The Obscure Analyst ups 2014 Revenue and EPS Estimates and Explains GTAT’s 2015 and 2016 Upside Potential

by Matt Margolis

Background

GT announced a $58.6m Specialty Furnace order that is expected to be booked as revenue in 2H’14 on April 7th.  On April 30th GT announced a series of strategic initiatives to leverage its Hyperion technology.  On May 5th GT announced the release of its next generation ASF furnace that is capable of producing 165kg boules up from 115kg in the previous model.  Additionally, GT announced that they expect to be commercially available in Q3’2014.

Update to Estimate

GT has made several announcements over the past several weeks that forced me to modify my 2H’14 estimates and add Hyperion and Specialty Furnace revenue to my model and increase my estimate for ASF Equipment sales as explained above.  As a result of the recent announcement I’ve modified my 2014 street high revenue from $1.331B to $1.515B primarily driven by 2H’14 equipment sales.  In turn my 2014 EPS estimate is moving up from $0.62 to $0.82 partially driven by increased gross margins, which added $0.06 to my 2014 EPS estimate.  My gross margin estimate is now 26.9% up from 25.8% representing a 1.1% gross margin improvement driven primarily by additional equipment sales expected in 2H’14.

Although, I believe the iPhone 6 may arrive as early as June I have not modified my 2014 estimate to reflect any changes to my current forecast related to sapphire material sales to Apple. I am currently sapphire cover screens unit sales of 88m iPhone 6 units, 30m iWatches and 18m iPods.  It is important to note that my unit Apple sales estimates also include unit sales to Apple to accumulate 1 to 2 months of inventory on hand heading into 2015 for the iPhone 6, iWatch and iPod.

My updated 2014 Revenue and Product Mix Estimate is below

Previous Analyst Round Table 2014 FY Estimates

GT’s 2015 and 2016 Upside Potential

My 2015 and 2016 estimates do not reflect the likelihood that GT will receive annual follow-up equipment orders related to its Thermal Technology equipment portfolio.

My estimates do not include the impact of Hyperion 4 likely being adopted in volume that is above and beyond my current estimates.  Hyperion will likely be sold within a “total solution” for the growth, processing and bonding of Sapphire lamina.  Hyperion will also likely be sold alongside GT Silicon Carbide furnace to create ultra-thin and relatively less expensive Silicon Carbide wafers.  I expect both of these “total solution” options to begin gaining traction by 2014 and likely significant revenue on top of my 2015 and 2016 estimates.

Apple’s most recent purchase of LuxVue and its patented LED display technology will eventually land inside Apple’s devices and replace Apple’s current display with a more efficient and just as bright LED display, which will also improve the battery life.  The foundation of LED displays are sapphire substrates and GTAT’s sapphire produced in Mesa will likely land inside Apple’s devices for LED displays by 2016.  Lastly, Apple is currently focused on the manufacturing of the iPhone 6 and iWatch, however most industry analysts believe that sapphire cover screens will also end up on Apple’s iPad.  The timing of sapphire cover screen’s addition to the iPad is likely tied to the availability and less tied to the price of the sapphire cover screens themselves.

The last product to watch that will be emerging from GT’s R&D lab is ultra efficient solar cells, including “triple junction solar” cells for consumer electronics.  GT’s super thin and efficient triple junction solar cell is patented and is designed to support consumer electronics.  Apple is currently very interested in extended the battery life of its devices and when Apple does introduce solar charging to its devices, GT will receive considerable consideration to supply the product.

The original focus for Hyperion project while under the direction of Twin Creeks Technologies was to develop ultra thin solar cells to cut the cost per watt to produce solar energy in half.  GT has been referring to the progress made on solar cells with a “well-known” solar cell manufacturer in Asia for quite some time and I expect an announcement will be made shortly on availability and details of the product.

Price Target

I am maintaining my strong buy recommendation on shares of GTAT and a 12 month price target of $87.50 which equates to 17x my 16′ EPS estimate of $5.26 on $4.736B of sales and 31x my 15′ EPS estimate of $2.84 on $3.177B of sales.

 

Full Disclosure: I am long GTAT