What Should Investors Do With Small Cap Universal Display Corporation (OLED)? GLW, DAKT & SGOC

Small cap flat panel display stock Universal Display Corporation (NASDAQ: OLED) was hit by bearish news in late November and the trend lines on its technical charts appear to be confused as to what direction the stock will head, meaning its probably time to take a closer look at the situation along with the stock's performance verses that of flat panel display peers like large cap Corning Incorporated (NYSE: GLW) and small cap players like Daktronics, Inc (NASDAQ: DAKT) and SGOCO Group Ltd (NASDAQ: SGOC)

What is Universal Display Corporation?

Small cap Universal Display Corporation is a world leader in the development of innovative organic light-emitting diode (OLED) technology for use in flat panel displays, lighting and organic electronics. Universal Display Corporation also has one of the largest patent portfolios in the OLED field with licensing rights to over 1,000 issued and pending patents worldwide in a broad array of OLED technologies, materials and processes.  Moreover, Universal Display Corporation has entered into more than 30 business agreements with leading manufacturers in Japan, Korea, Taiwan, China, Europe and the US including with companies such as Chi Mei EL, DuPont Displays, Konica Minolta, LG Display, Samsung SMD, Seiko Epson, Sony, Tohoku Pioneer and Toyota Industries.

For reference, Corning Incorporated is also an LCD glass maker; Daktronics is a designer and manufacturer electronic scoreboards, programmable display systems and large screen video displays; and the SGOCO Group Ltd is focused on product design and brand development in the Chinese flat panel display market.  

What You Need to Know or Be Warned About Universal Display Corporation?

Near the end of the week just before Thanksgiving, Universal Display Corporation plunged nearly 20% in inter day trading only to close down in the high single digits after the company announced that the European Patent Office (EPO) had issued a decision on the previously-disclosed appeal of a prior ruling relating to a patent held by the company (the opposing parties being Sumitomo Chemical Company, Merck Patent GmbH and BASF SE). Apparently, the EPO panel revoked the patent previously allowed by the lower EPO, which had upheld the broadest claim of coverage for organometallic iridium device architectures.

Besides the fact that Universal Display Corporation has more than 3,000 patents, the press release noted:

"The EP '238 patent is one of more than sixty patents issued worldwide that cover four early fundamental phosphorescent OLED inventions developed at Princeton University and the University of Southern California, which are exclusively licensed to Universal Display Corporation."

Nevertheless, Canaccord Genuity's Jonathan Dorsheimer reiterated a Sell rating on the shares and said:

"Universal Display Corp just lost its appeal for core patent EP '238.' We believe this decision is potentially transformational and likely to affect the Samsung agreement, roughly +90% of OLED sales."

However, Jagadish Iyer of Piper Jaffray noted:

"While this ruling is unlikely to change the course of the Samsung licensing agreement we believe it puts a dent in the armor of OLED given that its core patent for phosphorescent OLED material (iridium based organometallic) has been revoked. We expect OLED to appeal while we see its negotiating power with upcoming customers (LG, AUO) likely gets weakened."

Canaccord Genuity's Jonathan Dorsheimer then issued another bearish note last Monday which pointed out that if Samsung is stuck because of how it negotiated the contract, an extension beyond the expiration in 2017 is less likely. Dorsheimer also believes that a European ruling could prompt "further negative rulings in other geographies, including the US," resulting in increased competition that could make it harder for it to sign "favorable commercial agreements in the future."

Share Performance: Universal Display Corporation vs. GLW, DAKT & SGOC

On Wednesday, small cap Universal Display Corporation rose 1.6% to $33.67 (OLED has a 52 week trading range of $22.78 to $39.74 a share) for a market cap of $1.56 billion plus the stock is up 31.4% since the start of the year and up 361.9% over the past five years. Here is a look at the long term performance of Universal Display Corporation verses that of Corning Incorporated, Daktronics and SGOCO Group Ltd.:

As you can see from the above chart, small cap Universal Display Corporation has outperformed large cap Corning Incorporated and small caps Daktronics and SGOCO Group Ltd.

Finally, here is a look at the most recent technical charts for all four stocks:

The Bottom Line. Given the messy or uncertain situation with the patent and Samsung contracts, new investors will probably want to stay away from Universal Display Corporation or at least wait for some clarity. However, current investors do not appear to be panicking as the stock has not plunged – meaning Canaccord Genuity's fears could be unfounded.