by Matt Margolis
I’ve been reading the feedback I received from several of my loyal followers as well as the various message board comments regarding sapphire cover screens, Apple’s iPhone 6 release date, and Apple’s WWDC that is set to kickoff on June 2nd. Listed below some of the questions I have recently received.
- When will Apple launch the iPhone 6?
- Will the iPhone 6 include a sapphire cover screen?
- Will a sapphire cover screen only show up on the high-end 5.5″ iPhone 6?
- Will sapphire be used on the iWatch?
I believe the answers to all of these questions are very important but the way all of GTAT’s shareholders are going to make some serious money is going to come down to analyst analytics. I’m sure you are wondering what am I saying? Well to be honest there are a handful of key data drivers that can turn Wall Street’s base case Apple annual revenue from $1 billion annually to of $2 billion in 2015 for JUST APPLE! Just for the record, the Obscure Analyst is estimating GT’s revenue from Apple at $2.2 billion for 2015.
The immediate impact on GTAT’s share price and Wall Street estimates once Apple announces sapphire cover screens on the iPhone 6 comes down to analyst analytics.
I’ve taken the last few days to digest some information to help everyone understand what the next impact will be to GTAT’s share price and valuation. Goldman Sachs indicated they anticipate Apple to sell 203 million iPhone units in 2015, which under Goldman’s bull case would lead to $2b and $2.00 EPS for GTAT in 2015.
It is also important to note that even though bloggers and various naysayers indicate that the iWatch will carry sapphire cover screens first, there is $0 of revenue for the iWatch assumed in any of the Wall Street estimates (for those who gave detail). I repeat there is $0 of revenue built into analyst forecast’s for sapphire iWatch cover screens for 2014, 2015 and 2016. The reason why Wall Street has $0 of revenue forecasted for the iWatch is directly related to the estimated full capacity of the Mesa, AZ sapphire plant.
Mesa, AZ Sapphire Plant Capacity: Goldman Sachs, Dougherty & Company & The Obscure Analyst
I would first off like to tip my cap off to Dougherty & Company for producing one of the best Wall Street research reports I have seen on GTAT. My very high-grade has nothing to do with the $29 PT the company gave GTAT, but the breadth of understanding Dougherty demonstrated through its analysis of GT’s business.
The key data points that determine the Mesa, AZ sapphire plant capacity in terms of millions of sapphire cover screens are listed below:
- Boule Size
- Number of ASF Growth Furnaces
- Days to Grow a Boule
- Useable Boule %
- Kerf Loss %
- Yield Loss %
- Cover Screen Height
- Cover Screen Length
- Cover Screen Thickness
- Boule Form (Round versus Rectangle)
I’ve taken the base case from each analyst (Goldman, Dougherty and Obscure) and put them side by side. I’ve also modified some of the key data points and ran three different scenarios so everyone can see how much the capacity calculations can swing.
Base Case Key Differences:
- Screen Thickness: Goldman is modeling 1mm, Dougherty has the thinnest screen thickness model at only 0.55mm thick and Obscure is modeling 0.65mm.
- Boule Size: Goldman is modeling 200 kg, Dougherty 100 kg and Obscure 230 kg
- Form & Useable %: Goldman and Obscure are rectangular and 100% and Dougherty is round and 80%
- Average Screen Size: Goldman 13 square inches, Dougherty 11.27 square inches and Obscure 10.69 square inches
Maximum Capacity (Goldman 120m, Dougherty 89m and Obscure 310m)
Scenario #1 (Align Boule size and Relative Screen Thickness)
Maximum Capacity (Goldman 185m, Dougherty 223m and Obscure 270m)
Scenario #2 (Align Boule size, Relative Screen thickness and Form)
Maximum Capacity (Goldman 185m, Dougherty 223m and Obscure 270m)
Scenario #3 (Max Boule size, Relative Screen Thickness and Form)
Maximum Capacity (Goldman 212m, Dougherty 256m and Obscure 310m)
GTAT’s CEO informed investors during the conference call that Apple would be fully utilizing the sapphire being produced by GTAT. Currently Goldman Sachs and Dougherty Group are estimating that GTAT will sell nearly 100% of its annual sapphire capacity to Apple, but at a clip of only $1 billion per year or approximately $10 ASP based on 100 million units sold. Goldman and Dougherty have $0 of revenue built-in for Apple’s iWatch.
There are several key data points that are used to calculate the capacity of the Mesa, AZ sapphire plant and there are drastic differences between Goldman Sachs and Dougherty Group capacity models. Goldman Sachs’s boule size is twice the size of the boule used by Dougherty, but when it comes to sapphire screen thickness estimations Goldman’s estimated screen thickness was nearly twice as thick as Dougherty.
I ran three different estimation scenarios in an effort to modify the data outliers and to better align the peer group to come up with a better consensus of the estimated sapphire capacity of the Mesa, AZ plant. The boule size in Dougherty’s model (100 kg) is less than half of what should be used (200 kg+). Additionally, the sapphire cover thickness estimated by Goldman Sachs is likely over estimated by 40% or more. The form factor (round) used by Dougherty should be replaced by a rectangular boule form, which would lead an increase in the useable sapphire percentage in the company’s model. The results of the scenario modeling (scenario #2) indicate that the maximum annual capacity of the Mesa, AZ sapphire plant is likely between 185m and 270m sapphire screens or $1.85B billion and $2.7 billion of annual revenue assuming a $10 ASP.
I am currently estimating that the Mesa, AZ sapphire plant at full annually capacity can produce 310m of annual screens or $3.1B of annual revenue, however I am only estimating $2.2B of revenue or a 71% conversion rate in my 2015 estimates. The major upside that has not been priced into GTAT’s share price is the fact that the Wall Street analysts have grossly under estimated the annual sapphire capacity of the Mesa, AZ plant. The difference is worth $20+ of additional share value if Apple not only produces a sapphire cover screen for the iPhone 6 but also for the iWatch in 2014. If Apple produces sapphire cover screens for both the iWatch and the iPhone it will result in annual Apple revenue, that will be closer to$2 billion versus the $1 billion estimated by the Wall Street analysts in 2015. If GTAT generates $2 billion of annual revenue from Apple beginning in 2015 it will result in base EPS of $2.00+ for 2015, 2016 and beyond.
There is only one question remains unanswered. Whose “analytics” hold more water, the Wall Street analysts or the Obscure Analyst? The right decision may make you a lot of money!
I am long GTAT