If You Want To Play The Monitor Business, Here’s Where The Action Is
Monitor and Display Technologies
The monitor and
display business has substantial growth potential. But instead of playing the
OEMs’ stocks, the component suppliers are where the action is — companies that
supply technologies to the manufacturers of monitors and displays. At the
finished product level it’s a tough segment for OEMs make profitable: like all
high volume commodity businesses, monitor and display products have slim margins
and declining prices
Furthermore, at the large OEMs sales of monitors and displays constitute a
relatively small part of total sales; so even significant growth in this
business is unlikely to lead to a significant move in large OEMs’ stock prices.
The
monitor and display business, and most of its component suppliers, is in for a
world of hurt over the long term. This space is analogous to the PC space in
1992 with hundreds of vendors, a fragmented market, and prices and margins
crashing. Over the long-term I think monitors and displays will be a super ugly
business.
Display
monitors are generic – like cartons of milk – and the monitor business can
probably support only a handful of OEMs that are sustainably profitable.
Currently, there are some hundreds in the monitor / display segment; many are
names most people have never heard of – mostly Asian companies and DBAs. Most
monitors are so easy to manufacture that many of these companies are little more
than “garage” operations just putting components together: mom and pop
operations actually make a living throwing them together in a garage type
setting. So it seems that making monitors is easier production than the PC in
the white box market. Little wonder that so many small companies have sprung up
trying to get share. There are just too many vendors, and they just keep popping
up. This kind of over-saturation that hurts component suppliers and this is
probably just the beginning.Â
The
monitor OEMs will engage in a nasty price war at some point. With this amount of
product out there in abundance and in generic form it’s difficult to see them
holding onto margins. There’s a flood of monitor product of all shapes and sizes
in the marketplace and much of it is white-box oriented. Once a price war
begins, it will likely take one to two years for the herd to thin out to a
reasonable number and for prices to stabilize. But by then, the margins and
growth rates will have declined.
When the
price wars hit and nobody makes margins, most of the suppliers to this segment
will probably suffer. I can’t envision any supplier doing well when a generic
product like a monitor is sold by hundreds of manufacturers and prices are
falling substantially and rapidly. Perhaps display / monitor pricing could
potentially get as ugly as printer hardware. (If only Carly could find a way to
sell toner for monitors!)
The larger
OEMs, which account for the bulk of the sector’s market share, and which are
most likely to survive, are mostly Asian names — Viewsonic, NEC, KDS, Samsung,
etc. These are not pure-plays; and while they account for the lion’s share of
segment sales, the monitor business as a percentage of these companies’ total
sales is still small. Samsung and NEC / Mitsubishi seem to have a lot of
monitor product, but as a percentage of total revenues it’s not substantial and
even growth in monitor sales would be unlikely to move the stock price. There
are relatively few pure play monitor companies but two are CTX and Viewsonic.
The big
Asian players in LCD include Seiko-Epson, Sony and Toshiba – all very strong
competitors. Sony and Toshiba, due to their TV technology, worldwide footprint
and hardware capabilities, and Epson given its relatively new flat screen
technology. The large consumer electronics companies (mostly Japanese and other
Asian conglomerates) are in a position to really hurt the larger computer
companies as convergence develops between consumer electronics (TVs / DVDs,
etc.) and PCs. Consider Gateway as a poster child for a company trying to move
in this direction, but obviously lacking enough horsepower to compete
long-term. Companies like Toshiba, Sony, Samsung, Epson, NEC, Hyundai, etc. can
hurt the likes of HP, IBM, and Dell, etc. in the electronics space Other names
to consider on a longer-term play on competitive shifts in the electronics
industry include Matsushita, and possibly Taiwan Semiconductor, Infineon. But
those would be big-picture plays.
Investible themes
in the space include high definition television (HDTV), liquid crystal over
silicon (LcoS), liquid crystal display (LCD), and other flat screen
technologies, film coating technologies, as well as some of the semiconductor
component suppliers.
- LCoS — liquid crystal over
silicon – is a “micro-projection”
technology
typically applied in flat-panel TVs and monitors. This technology requires
less optical quality glass than LCD and plasma display technologies, which
makes it less expensive to incorporate in TVs, monitors, and displays. - LCD — liquid crystal display
– is a thin, lightweight display device with no moving parts and consists of
an electrically controlled light-polarizing liquid trapped in cells between
two transparent polarizing sheets. Each cell is supplied with electrical
contacts that allow an electric field to be applied to the liquid inside. - Plasma display is an emissive
flat panel display where light is created by phosphors excited by a plasma
discharge between two flat panels of glass. Plasma displays are bright, with a
wide color gamut, and can be produced in fairly large sizes, up to 150 cm (60
inches) diagonally. While very thin (usually less than four inches), plasma
displays use twice as much power as a comparable CRT (cathode ray tube) TV,
and in 2004 the high cost is prohibitive for most people. The use of
phosphors, as in CRTs, limits their useful life to 20,000 to 30,000 hours.
Semiconductor companies that
supply to the plasma, LCD and flat screen manufacturers include Genesis
Microchip, Trident Microsystems, Pixelworks, National Semiconductor, Texas
Instruments, Zoran Corp., ATI Technologies, and Broadcom. These companies supply
a variety of products – image processors, DLP chips, etc. I think GNSS, TRID,
and ATYT will all be interesting in 2005 / 2006, and can probably be picked up
over the next six months at lower prices.
High Definition or Digital
TV should experience more growth in 2005, and since late August, I’ve been
hearing the LCoS flat panels coming out for the Holiday’s should be a big hit.
But rather than play this theme with stocks of the hardware manufacturers (like
Sony, Mitsubishi, etc.) I’d look at suppliers to these types of companies. One
name that’s performed very well since early 2003 is Spatialite, which trades on
the NASDAQ under the ticker HDTV. Spatialite develops LCoS micro-displays, which
provide high-resolution images and are used in monitors and TVs.
Applied Films is a Japanese company that manufactures thin film
deposition equipment used in flat panel displays, architectural, automotive and
solar glass-works and product packaging and electronics industries. The company
trades as AFCO on the NASDAQ. The products include thin film coating equipment
and thin film coated glass. Two major customers are Guardian Industries and LG
International. International markets are Germany, Hong Kong, Belgium, Taiwan,
Korea, Japan and China. The company’s revenues are accounted for mostly by thin
film coating equipment, around 90 percent of revenues, and thin film coated
glass accounts for the balance. Just note the company’s often lumpy bookings.
Shibaura Mechatronics
and Micronics Japan are
two other Japanese companies that could be worth a look. They trade on the
Nikkei; I don’t see an ADR for either company.
Westaim is a
small cap Canadian manufacturer of flat screens, which trades most volume on the
TSX under WED, but also trades on the Nasdaq under WEDX.
Westaim
has two primary businesses:
one, Nucryst Pharmaceuticals, develops new technologies for fighting infection
and the other, iFire, develops flat panel displays (iFire Technology). (I’m not
totally won over by the combination of flat panel and biotech lines of
business.) IFire is the business that interests me here.
However, management’s lack of ”
real deals” with their flat screen technology concerns me, and with technology
issues it is often who moves fastest to market to secure the first mover
advantage that wins; it’s a race. The risk with WEDX is holding the position
solely on the basis of “hoping” for an imminent JV deal or alliance. Also, the
stock’s thin trading volume is a drawback. One mitigating factor for holding
WEDX for a long-term position has been Westaim’s large cash position.
Westaim
has a cost advantage well below plasma screens, and a new patented “Blue
Imaging” manufacturing method
lowers the cost another 30%.
Westaim commissioned a study that claimed its costs will be 50% lower than that
of LCD screens from new fabs. I’d like to see management moving faster: I’ve
considered whether I’m being impatient and my expectations for Westaim’s
time-to-market, or whether management is missing the boat. My impression is that
Westaim is going as fast as it can, but that potential, large partners (such as
Sony, Samsung, etc.) expect a “show me†story and are unlikely to jump to a new
technology unless it is a lay-up. In 2004, there was some disappointment in the
market about the timing of production. The market was widely expecting 2005,
whereas now it looks like there will be limited 2005 production with a full
ramp-up in 2006.