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

Click for company website

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.

Here at Nanalyze, we write about tech stocks a lot, but most of our money goes into a dividend growth strategy. Our 30 dividend stocks provide an income which increases every year. Find out how to build your own growing income streams with dividend growth stocks - Quantigence - A Dividend Growth Investing Strategy - freely available to Nanalyze Premium subscribers.

3 thoughts on “Sapphire Smartphone Screens from GT Advanced Technologies

  1. Sapphire could be the next big thing to be used in smartphones and tablets. This video shows how durable it is

    https://www.youtube.com/watch?v=b7ANcWQEUI8

    It’s a great growth story and could be turn out to be huge. Here’s how I see it:

    Pros:
    – They have a multi-year exclusivity agreement with Apple to manufacture screen for their next iPhone and possibly iPad and iTime. That’s great, because it could mean sales of 300-400m unit sales per year. Let’s say they sell it at $16 to Apple, and it is costing them $12 to manufacture, so they make a gross profit of $4/unit, which equates 1.2-1.6bn of gross profit a year. That’s huge, as it’s 4x more than their highest even gross profit in 2011.
    – They are also manufacturing synthetic sapphire producing equipment, which could be sold onto the rest of the market, and these equipment have much higher profit margin than the synthetic sapphire itself.
    – They have been investing heavily into R&D, having ramped up their R&D spend from 20M in 2010 to 80M in 2013, hopefully materialises into multiple revenue streams in the future.

    Cons:
    – Their other two lines of business are on a decline, and it seems they are shifting their whole focus to service one client now, which is Apple.
    – From my understanding of their exclusivity agreement with Apple, they are not allowed to sell such sapphire screens to other companies. Apple on its own is a great client to have, buying possibly huge volumes every year, however having this exclusivity agreement possibly means Apple can easily “bully” a small supplier to provide highly competitive prices, and GTAT would yield to that as they want to be associated with a large company like Apple to improve their brand recognition.
    – Gross Margins, and then net profit margins are paper-thin on the sapphire screens. I assumed gross margins are 33% from earlier example, but that’s just a shot in the dark. They do mention in their latest quarterly report that the costs are higher than expected, so margins could turn out to be much lower than that.
    – They’re currently in bad financial state, declining revenues, haven’t made a profit in 2 years, and strapped with commitments to repay to Apple 600M of their lease as soon as they start generating revenue from sapphire glass.
    – A lot of the Apple story is already priced in by the market, as you mention, shares have rallied 170% while revenues were declining.

    I mention more cons than pros, because I like to play devil’s advocate and try to figure out the threats to the business. The threats are much harder to identify than the positives (which are clearly highlighted in the annual reports).

    I think if the Apple screens turn out to be as durable and without any major flaws, this company does have some more upside to go. However, they’re heavily dependent on a single customer for a product that hasn’t been released yet, any flaw could see stock price plummet, and also Apple might decide in a year or two to use a different technology or a different supplier.

    1. Thank you for the post Ahmed. The “cons” you have mentioned should be on the mind of any current or potential investor. In looking at the commentary being made in various stock forums, there seems to be far more cheerleaders than naysayers currently.

    2. You’re missing so many components of this company outside of sapphire. GTAT is not a one trick pony with Apple. They are much, much more. I’m not going to write an essay here about their solar technology, but you’re overview of GTAT is way off. Read some more about the company then come back and add a significant amount to your ‘Pros’ section.

Leave a Reply

Your email address will not be published. Required fields are marked *

  • This field is for validation purposes and should be left unchanged.
46 Shares
Tweet28
Share18
Share
Reddit
Buffer