Trade Idea: 70% Upside For Universal Display Stock If China Folds

Hammered by tariff announcements this year, Universal Display stock (NASDAQ:OLED) experienced a significant 27% fall in a month. It did see a 17% spike following President Trump’s announcement of a 90-day pause on tariffs for non-retaliating countries, but that rally was short-lived. While the ongoing tariff standoff with China, which accounts for a substantial 35% of OLED’s revenues, remains a valid worry, several factors suggest that the outlook for OLED might be more favorable than negative, potentially presenting an attractive buying opportunity. However, if you seek upside with less volatility than a single stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.

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Price Action Indicates Great Buy Point

• OLED’s current price is situated within a historical support zone that has attracted strong buying interest in 2018, 2020, and 2022.
• Furthermore, the stock has traded within a defined range for nearly a decade and is currently near the bottom of its long-term swing cycle.
• This confluence of technical indicators suggests a potentially advantageous entry point.

Diluted Impact of China Standoff

• While a significant portion (35%) of OLED’s revenue originates from China, it’s crucial to understand the nature of this revenue.
• Universal Display primarily licenses its technology to manufacturers. The OLED panels produced in China are not solely for the US market; they are incorporated into products exported globally.
• Given the US’s importance as a consumption market, China will likely need to engage in negotiations at some point, mitigating the long-term impact of the current standoff.

Numbers Aren’t Bad, And Analysts Are Bullish

• Universal Display exhibits robust financial health. The company achieved a growth rate of over 12% in the last 12 months and boasts impressive profitability metrics, including a 3-year average cash flow margin of nearly 30% and a last-twelve-month net margin of approximately 35%.
• Additionally, its price-to-earnings ratio is reasonable at under 30, and the company carries no debt.
• This strong financial foundation is further supported by the average of analyst price target, which is nearly 70% above the current price of $110.

All Good But What Is The Catch? 

• Despite the positive indicators, it’s important to acknowledge the inherent risks associated with any individual stock.
• OLED has a history of significant price drops (over 50%) during broader market downturns, as seen in 2018, 2020, and 2022.
• This sensitivity is understandable given that its technology is used in consumer discretionary products, which tend to be more vulnerable during economic slowdowns.
• However, OLED has also demonstrated a capacity for rapid recovery following these dips.
• Considering the current market cycle and overall sentiment, this potential for a rebound could be advantageous.

Overall, considering the favorable price action, the global nature of OLED’s technology licensing, its strong financial performance, and positive analyst outlook, OLED stock appears to present a compelling buying opportunity. However, investors should be mindful of the stock’s historical volatility and potential for significant drops during market downturns. Not too happy about the volatile nature of OLED stock? The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

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