by Matt Margolis
The notion that GTAT is the only company that can deliver Apple’s sapphire goods may have come up on my own but the idea was driven home during TG’s onset interview with CNBC’s fast money on March 17th. During TG’s three minutes on Fast Money he defended he focused on creation of jobs, the unique nature of the Apple project and defended the margin on Apple.
Commitment for jobs back in the US, it is a sapphire manufacturing facility thats all we’ve said and Apple has said, it is a rather sizable operation with 1.4m square feet under roof. What we reported on our last call is that we are going to probably going to hit 1,000 employees mid year as a company and things are going well. As you can imagine in that industry surprise is an important element of introducing new products. We are spending a lot of time ramping the facility up. This will be a lower margin but I think the unique nature of what we are doing for Apple and we are probably the only ones in the world who can pull this off put us into a good position. We are not going to be selling commodities here we are selling and making good margins but the fact of the matter is the margins are below the margins we would get for our equipment. This is not just Apple we introduced products that should drive 3 to $5b of incremental market opportunity over the next 3 to 5 years that all are all equipment products in sectors we have entered over the last 3 or 4 years.
My 4 Why’s
Why does TG feel that GT is the only ones in the world who can pull this off? Apple already had an existing arrangement with Asian sapphire manufacturers to supply key sapphire components for the iPhone camera lenses and the home button covers. Why wouldn’t Apple just stick with those suppliers and have them grow more sapphire? Why would Apple pour $2B into a sapphire manufacturing facility with a company that has never produced sapphire to this scale? Why are the analysts minimizing the potential size of GT’s recurring revenue stream from Apple?
Goldman Sachs is Heavily Discounting the GT’s Revenue and 2016 EPS Estimates
Goldman Sachs is estimated Apple’s sapphire business at $500m 14′, $958m 15′ and 1,039m in 16′ with approximately $1 EPS of their $1.94 2016 estimate coming just from Apple. Does it make any sense why Goldman Sachs values GT at only 12x 2016 earnings when more than half of the EPS estimate is recurring in nature? I think the bottom line is outside of TG and TC and some raving fans I don’t believe anyone in wall street believes GT can pull this cover story off. The wall street analysts have baked in some considerable risk into their price targets because they believe GT’s lack of high volume material business experience is a significant risk to executing the project.
I don’t know exactly what Apple will cover in sapphire but I do expect them to surprise just about everyone to the upside. I’m currently estimated Apple revenue at $1,180m 14′, $2,027m 15′ and $2,216m in 16′. My estimated revenue includes revenue for the iPhone, iPod and the iWatch and it assumes a September 2014 launch for all 3 products. If Apple added the iPad to the mix it would add an additional $1,400m a year in revenue by 2016. If you add up my base estimate and as well as the iPad revenue I am modeling out GT’s revenue potential with Apple at just under $4B in annual revenue by 2016 with a future growth rate of 10% annually. It should come as no surprise that my Apple base revenue estimate is double Goldman’s estimate. Goldman’s model does not even assume any new products get introduced with sapphire by 2016. Their 10% growth estimate just assumes an industry unit growth estimate. Are they naive enough to assume that this project will be mature in 2014 and will just make iPhones and that GT’s sales will nearly double in 2015 from 2014 estimates and then grow at a 10% rate annually? Give me a break!
Goldman Sachs seems to be doing everything in their power to keep their price target low. They are currently modeling Hyperion at $57m in revenue for 2016 along with a contribution of negative $0.03 EPS. However, by 2018 Goldman expects Hyperion to contribute $1.58 in EPS assuming the middle of the road 60% of TAM and a gross margin of 35%. For clarity this Goldman is assuming GT’s Hyperion sales will jump from $57m in 2016 to $2.25B in 2018. GT’s management is expecting to receive initial orders in 2014 for delivery in 2015 that will exceed Goldman’s 2016 Hyperion estimate of $57m which is roughly 6 Hyperion tool sales. Goldman flat-out does not want to give any credit to GT’s Hyperion opportunity and the way they modeled out 2016 they don’t even need to deal with it. My point here is Wall Street analyst’s are not giving GT Advanced market potential market opportunity with Apple or even Hyperion much respect and it’s time they start thinking outside the box.
GT is One of a Kind!
TG knows that GT is the only company in the world that can pull off the Apple sapphire project. How many sapphire production equipment makers are there in the world? How many sapphire manufacturing operations are there in the world? How many sapphire production equipment makers are also running sapphire manufacturing operations in the world?
There is just 1 company in the world that produces sapphire equipment and also runs a sapphire manufacturing operations in the entire world. That one company is GT Advanced Technologies. I’ve read a lot of material over the last few years related to sapphire and sapphire operations. One of the biggest issues with producing sapphire materials is having the knowledge to run the equipment. It can take months for ASF furnace customers to get their yield up to where they want it. GT sapphire solution includes on site training to help with the knowledge transfer and to reduce the learning curve and help achieve the desired material yields. The biggest issue is customers will not be able to produce the results that GT does in their labs.
You know what would be a brilliant idea if Apple selected the only company in the world that actually designs and makes the ASF furnaces and actually uses them to produce materials and has years worth of man hours under their belts testing, innovating and upgrading their ASF furnaces on an ongoing basis. Apple gets GT’s know-how related to the ins and outs of the furnaces as well as the experience of using their best and brightest to run the sapphire operations in Mesa, AZ. There is no other company in the world that can offer the intimate knowledge of the equipment as well as years of experience in actually growing and performing R&D on sapphire products in their lab.
Paul Beailieu GT’s Vice President of sapphire operations in 2011 summed up what gives another advantage unique to GT, GT is “the only merchant equipment provider that also operates a modern, state-of-the-art sapphire production facility. This quote was taken from Yole Developpment’s March 2012 LED Industry Review.
If you are wondering how GT got its name GT Advanced Technologies the answer can be found below. It seems clear that GT is in a league of their own with sapphire furnaces as well as developing their other equipment that they acquire (i.e. Hyperion). The quote and image below was also taken from Yole Developpment’s March 2012 LED Industry Review. What is more impressive about the quote and image below is that it came from the director of a rival furnace producer named Oleksandr Lavryk from Pryroda Engineering.
Before the entrance of GT Advanced Technologies, the market for sapphire equipment was a case of a ‘Market for Lemons’ as described by Nobel prizewinner George Akerlof, Lavryk told iLEd. Akerlof’s ‘lemons’ are used cars, where for regular buyer it is notoriously difficult to assess the quality. Good cars and lemons are sold for the same price because buyers see no difference in them.
It can be argued that one of GT’s core skills is to identity quality and potential of equipment. GT acquires equipment with high potential, develops it further and resells it to those who lack the important skill of identifying equality of equipment.
This article highlights why GT Advanced Technologies is one of a kind, Apple knows it, TG knows it and now every reader of this article knows it. GT may not have the experience of delivering hundreds of millions of sapphire cover screens or ramping up a large-scale operation in just 6 months but they can do it. They are the only company on the planet that produces sapphire growing equipment that also run a sapphire operations.
I played high school and college basketball and I had a fantastic basketball coach. Our coach taught us and we ran John Wooden’s famous flex offense. My coach had a great understanding of the offense, he had scouted teams that ran it and played against teams that ran the offense. I have to believe my team would have been even more productive on offense if the legendary John Wooden was coaching us. John Wooden ran the flex offense successfully at UCLA for years and even wrote a book on it.
Apple by signing up GT Advanced to buy and operate their ASF furnaces to grow sapphire materials for Apple has added a technological innovation legend to their bench. GT’s equipment knowledge inside and coupled with their years of experience in the lab growing and researching sapphire will produce an astounding amount of sapphire in such a short period of time to cover most if not all of Apple’s devices in 2014. It’s now clear to everyone why GT is One of a Kind and Apple knows it!
If you are interesting in following my tweets, asking me a question or just want to give feedback or say hello you can follow me @sapphirecover24 on Twitter.
Full Disclosure: I am long GTAT and have no plans to buy or sell any holdings over the next 72 hours