LGD, Google, Korea and Japan ?3

Some subscribers have mentioned/asked about the recent press coverage of Google potentially subsidizing LG Display flexible mobile AMOLED expansion in return for product...  I saw the original Korean article that prompted all this early yesterday morning and didn't think it was worth writing up in that it didn't change my outlooks for any of the companies involved.  To my mind, it's just more follow through on what I wrote a week earlier, when I said that the market is finally realizing that AMOLEDs are about to take over the display industry.  That realization mostly comes from LG Display's keynote in Japan, and the ET News article seems to be mostly a rehash of earlier rumors whose publication was prompted by the keynote.

Some experience and perspective on the Korean press can be instructive here.  I think of it like advice from a really old grandparent.  What they are saying is not necessarily wrong or right.  It will probably actually be useful at some point in your life, but it can be very hard to know when.  Furthermore, the details of the world may have changed from the experience that is being related.  In short, there's nothing reliable here that we didn't know already.  If there was, LGD would probably announce it.

Instead, I think the stats that LGD execs conveyed in the keynote are much more interesting:

  • LG dominating luxury TV sales: the company claims 80% of 65" sales priced over $3K and nearly 100% of 55" above $2K
  • AMOLED generated 10% of revenue in 2016: I'm a little skeptical about this being a full-year stat.  More likely, it was up to that by the end of the year.
  • AMOLED at the tipping point: the screens will be in 40% of phones this year, and 58% next year, up from 27% in 2014.

Yet LG Display only expects 50% of its revenues to come from AMOLED by 2020.  This is because of massive industry expansion:

Global AMOLED Production Capacity (m2)
2014
2016
2018 (projected)
3.6M
5.3M
14.7M

Samsung will continue to dominate the current generation of displays, and be progressively undercut by Chinese suppliers like BOE, EverDisplay, Tianma and Truly.  Somewhat surprisingly, LG Display only projects that 50% of its revenue will come from AMOLEDs by 2020.  This indicates to me that management will only invest in the next-gen flexible and large screens, where it has a lead, or where its sales are guaranteed and the manufacturing subsidized.  That's smart but it also makes for potentially limited upside.  This is why I was calling out LPL shares at $12.50 and below, but not so much in the mid $13 range.  The shares are cheap and could go higher, but I prefer to be conservative in this market and in the face of continually evolving TV competition.  Management is right to stick to its areas of strength, while keeping its customer base as diversified as possible, and investors are right to price that appropriately.

As for the rest of the industry, I've already discussed how this explains the up-tick in MX and OLED shares.  The rampant demand could still be good for companies like eMagin or AU Optronics, and for investors inclined toward risk, I think EMAN now offers better profit chances at current entry points.  However, it's a fallacy to think that industry or even company health necessarily means good investment prospects.  Conflating the two is a classic retail investor mistake.  Again, none of this really changes the outlook I've been communicating: for UDC I expect the next year or so is as good as it gets due to the changing technology in the industry; OLED stock may run because of that, but I'm not willing to play musical chairs with it.  I personally prefer investment propositions where time is on my side, which probably means I will wait and short it when the time and pricing appear right.  All I'll say in my long service, is that evidence continues to mount that such a time is approaching.  As always, it's all about valuation over the long-term.