Have you ever dropped your smartphone and experienced the sheer frustration (or even depression) when you first see the spider web like cracks emanating from the point of contact on your beloved $600 iPhone? If so, you are not alone as approximately 11% of current iPhone users are walking around right now with a cracked screen. A study conducted by Square Trade on iPhone damage indicated that 30% of iPhone owners have experienced accidental damage on their device at some point within the previous 12 months. In addition, 17% of respondents have damaged their iPhone more than once. Cracked screen repairs has become somewhat of a cottage industry with kiosks and local repair shops offering to fix broken screens for a price tag ranging from $70 to $150. The frequency of this has led Apple (AAPL) to roll out in store repairs in hopes of saving around $1 billion per year in costs, thereby eliminating the need to replace an entire device when it can be more cost effective to repair the screen within an Apple store. While not all of the damaged iPhones are due to cracked screens, the majority of cases are. An estimated 30% of damaged iPhones fell out of the user's hand, 13% fell off the user's lap, and 11% were knocked off tables. The reported cost to Americans for damaged iPhones is reported to be $5.9 billion since 2007 and $7 billion for Android users. Thankfully, this nonsense may be nearing its end.
Digitimes (an online newspaper that focuses on the Taiwanese and Chinese electronics industry) reported that Apple is potentially looking to include sapphire touch screen covers for the iPhone 6, which can potentially be launched in 2014. As it goes in the smart phone industry, if Apple is interested in something, Samsung (SSNLF.PK) won't be that far behind. Currently the sapphire screens are being used to cover the iPhone 5s finger print home key and is expected to be used in the home keys of the future iPad and iPad mini, expected to be launched before this year's Christmas.
Four Taiwan-Based sapphire wafer makers Chrystalwise, Crystal Applied, Procrystal and USI Optronics all have plans to expand their production capacity of sapphire wafers/ingots. For those unaware, sapphire is harder than any other material (except diamonds) and is three times stronger than Corning's (GLW) Gorilla Glass. Apple even recently filed a patent for a fusion process that will add sapphire laminate layer to future iPhones, iPads and potentially the iWatch. The process of laminating a piece of glass with sapphire would be cheaper than a 100% sapphire screen at current market prices. Corning's Gorilla Glass screen currently costs less than $3 per unit, while the same display in sapphire would cost $30. However, laminating glass with sapphire would help close this large price differential.
These rumors are helping boost shares of equipment supplier GT Advanced Technologies (GTAT). GT Advanced Technologies calls itself a diversified technology company serving the solar, LED and electronics sectors. Of major importance to note is the fact that GT Advanced Technologies is also the largest sapphire equipment supplier thanks to its line of advance sapphire furnaces that are sold for around $500,000 each. UBS September 19th research note mentioned that an industry check conducted by its research team showed a new Tier-1 customer is currently ramping its sapphire content for the first half of 2014 with orders of 500 furnaces from GT Advanced Technologies. Analysts at UBS speculated that this is for the first phase of a cover screen build out. To me this is very bullish for GT Advanced Technologies as the market is huge given that the analysts at UBS estimated that mobile sapphire demand will experience a 60% compound annual growth from 2014 to 2016. Finally, UBS raised its price target on GT Advanced Technologies to $10 from $5.50 and slapped a Buy rating from Neutral based on its positive findings.
We could be in the early days of sapphire's importance in mobile phones and wearable devices, and the demand and need certainly exists. I can hear the cheering now, if Tim Cook is to one day announce at a future launch event "the new iPhone 6…with an unbreakable screen." That would probably not be seen as a form of innovation by some of Apple's bears and the harshest critics, but it's the kind of move Apple needs to make, especially for a high end product.
Which brings me now to Corning, a stock that has drastically underperformed virtually every benchmark, delivering a negative return of 7.81% over the past five years. I think the future for Gorilla Glass looks bleak as advanced manufacturing technology (outlined in Apple's patents) are sure to close the only thing holding back true widespread use of sapphire in smartphone screens. I came across a very interesting note from MIT that relates to my thesis: "An alternative to using pure sapphire is to laminate an ultrathin layer of sapphire with another, cheaper transparent material, maintaining much of the performance advantage of sapphire at a cost comparable to that of the glass typical in mobile-phone displays." This is a game changer that will likely make Gorilla Glass obsolete in smartphone displays.
Corning's future is in jeopardy and investors need to prepare for the possibility that the company might not be a part of future Apple or Samsung products. Looking at Corning's second quarter 10Q, the company stated that its division that makes Gorilla Glass, known as the Specialty Materials Segment, is heavily dependent on two large customers. These two customers, likely Apple and Samsung, combine for 35% of the department's total revenue. It goes without saying that if either Apple or Samsung (or both) part ways with Corning, the loss of revenue could be a significant loss for the company's bottom line.
In regards to Corning using the sapphire screen as opposed to Gorilla Glass, the company commented in a press release in May 2013 that sapphire covers are two to three times thicker than Gorilla Glass and break more easily than Gorilla Glass in a commonly accepted strength test. Corning stated that the use of sapphire as a cover in high-end watches may have led to speculation on its use in mobile phones, but the watch covers are much smaller. "We do not see viable paths to offer these innovations in sapphire."
The argument made in the statement may have been correct at the time it was issued and likely was in regards to a pure sapphire screen. But since then (Sept 12-2013), Apple has filed its patent "Fusion Process that Will Add a Sapphire Laminate Layer to iPhone." So clearly Apple feels there are alternatives, and at the very least it is exploring options.
Investors can play the upcoming change in the market two ways. The first would be to initiate an investment in GT Advanced Technologies given a large potential ramp up in sapphire production. Alternatively, investors can initiate a short position on Corning assuming a significantly large decline in future orders. Personally, I'm still undecided which investment route I plan to take, but I do know that based on these facts I certainly would not want to count Corning as a stock I own.
Additional disclosure: i will continue to watch for a short entry point in GLW for myself.