One maxim about investing in the tech sector is that popular products this year may be obsolete next year. Recognizing the trends in technology can provide investors with enormous gains, especially if they can identify the new technology well before the market gets wind of it.A case in point: flat-panel display technology that outperforms liquid-crystal display (LCD) and plasma. The new technology is called organic light emitting diodes (OLEDs) and it's currently being tested by Samsung and Toshiba. While still in early development, OLED technology is impressive, with the screens coming in thinner than anything currently on the market and requiring much less energy to operate. No one knows for sure just how expensive these televisions are going to be when they are mass-marketed down the road, or even how far we are from seeing these OLED televisions show up in stores. But if the market for OLED television turns out to be even half of the flat-panel display market's $50 billion in sales in 2005, it could be quite profitable for early market entrants. To get in early on the OLED trend, we ran a screen for publicly traded companies involved in the design of OLEDs and came up with two low-dollar names that speculative investors should keep an eye on: Cambridge Display ( OLED) and Universal Display ( PANL). We aren't taking action for the Stocks Under $10 model portfolio because we already own two stocks with exposure to the television industry, and we want to remain diversified. Based in the U.K., Cambridge is the smaller of the two companies, with only a $150 million market capitalization and shares recently trading at $6.53. But its OLED screens, based on polymer OLEDs, or P-OLED's, are already making an impressive showing based on recently announced joint ventures. The company recently signed a joint venture with Japanese industrial giant Sumitomo to form a company to develop its OLED materials into commercial display and lighting applications in Japan. And the company has a deal with IBM (IBM:Nasdaq) to market IBM's flat-panel display backplanes that are used in larger LCD displays already.
Unlike standard OLEDs, Cambridge's P-OLED's also have a place in the inkjet printing market. Most recently, technology Web site engadget.com revealed a P-OLED flat panel display that was created using Cambridge's technology, saying printing light-emitting polymers onto sheets of glass or plastic costs less than creating conventional televisions. On Aug. 9 Cambridge reported second-quarter revenue of $2.7 million, up 4% on an annual basis. Most of its sales now come from early stage licensing, and research and development funding. More importantly, the company only burned $2 million in cash in the quarter, about a 60% year-over-year improvement. While it is difficult at this point to predict when OLEDs will generate a profit for Cambridge, with $15 million in cash on the books the company shouldn't need any financing in the immediate term. Universal Display shares were recently changing hands at $11.43, giving the company a $326 million market capitalization. The company is working with Samsung, flat panel maker AU Optronics, and Toyota to develop commercially viable uses for its OLED technology. One of the unusual aspects of Universal Display's OLED technology is its transparency. The company believes transparent OLEDs could one day lead to sales in the auto industry, where images such as global positioning system-based maps and directions could be displayed directly on windshields. The company is also working on creating a flexible OLED, or FOLED, that would allow for flat screens to be rolled up into cylinders. FOLEDs could possibly be used to make PDA devices lighter and easier to carry, possibly even wearing a PDA as a wrist band. In the most recent quarter reported on Aug. 9, Universal Display said revenue was $3.01 million, up about 105% year over year. And although Universal still isn't making any money, its $40 million cash balance should be enough be enough to carry the company for a few more years without any large equity offerings.
One of the roadblocks to OLEDs making a splash in the market is whether it will be able to scale the technology into larger screens such as the 32-inch flat panel televisions Wal-Mart (WMT:NYSE) will offer for under $1,000 this holiday season, according to recent industry chatter. And with LCD and plasma prices coming down recently as manufacturing capacity has risen, the potential economic advantages of OLED screens for consumers could be minimized. In May, Samsung unveiled a 40-inch OLED-based screen. And the energy savings from the lighter OLEDs that don't require a constant running back light may still be enough to entice further investment and ultimately mass production of OLED screens. We believe both stocks will benefit once the media picks up on potential for OLEDs. While speculative, this technology has the Game Breaking characteristics we screen for when looking for companies that can change the way business is done in an industry. The upside potential from the current prices more than makes up for the downside risk.