Congratulations, GT Advanced Technologies (NASDAQ: GTAT) investors, because your company just officially became Apple's (AAPL +2.70%) newest supplier.
Naturally, the stock popped more than 20% Tuesday following GT's announcement of the multiyear agreement, under which it will own and operate Advanced Sapphire Furnaces to produce sapphire material for Apple's wildly popular devices.
GT Advanced Technologies optical sapphire. Image source: gtat.com
What's more, Apple is fronting GT Advanced Technologies an advance payment of $578 million to help the smaller company get its operations up and running, for which GT will reimburse Apple over a period of five years beginning 2015. Apple is also leasing GT Advanced Technologies a new 700-employee manufacturing facility in Mesa, Ariz.
A much-needed lifeline...
To be sure, the news couldn't have come at a better time; GT Advanced Technologies simultaneously released its dismal quarterly earnings that day, badly missing expectations thanks primarily to the continued long-standing weakness of its photovoltaic (PV) solar cell business.
For reference, in 2011, PV sales made up more more than 82%, or roughly $740 million, of GT's total revenue of $899 million. When all is said and done this year, taking the midpoint of management's latest guidance, PV should only account for around 10% of GT's projected $305 million in sales. Meanwhile, polysilicon sales will represent around 73% of this year's total, while sapphire should bring in the remaining 17%.
Thanks to the Apple deal, however, GT stated it expects revenue to more than double to a range of $600 to $800 million in 2014, of which 80% should come from the sapphire business.
...but the devil's in the details
Before you get too excited, let's talk about what this deal doesn't mean.
First, note GT's press release explained gross margin from this new sapphire business is expected to be "substantially lower than GT's historical equipment margins." That's fair enough; given GT Advanced Technologies' current weakness, few would argue they made the wrong move by sacrificing margin in exchange for the long-term stability of the business.
Second, the agreement does not involve sapphire replacing Corning's (GLW 0.95%) Gorilla Glass as the full-screen protective cover of choice on Apple's iPhones and iPads -- at least over the short term. Still, that's little consolation for Corning investors, who watched Corning stock drop 4.4% on the news.
Corning's Gorilla Glass 3 could compete with sapphire in the future. Image source: Corning
But as fellow Fool Evan Niu pointed out back in March, sapphire is currently just too darned expensive and difficult to produce for Apple to be able to count on large enough quantities to fulfill demand. In fact, that's why GT management was quick to add the caveat that, while the agreement does require them to maintain a minimum level of capacity, it doesn't guarantee production volumes.
That's also why Apple only took advantage of sapphire's incredible scratch resistant characteristics last year by using it to cover just the tiny camera lens on the iPhone 5. Now, though, Apple is also using sapphire to protect the new Touch ID home buttons in this year's new iPhone 5s.
Meanwhile, Corning certainly hasn't been resting on its laurels. To the contrary, the 162-year-old company recently unveiled Gorilla Glass 3 at this year's Consumer Electronics Show, saying the latest generation is not only 20% thinner than the original, but also up to three times stronger than last year's Gorilla Glass 2. Going further, Corning has continued to relentlessly pursue ways to streamline its own manufacturing processes for Gorilla Glass, which singlehandedly drove sequential sales and earnings gains of 8% and 23%, respectively, in its specialty materials segment last quarter.
There's still hope yet
That said, GT's press release also pointed out it has already "accelerated the development of its next generation, large capacity ASF furnaces to deliver low cost, high volume manufacturing of sapphire material." When all is said and done, GT says, it'll be nicely positioned as "the industry's lowest cost sapphire producers."
However, an MITReview article earlier this year pegged the cost of an average sapphire display cover at roughly $30, while at the same time saying the cost could eventually fall below $20 "in a couple years" thanks to competition and improved technology. Though that estimate likely didn't account for a massive cash infusion from Apple to speed up the process, it still becomes apparent the folks at GTAT have their work cut out for them if they plan on catching up to Corning's value proposition anytime soon.
But don't for a second think GT Advanced Technologies' only opportunity lies in its newfound status as a bona fide Apple supplier. After all, thanks largely to both an expected late-2014 rebound in PV sales and the introduction of several new equipment products in its other segments, GT expects 2015 sales to exceed $1 billion. By 2016, GT thinks sales could "nearly double from 2014 levels" and drive its non-GAAP earnings to over $1 per share, all on the back of continued sapphire segment contributions and incremental strength in equipment revenue.
If all goes as planned, then, and considering the stock currently trades for just under $10 per share, it appears patient long-term GT Advanced Technologies investors could be handsomely rewarded over the next few years.
