smartphone trade have been reporting weak steering for the fourth quarter and into early 2023. In keeping with main smartphone chip designer Qualcomm, smartphone unit gross sales are headed for a share drop within the low teenagers this 12 months in comparison with 2021.

On condition that a variety of mid- to high-end smartphone fashions use ultra-high-definition OLED screens at present, it is no surprise that traders have been feeling glum about Common Show. China’s zero-COVID lockdown coverage is not serving to the scenario, neither is the Federal Reserve’s aggressive rate of interest hikes to attempt to tame inflation (larger charges decrease the current worth of shares). 

And but despite all of it, Common Show is hanging in. Income reached a brand new quarterly report of $161 million within the third quarter (an almost 12% enhance over a 12 months in the past), and web revenue was a really wholesome $68 million (a profitable web revenue margin of 42%).  

Even higher, within the face of financial fear, administration reiterated its full-year 2022 steering for income to be about $600 million. That is in no way a excessive development charge, however this outlook does indicate an 8% enhance over 2021.

Extra than simply telephones, and extra than simply displacing LED

Granted, there’s a excessive stage of uncertainty about how financials will pan out in 2023. Anticipate some early steering in just a few extra months when Common Show stories on its fourth-quarter earnings. However this firm is much from reliant on smartphones. Actually, units with far bigger shows (TVs, laptops, desktop laptop displays) are actually starting to succeed in an inflection level the place OLED begins to make sense versus legacy LED screens. 

CEO Steven Abramson famous a analysis report within the final earnings name that predicts larger-screen OLED shipments (laptops and displays) will enhance 400% over the subsequent 5 years. TV and laptop adoption of OLED could be vital, since far bigger screens imply exponentially extra OLED primary materials bought in comparison with that for a small smartphone — to not point out larger licensing income from patents on manufacturing processes.  

And Common Show can also be laborious at work to convey blue phosphorescent OLED materials to market, which might be a part of its pink and inexperienced supplies. A brand new and extra environment friendly manufacturing methodology known as OVJP (natural vapor jet printing) can even develop into a significant income generator within the coming years, and will assist extra producers make the change from LED to OLED if it helps drive down price.

UDC inventory seems to be like a discount to me after the third-quarter replace, although I anticipate lots extra turbulence whereas the market types out financial woes and a slowdown in tech manufacturing. Shares commerce for 25 instances trailing 12-month earnings, and at the moment pay a small however rising dividend yielding 1.1%. The dividend cost is small proper now, nevertheless it’s increasing quickly. It has been elevated yearly since UDC began it again in 2018, and was elevated by 50% earlier in 2022. 

This Tech Dividend Development Inventory Is Shaking Off Weak Smartphone Gross sales

Information by YCharts; TTM = trailing 12 months..

With Common Show extremely worthwhile and holding $863 million in money and investments on the books (and nil debt), there’s loads of room for this dividend to climb even larger. And as soon as the market will get a touch that this slowdown is bottoming, shares might soar as they’ve prior to now after cyclical downturns. As Common Show shakes off smartphone trade woes, I stay a purchaser right here.

Nicholas Rossolillo and his shoppers have positions in Qualcomm and Common Show. The Motley Idiot has positions in and recommends Qualcomm. The Motley Idiot recommends Common Show. The Motley Idiot has a disclosure coverage.

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