GTAT stock, Apple stock, sapphire

GTAT's sapphire is expected to play an increased role in Apple's next devices. Credit: GT Advanced Technologies

GT Advanced Technologies isn't a household name like Apple, but make no mistake: This small-cap tech company's products are widely expected to play a key role in least one of Apple's next round of popular iDevices.

Going into Monday's close, shares of GTAT had risen nearly 90% since it announced a multi-year sapphire production agreement with Apple last November. Apple was already using sapphire as the protective cover for both its iPhone camera lenses and Touch ID home buttons, but the new sapphire production agreement made it obvious the folks in Cupertino had their minds set on expanding Apple's use of GTAT's incredibly scratch-resistant material.

Now, shares of GTAT are soaring by as much as 12% in Monday's after-hours trading following the release of its second quarter earnings report -- even as GTAT missed analysts' estimates on both its top and bottom lines. To be sure, GTAT's second-quarter revenue fell 65% year over year to $58 million, which translated to an adjusted loss of $0.16 per share. Analysts, on average, were looking for a narrower loss of $0.14 per share on higher sales of $63.94 million.

Why GTAT stock is soaring right now
So what had investors so excited today?

Look no further than GTAT's revised full-year 2014 earnings guidance. Specifically, though GTAT now expects 2014 revenue of $600 million to $700 million -- or the lower end of its previous $600 million to $800 million range -- it simultaneously increased the bottom end of its previous earnings guidance by a dime to a range of $0.12 to $0.18 per share. By comparison, analysts were modeling for 2014 earnings of only $0.03 per share on sales of roughly $667 million.

To explain its bottom-line boost, GTAT pointed to "an expected change in mix and more favorable gross margins in the second half of the year."

GTAT also reiterated its target for 2016 earnings at or above $1.50 per share, driven by not only growth in its existing sapphire, polysilicon, and photovoltaic solar businesses, but also by "expected contributions of Merlin, Hyperion, and [...] other new technology platforms." 

On GTAT's (Apple-driven) sapphire business
GTAT also provided a few updates on the Apple deal, which notably included terms for $578 million in prepayments to help GTAT get its sapphire operations up and running at the scale Apple requires.

Keeping in mind that it will reimburse Apple for those funds over a period of five years beginning in 2015, GTAT noted that it has now received all but one final $139 million prepayment, which it says "is contingent upon the achievement of certain operational targets by GT." That said, GTAT expects to achieve those targets by the end of October. 

GTAT CEO Tom Gutierrez elaborated: "The build-out of our Arizona facility, which has involved taking a 1.4 million-square-foot facility from a shell to a functional structure as well as the installation of sapphire growth and fabrication equipment, is nearly complete, and we are commencing the transition to volume production." [emphasis mine]

Foolish takeaways
So what does this mean for investors today?

First, I find Gutierrez's "volume production" verbiage curious, especially considering many analysts have speculated that GTAT had already begun to ramp up mass sapphire production at its Arizona facility months ago in anticipation of Apple's expected new product launches this fall. Of course, that doesn't mean GTAT hasn't been producing sapphire at the facility along the way, but we still don't know whether Apple will have the volume necessary, for example, to include sapphire in all, some, or none of its upcoming iPhone models. 

In any case, I think the market is right in putting aside its near-term estimates for GTAT and instead applauding the company's expected improvements in profitability going forward. This is a transition year during which GTAT is heavily dependent on building out its sapphire business for Apple, and investors should be more than happy that GTAT appears to remain on track with regard to delivering on its end of the deal. As it stands, that's why I still think GTAT represents a compelling investment for patient, long-term investors.