Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Is This How Apple, Inc. Can Afford Sapphire For the Rumored iPhone 6?

By Evan Niu, CFA - Jul 29, 2014 at 11:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Upgrading the iPhone's cover glass to sapphire could be rather pricey. Investors are already expecting the Mac maker to make the move, but here's one way Apple could save on costs.

Paper-thin sheet of sapphire produced using Hyperion ion implanter technology. Source: GT Advanced Technology.

The sapphire smartphone storyline has come full circle. Last March, MIT Technology Review was among the first to contemplate whether or not sapphire could displace Corning Gorilla Glass in high-end smartphones. With Apple's (NASDAQ: AAPL) expected release of a sapphire-equipped iPhone 6 just months away, MIT Technology Review is back with some more details on how supplier GT Advanced Technology (NASDAQ: GTAT) could be cooking up copious amounts of the material.

One of the most prominent hurdles to sapphire adoption is the cost differential, although that gap has narrowed over the past year. In early 2013, a pure sapphire cover glass would cost $30 compared to Gorilla Glass's $3. A pure sapphire cover glass now costs $15-$20. However, there is an alternative to using a pure sapphire cover glass: using sapphire as a laminate.

To Hyperion and beyond
Applying an incredibly thin layer of sapphire to a less expensive material could be a way to balance out the premium while retaining the appealing characteristics. GT Advanced has implemented a new Hyperion ion implanting technology (acquired through GT's 2012 $10 million acquisition of assets and intellectual property from Twin Creeks) that allows it to produce sapphire layers as thin as 26-micrometers, which can then be applied on top of another material. Analysts estimate that laminating glass with sapphire could cost as little as $6.

This technology makes much more efficient use of the sapphire material, since, traditionally, sapphire pieces must be cut from larger wafers. That process takes a lot of sawing and grinding, and ends up wasting considerable quantities of the material. GT Advanced expects to get its first Hyperion order this year.

Even Apple likes to save money
That cost differential for laminated sapphire is much more manageable for OEMs, including Apple. No one knows quite yet whether or not Apple will use pure sapphire or laminated sapphire. Of course, Apple could easily afford to spend extra if it feels confident that sapphire would be a differentiated and marketable feature, but at the same time the marginal benefit to using pure sapphire over laminated sapphire could be negligible compared to the marginal cost. Margins are margins, and there's no reason to take unnecessary hits.

Rivals can't really afford pure sapphire, as most operate at negative margins. The only (but most important) competitor that could afford it is Samsung, but Samsung's handset business is hitting a ceiling right now as competition intensifies.

Pushing forward with sapphire
GT Advanced continues to be very bullish on sapphire's prospects, with its sapphire segment still expected to comprise 80% of revenue this year. Demand in the merchant market also remains robust, outpacing supply. In May, the company announced its next-generation ASF 165 furnace, which boosts boule size by 40% to 165 kilograms while also reducing production costs. Commercial availability of these new furnaces is slated for the third quarter.

In recent years, GT Advanced has also been designing its furnaces so that they can be upgraded with the latest and greatest without having to purchase entirely new equipment. For example, previous-generation ASF 115 furnaces can be upgraded to ASF 165, and GT Advanced expects many customers to convert their equipment. This will prove key, since the net result is reduced capital expenditures for sapphire material vendors, which will help keep prices down and potentially spur adoption.

Patience is a virtue
In a few short months, all will be known. Apple's iPhone 6 event is expected in September, where it will detail precisely what is or isn't in the handset. Apple's gross margins have stabilized meaningfully and the Mac maker's profitability was a particular area of strength last quarter.

The potential shift to sapphire could be a margin headwind, especially if Apple decides to go with pure sapphire cover glass (if at all). The upside would be that Apple appears to be preparing for a massive iPhone 6 launch.

 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
624%
 
S&P 500 Returns
140%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/06/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.