Today’s bout of cutting-edge technology comes straight from…
The 19th century!
As crazy as it sounds, LCD (liquid crystal display) technology was actually conceptualized in the late 1800s, when Austrian chemist, Friedrich Reinitzer, first discovered the properties of liquid crystals.
He and fellow scientist, Otto Lehmann, then began experimenting with potential uses for it.
The only problem was… it was the 19th century! The world wasn’t even close to finding uses for it.
It turns out that the guys were just ahead of their time. Way ahead.
Their work laid the foundation for a torrent of further LCD research and innovation throughout the 1900s. This includes electroluminescence – the science behind organic light-emitting diodes (OLEDs).
Today, LCD and OLED displays are in televisions, computers, mobile phones, tablets, cameras… just about anything with a screen.
Needless to say, the world’s tech heavyweights are “all in” on this massive field.
But you’re not going to make any money by playing one of the big boys.
Instead, it’s better to consider lesser-known players – but ones that are still crucial to the industry.
To separate the contenders from the pretenders, I use my uncompromising C.H.A.O.S. tech stock screener. If you’re unfamiliar, here’s how it works.
So let’s see how Taiwan’s AU Optronics (AUO) stacks up…
AU Optronics designs and manufactures the thin film transistors used in today’s LCD, OLED and active-matrix organic light-emitting diode (AMOLED) panels.
In the first quarter, it reported slightly lower sales, as shipments of LCD TVs, desktop monitors and notebook PCs fell 18.7% from the fourth quarter.
However, the company’s better mix of products and cost structure have radically changed the bottom line.
For 10 straight earnings reports, the firm didn’t report a profitable quarter. But it’s reported four straight profitable quarters, beating estimates substantially.
And based on a five-year EBIT valuation, the stock has…
- A conservative price target of $8.28, with a 54.1% margin of safety – up 117%.
- A normal price target of $11.48, with a 66.9% margin of safety – up 202%.
- An aggressive price target of $14.67, with a 74.1% margin of safety – up 286% from today.
Also, based on its net reproduction valuation, the company has a $9.61 intrinsic value – 153% higher than its current level.
Keep this up, and AU Optronics has the potential to more than double.
C.H.A.O.S. Meter: 16/20
It wasn’t until the mid- to late- 2000s that LCD displays swamped the consumer electronics market. Suffice it to say, they’ve had an incredible impact in a short time.
As such, AU Optronics has similarly high impact in the industry… although few seem to know it.
The company makes both LCD and AMOLED displays with its thin-film transistor (TFT) technology. Each display works differently, and with consumer demand for both, AU Optronics is satisfying that demand.
Its Hyper-LCD displays offer even greater viewership through “Advanced Hyper-Viewing Angle” (AHVA) technology, which gives flawless picture quality, even at various angles.
But its AMOLED technology is really raising the bar.
By adding a layer of semiconductor film behind an OLED panel, it activates each pixel individually, rather than all at once with a backlight, like LCDs do.
Not only that, it does so 1,000 times faster than LCDs.
This is ideal for larger, high-definition displays with a massive amount of pixels – like the 55-inch 4K Ultra-HD curved display that Panasonic (PCRFY) showed off at this year’s CES, using AU Optronics’ technology.
And given that AMOLED technology also helps power conservation, AU Optronics’ displays are on smaller devices like smartphones and tablets, too.
In fact, just this April, the firm unveiled the world’s highest resolution, 5.7-inch AMOLED touchscreen display, stuffed with a record-breaking pixel dimension of 2,560 x 1,440.
AU Optronics’ displays are also on ATM machines, digital advertising displays, medical screens, digital photo frames, vending machines and refrigerators.
Bottom line: AU Optronics’ technology doesn’t just exist in several major growth trends… it’s also advancing those trends by pushing the bar even higher.
C.H.A.O.S. Meter: 19/20
Recently, Zacks upgraded AUO shares to “Outperform,” and raised its price target to $4.10. While that’s only a modest 8% from current levels, other analysts have raised earnings estimates by over 250% for fiscal 2014.
Yet AUO has declined nearly 5% since that news. Clearly, the market hasn’t priced in those adjustments, yet. And that speaks to AU Optronics’ relative anonymity.
However, now that it’s steadily beating earnings and hooking up with some of the tech sector’s biggest names, analysts and investors will eventually catch on. When they do, shares will soar.
C.H.A.O.S. Meter: 17/20
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As a result, the display business accounted for 96% of AU Optronics’ $13.4 billion in net sales in 2013.
Late last year, following an order from Sony, AU Optronics started mass-producing 65-inch curved TV panels. It was the first company to ever mass-produce such a high-tech product, beating Samsung (SSNLF) and LG (LPL) to the punch.
AU Optronics has also secured orders from Apple (AAPL). In 2012, it received an order from Apple for two million iPad Mini displays. Apple then upped its order to three million – and AU Optronics delivered every one.
AU Optronics is on Apple’s supplier list again for this year, and while product details are undisclosed, there are a few compelling possibilities…
- Apple’s mobile or PC retina displays.
- Apple TV.
I believe the latter is most likely. Why?
Because when AU Optronics announced its 5.7-inch AMOLED, it also said that a 1.6-inch display is in development, specifically geared toward wearable technology.
In addition, AU Optronics has just secured orders from Xiaomi, a company dubbed “the Apple of China.”
Needless to say, this is a massive market. One where Xiaomi has a significant “home-field advantage” over Apple. Indeed, its rapid growth is due to the fact that while its products are nearly identical to Apple’s, it offers them far cheaper to the Chinese market.
AU Optronics’ panels are also set to be incorporated in Xiaomi’s 55-inch, Ultra-HD TVs.
Keep in mind, the display industry does experience some seasonal fluctuations. However, the second and third quarters tend to be the best time of the year for orders, with major sporting events playing a role. For example, with the World Cup starting in two weeks, TV manufacturers are seeing an increase in 4K orders.
On the downside, AU Optronics relies a little too heavily on a few clients. In 2013, for example, 40% of its revenue came from its five largest customers.
Plus, the company’s actual order structure can be unpredictable. You see, its customers don’t really place “orders” at all. Rather, they submit “monthly, non-binding, rolling forecasts,” based on their estimated demand several months ahead.
Actual purchase orders don’t arrive until closer to shipment dates… which, of course, could turn into cancellations. And since AU Optronics bases its inventory on these “rolling estimate orders,” it could be stuck with a lot of product, and no money for it.
C.H.A.O.S. Meter: 15/20
AU Optronics plans to scale its growth in two ways…
1. Boost Solar Revenue
Aside from its display business, AU Optronics also manufactures polysilicon, ingots, wafers and solar cells. However, its solar business only accounts for 4% of total annual revenue.
In fairness, though, the company only broke into solar five years ago, and its mono-crystalline technology already increases efficiency by over 20%.
To help expand, AU Optronics has established partners in the United States, Europe and Africa, including major player, SunPower Corporation (SPWR).
And last month, the company announced that it jointly founded Taiwan’s Star River Energy Corporation. This could prove lucrative in boosting Taiwan’s renewable energy resources.
2. Expand Globally
To better meet the demands of its customers, AU Optronics is expanding overseas. For example, it recently boosted efficiency to Chinese customers by setting up an LCD assembly operation there.
As AU Optronics grows, though, it will certainly face challenges. The display business is highly competitive, and its rivals include a host of tech giants.
However, the company does hold plenty of award-winning patents. A total of 12,213 globally, to be exact, with an additional 3,890 pending. These are critical assets in the ruthless consumer electronics world, where patent infringement suits are common.
C.H.A.O.S. Meter: 15/20
Final Verdict: While AU Optronics isn’t an 85-pointer, it’s still a compelling company…
- Its technology is brilliant and hugely important.
- It gets orders from the world’s biggest tech companies.
- It has a stable bottom line.
- It has plenty of room to grow internationally and in its solar business.
It fell just shy of the key 85 points because of its unpredictable, seasonal revenue stream and its order-processing model.
Regardless, it has a very bright future, and with the second quarter typically its best, the timing is right to consider picking up a few shares.
Your eyes in the Pipeline,