Sapphire Smartphone Screens from GT Advanced Technologies

Synthetic sapphire is a very unique material that is created by heating aluminum oxide to almost 4000°F until the powder melts and it can then be formed into a single crystal. The resulting product is second in hardness only to a diamond and incredibly transparent. Sapphire has been historically expensive to produce, so applications have been limited to include airplane windows, LEDs, and scratch-resistant watch covers. Over the next 5 years though, the market for sapphire is expected to grow from under $1 billion dollars to over $5 billion, a compound annual growth (CAGR) of +50%:

Sapphire_Growth
Source: Yole Developpement Sapphire Market Update March 2014

While the majority of the current market for sapphire is for LEDs, this application area is not expected to grow much while non-LED applications such as consumer electronics are expected to drive most of the growth. One company is soon to become the undisputed global leader in the production of sapphire. GT Advanced Technologies is ramping up to manufacture twice the amount of sapphire currently produced globally, an amount that exceeds that of all other 100 sapphire manufactures combined. Financing for this ramp-up is being provided by none other than Apple.

About GTAT

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With a current market cap of $2.39 billion, New Hampshire based GT Advanced Technologies (NASDAQ: GTAT) is a diversified technology company with crystal growth equipment and solutions for the global solar, LED and electronics industries. The Company breaks down their business into three areas; photovoltaics, polysilicon, and sapphire. The Company’s revenues have plummeted -69% from nearly $1 billion in 2012 to $298 million in 2013 while they shift their focus to become the global leader in the production of sapphire. Investors have applauded this change in focus by driving the share price up over +176% in the past year. The shift in focus shows in GTAT’s 10-Q filing several weeks ago. In the first half of this year, revenues for sapphire increased over +130% from the same period the year prior to $42 million. Revenues for polysilicon fell -97% from $188 million to just $6 million. Revenues from photovoltaics grew +54% from $15 million to $24 million.

GTAT and Apple

Apple currently uses sapphire to cover the iPhone’s camera lens and fingerprint reader, and now they are looking to ramp up usage significantly. In November of last year, GTAT announced a multi-year supply agreement with Apple Inc. to provide sapphire material. As part of the agreement, Apple purchased a 1.4-million square foot facility and leased it to GTAT to be used exclusively to supply sapphire material to Apple. Apple further agreed to prepay GTAT $578 million to outfit the factory with cutting-edge sapphire production furnaces. Speculators believe that Apple may be looking to use sapphire screens for some or all of the new iPhone 6 smartphones. Others think that Apple is looking to use a sapphire laminate along with glass based on this patent Apple filed last year shortly before making their investment in GTAT.

Smartphone Revenue Potential

According to Eric Virey, a senior analyst at French research firm Yole Développement, the cost of a sapphire screen would be around $16 as opposed to $3 for a “Gorilla Glass” screen commonly used in today’s smartphones. According to Gartner, 601 million smartphones were manufactured in 2013, a number that is expected to increase to 965 million by 2016. If just 10% of all smartphones were manufactured with a sapphire screen, this would present a $1.5 billion dollar opportunity.

Conclusion

With Apple being potentially GTAT’s biggest customer, investors can expect wild swings in the stock price as speculators provide various reports on the technology’s scalability and usage. Regardless of short-term fluctuations, the real potential here is a company that will be the dominant global supplier of a material that is expected to increase in demand at a CAGR of +50% over the next 5 years. The key metric to watch going forward will be growth in sapphire revenues which will show the company is successfully scaling this business line. The release of the iPhone 6 which is speculated to take place next month will also be a significant event for GT Advanced Technologies (NASDAQ: GTAT) investors as they will learn just if and how Apple plans to use all the sapphire production they have invested so heavily in.

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