Shares of GT Advanced Technologies (NASDAQOTH: GTATQ ) have been on fire. Over the last 12 months, the stock has skyrocketed from just over $3 per share to the most recent close of $18.67, representing a whopping 516% increase. To put that in perspective, $100,000 invested in GT Advanced Technologies about a year ago is now worth $616,170. However, after a deal with Apple (NASDAQ: AAPL ) lit up the shares once more, are they now too hot to touch?
What's the deal, man?
Since GT signed an agreement with Apple to dedicate the vast majority of its sapphire furnaces to produce sapphire for Apple, presumably for a next-generation iWatch or iPhone (or both). The company's guidance for the current year stands at a range of $600 million-$800 million, representing 130% year-over-year growth from 2013, and between $0.02 and $0.18 a share in earnings. However, this isn't why the shares have soared in recent months.
Indeed, as a result of this deal -- and this deal giving GT the wherewithal to invest in other materials businesses outside of sapphire -- the sell side expects GT to post revenues of $1.15 billion during the fiscal year ending in 2015 and earnings of $0.80 a share. That's a lot of iPhone (or iWatch) cover glass!
Shares aren't that expensive
There's a lot of uncertainty here; the sell side expects revenues of between $1.07 billion and $1.33 billion and full-year 2015 EPS of $0.50 to $1.49, with midpoint sitting at $1.15 billion/$0.80, respectively. Now, while the $600 million-$800 million number is "official guidance," we really have no idea what 2014 will look like, although the idea behind these estimates is that:
- Apple will introduce sapphire cover glass on the iPhone 6, which will drive the demand for sapphire.
- As the iPhone 6 makes up a larger portion of the mix during calendar 2015, GT should see growth roughly in line with the growth of iPhone 6 as a percentage of Apple's overall iPhone mix.
Apple suppliers eventually get squeezed, but GT likely has room to run
Where the real uncertainty lies -- and what could be upside and downside drivers -- are the following:
- What are the chances that Apple will require sapphire glass for its oft-rumored iWatch and what kinds of volumes could those potentially drive?
- How long term is this deal and how susceptible is GT to the longer-term margin compression that all Apple suppliers have inevitably suffered?
- How well will the iPhone 6 sell?
That said, the first concern is more about further upside rather than justifying today's price, and the latter concern probably isn't too relevant for the first few years as a newly minted Apple supplier. Indeed, if you'll remember, shares of Cirrus Logic (NASDAQ: CRUS ) , a chip supplier that derives over 80% of its revenue base from Apple, ran from about $5 a share to about $44 per share before concerns of margin compression took their toll on the chip vendor. It was a good five-year run before the "crash."
Where does it all go from here?
At this point, traditional "valuation" techniques fail because there's such a wide range of outcomes and possibilities vis-a-vis GT and Apple, so what will really drive this stock is news flow and the perception of future earnings. Right now, things look like they're going very well for GT, and unless the iPhone 6 turns out to be an abject flop, which is extremely unlikely, the stock could very well have room to run from here and a price north of $30 could be justified if it has line of sight to about $1.49 per share in earnings as some of the more bullish analysts expect.
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