Saturday, February 15, 2014

Mirror, Mirror On The Wall, What’s The Fairest Glass Of All?

In the Cinderella fairytale, it was a glass slipper that revealed the identity of the young lady to the prince. In Snow White, it was a magic mirror that betrayed the identify and location of the tale’s heroine. 

In today’s digital device world, glass will play an increasingly important role in product innovation and market success. It’s industry lore Steve Jobs opted to replace the plastic screen on the iPhone just weeks before the original iPhone’s release with what’s now called Gorilla Glass from Corning. This apparently 11th-hour decision brought to market a Corning product that had been mothballed for years.

Corning’s Gorilla Glass has become both a successful and ubiquitous product in the global smartphone and tablet markets. But the drive for continued innovation and the desire for competitive advantages in the marketplace has Apple investing heavily is a new glass product for the company’s devices. 

On November 4, 2013, GT Advances Technologies (GTAT) announced a multi-year agreement with Apple to provide sapphire glass for Apple products. Apple is investing $578 million upfront to fund development of a sapphire glass facility in Arizona. GTAT will reimburse Apple for the pre-payment beginning in 2015. But like all good stories, the plot thickens and sub-plots abound. 

The Mythical iWatch
There isn’t an Apple product enthusiast on the planet that isn’t expecting an Apple iWatch. Looking at Apple’s recent hires including the former CEO of Burberry, the former CEO of Yves Saint Laurent and other recent hires with expertise in various medical fields, matched-up with recent Apple management meetings with representatives of the FDA, speculation extends to talk of a high-quality watch with all kinds of health monitoring capabilities. But who knows?
What is known is Katy Huberty at Morgan Stanley, one of the most respected Wall Street analysts covering Apple, has issued a note suggesting an iWatch could deliver up to $17.50 billion in revenue in the first year absent supply constraints. She’s not usually one to write fairytales. Apple currently uses sapphire glass to cover the camera on the iPhone 5s and the fingerprint reader on the device’s home button. Sapphire glass is also used by luxury watch markers to cover the face of their products. 
Looking Beyond The iWatch
Looking beyond the yet-to-be-announced iWatch, Apple has filed an interesting patent application consisting of different ways to fuse sapphire glass layers to strengthen manufactured sapphire glass panels. 
This patent application is definitely for fusing sapphire glass panels in sizes larger than what’s needed for a watch display. Although sapphire is among the hardest materials on the planet, fusing two panels cut on different planes will further strengthen sapphire glass for uses in particular applications. Following everything from patent applications to the size of the Arizona facility and the volume of specialty equipment shipped to the new facility for sapphire glass production suggests Apple is planning more than watch displays for sapphire glass.
The different pieces of evidence suggest very high sapphire glass production levels for whatever Apple plans to do with the product. The manufacturing capabilities of the new plant are for levels of sapphire glass production that are absolutely outsized compared to current industry demand.
All Good Stories Have A Fair Amount Of Risk
GTAT may trade as an almost pure Apple derivative and the company will have dramatically reduced gross margin per revenue dollar. The shares may bounce up and down based on the latest iWatch rumors and speculation about sapphire glass production levels at the Arizona facility. Apple excels at drilling down costs of components and squeezing every dollar it can from suppliers. Because Apple is financing the manufacturing facility’s development the company will be pushing down its costs per sapphire glass panel. High short interest, a low share price and heavy dependence on Apple for future revenue growth makes GTAT a volatility trifecta.
There’s No Magic Mirror
Whether or not GT Advanced Technologies is a modern-day “Cinderella story” is well beyond the scope of this blog. I neither recommend or suggest the company for investment. However, I am intrigued by Apple’s sapphire glass agreement with the company. I
f GTAT is to become the newest Apple supplier to find great success providing components for the maker of the world’s most popular digital devices, it will be revealed not by a magic mirror but by the passage of time.
This isn’t a fairytale. But it is a fascinating story to watch as the plot and sub-plots continue to unfold. Only time will tell if sapphire glass becomes Apple’s fairest glass of all. GTAT is looking for a very happy ending to this unfolding story. 

Robert Paul Leitao
Disclosure: The author is long GTAT shares