When GT Advanced Technologies' (NASDAQ: GTAT ) transformative deal with Apple (NASDAQ: AAPL ) last year was a culmination of a promise from CEO Tom Gutierrez that its sapphire would be a transformative business and product. While the company's legacy is in the solar business, the name chace from GT Solar to GT Advanced Technologies was directly tied to the development of sapphire and other advanced materials with applications far beyond just the solar business.
With this big shift in mind, it's understandable why the stock has fallen more than 20% this month on concerns about sapphire constraint, and shipments to Apple falling below expectations. But as much as sapphire -- and the Apple deal -- are transformative, GT Advanced still has strong ties -- and technology -- in the solar manufacturing space. With solar demand expected to begin outpacing manufacturing capacity in coming years, GT Advanced is incredibly well-positioned for the next three to five years. Let's take a look at why.
Solar market shifting upstream as demand ramps up
As we saw with SolarCity's recent acquisition of Silevo, and with Trina Solar's (NYSE: TSL ) new Honey Ultra module -- announced this spring and expected to enter the market late this year -- companies with a history tied to low-efficiency, commodity solar panels are moving upstream to panels which generate more power per unit of space they take up. At the same time, solar demand is expected to start pushing available manufacturing capacity in coming years:
As you can see, solar demand is expected to triple from 2013-2017. SunPower spent most of the past year near 100% manufacturing capacity, and is adding as much as 30% more capacity in 2014.
This increased demand is responsible for a lot of recent activity in the solar world, with different players integrating more parts of the solar value chain into their businesses. SolarCity's Silevo acquisition is a good example, both giving the company more direct control over its solar supply chain in coming years, and access to higher efficiency panel technology .
Chinese tariffs also creating opportunity
Trina Solar was hit with a 17% tariff, the lowest level of any of the Chinese panel makers, and as a large supplier of panels to SolarCity in the past, it was no surprise when SolarCity announced a deal with REC Group to purchase up to 240 megawatts of solar panels. Since REC Group's panels aren't made in China, they immediately become more price competitive, and with SolarCity's expected 90% growth rate in megawatts deployed over the next several years, expanding its supply chain options was a reasonable short-term move. The Silevo acquisition -- just weeks after the REC Solar deal -- is designed to address the longer-term challenges of meeting growing
For GT Advanced, these short-term moves point to the long-term opportunity: Solar manufacturing capacity simply won't be able to keep up with demand, and panel makers will need to start adding capacity soon. Add in the market's shift upstream to more efficient panels, and there's a lot to like about What GT Advanced is bringing to the solar market. While it's not clear how much Trina Solar directly would benefit from integrating GT Advanced's manufacturing systems, or materials making into its operation, plenty of its competitors and suppliers likely will be.
Getting past the short term weakness in sapphire
I think it's fair to accept that there could continue to be weakness in GT Advanced's stock price for the next several months, because there will remain a lot of speculation about the sapphire supply situation. But investors should focused on the diversity that GT will display in coming years. CEO Tom Gutierrez highlighted just how enormous the opportunity would be in the solar PV market, and how GT's core technologies were targeted at helping solar makers address both the capacity concerns and the efficiency/price concerns.
With technologies like Merlin, which can drive down manufacturing costs, while also increasing panel efficiency and production speed on existing lines, commodity solar makers can integrate this technology into both current and new lines, and more or less immediately become more competitive in the changing panel market. Add in more advanced, cheaper, and more efficient versions of several of the company's key materials systems, and solar component makers can drive down the all-important price-per-watt, while simultaneously increasing their manufacturing efficiency and speed while reducing overhead.
Final thoughts: This is a long-term play
The weakness in GT's stock is a product of the short-term speculation around the Apple sapphire supply. This is an important thing to watch, because if GT struggles to meet Apple's demand, it will hurt the bottom line. But there are some indications that GT has already increased production, and the delays are tied to third party finishing companies and not GT's ability to produce in quantity.
The real long-term play for GT is as much about solar materials and manufacturing, as it is about Apple or other consumer electronics makers. As Chinese panel makers like Trina Solar face the tariff, and the industry faces a need for increased capacity and demand for higher efficiency panels, GT Advanced will be in a winning position.
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