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Profiting From the Booming Smart Devices Industry

Sunday - 7/14/2013, 2:07pm  ET

According to recent reports, the smartphone industry grew by 45.1% in 2012 and is expected to grow by 44% in 2013. And thanks to the growing need for mobile devices, the tablet industry grew by 78.4% in 2012 and is expected to grow by 58.7% in 2013. Furthermore, tablet sales are estimated to surpass notebook sales by 2016. These bold projections point towards a booming industry of smart devices, and I believe that the following companies could be the prime beneficiaries of the boom.

Universal Display

Universal Display is the world’s leading manufacturer and marketer of Organic LED displays, which offer staggering clarity and with best-in-class color vibrance. These displays are energy efficient, and can be deployed in small and thin form factors.

This has made OLED displays a raging success in the growing market for smartphones, and made the existence of ultrathin displays a reality. However, the company generates most of its revenue by deploying OLED displays in Samsung’s (NASDAQOTH: SSNLF) high-end smartphones. Since Samsung dominates the global smart devices industry, with around 22% market share, Universal Display’s huge reliance on Samsung used to be considered as a positive.

But earlier this year, Piper Jaffray analyst Jagadish Iyer, downgraded Universal Display, suggesting that its revenues could continue to shrink. This was because, Samsung had reportedly tied up with Nippon Steel to outsource the production of its OLED displays. With another competitor in the picture, Universal Display quickly lost its luster. But I believe that its downside has been overblown.

This is because Samsung recently announced that it will work with Universal Display to develop Phosphorescent Organic LED, or PHOLED, technology. These new displays will offer more color vibrance, more Pixels Per Inch, or PPI, and consume even less power. In short, PHOLED will fiercely compete with Apple’s retina display. That should lure more consumers toward Samsung, and contribute to higher revenues for both the companies.

Since the propreitary technology will be kept between Samsung and Universal Dislpay, I don’t think Samsung will introduce a third party manufacturer to outsource its production. Samsung’s dependence on Universal Display will gradually increase, due to which it might even look to extend its 6.5 year contract with the display manufacturer. This is great news for Universal, as PHOLED displays will ensure a steady stream of income for the display manufacturer.

Corning

Unlike Universal Display, Corning has been consistently growing at an impressive growth rate. Its shares have appreciated by nearly 20% year-to-date, and analysts estimate its annual EPS to grow by 12% over the next 5 years. In fact, Oppenheimer recently upgraded to outperform rating, with a price target of $18 per share (a 31% premium).

This is because Corning has a long list of clients, and deploys its Gorilla glass in a wide range of devices. Apart from the growth in smartpone and tablet industry, the company stands to benefit from the growth of ultrabook industry. According to estimates, the demand for touch sensitive ultrabooks is expected to double in 2014. These ultrabooks require gorilla glass to prevent needless scratches, which have opened up a new growth avenue for Corning.

Besides that, Corning recently unveiled its higher resolution Lotus XT Glass. According to the company, the new protective glass offers one of the highest PPI, with minimal yield loss in the industry. These displays are meant for high resolution displays including OLEDs and optimized LCDs, and offer minimal loss of color vibrance. Naturally, gamers and imaging related professionals will now feel compelled to buy IPS displays equipped with Lotus glass.

Final words

In my opinion, Universal Display is a value play here, as the street has neglected its growth potential. The company just announced a breakthrough in its PHOLED technology, which could power up its shares again. On the other hand, Corning just developed Lotus Glass, which could further propel its growth rate in the short-medium term.

Since both of these companies operate in the rapidly growing smartphone and tablet industries, they have tremendous growth potential to capitalize on. Hence, I believe that initiating long positions in Corning and Universal Display, is a great way to enjoy the booming industry of smart devices.

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This article was originally published as Profiting From the Booming Smart Devices Industryon Fool.com

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