I last wrote about GT Advanced Technologies in an article published on November 19, 2012, when it traded at $3.10 a share and concluded that it was a good investment at that depressed price. GTAT closed Wednesday at $9.14, so I should be writing a self-congratulatory piece and celebrating. Instead, I am scratching my head and trying to determine where we go from here.
The Basics - GT Advanced Technologies (GTAT) was formerly named GT Solar and has made an amazing transition from being a troubled solar industry equipment manufacturer to becoming a very promising sapphire equipment and material manufacturer. The common theme is crystal growth technology as well as technology for the efficient deployment of crystal products. GTAT's primary businesses are polysilicon equipment, photovoltaic equipment, and sapphire product and equipment. The solar side of the business has seen recent pullbacks. In the second quarter of 2011, the photovoltaic business was generating quarterly revenue of $198.6 million; last quarter, this business produced only $4.4 million in revenue. The fact that GTAT has survived this calamity is a credit to its resourceful management team. Sapphire has picked up some of the slack, and GTAT is constantly turning out new equipment and innovative technology. It has several promising new lines of business including silicon carbide aimed at the power electronics industry.
The Numbers - GTAT had a share count of 124 million as of the end of the last quarter and net debt of roughly $3 million which would suggest a market cap and an enterprise value of roughly $1.1 billion. However, in early December, GTAT had a large offering of convertible notes (roughly $190 million) and common equity (8.65 million shares at $8.65) so that last quarter's numbers must be revised. It should also be noted that as of the end of the last quarter, some $82 million of the cash GTAT held was in the form of customer deposits. GTAT's gross revenue for the current fiscal year is estimated to be between $290 and 320 million and its profit is marginal. GTAT is definitely not a typical "value" investment based on rear view mirror numbers.
The Apple Deal - The big recent news for GTAT has been its deal with Apple (AAPL). For some time, there has been speculation that sapphire would be used in smart phones - perhaps, for the entire face of the phone. Sapphire is now used largely in the LED lighting industry, but it is also used for the camera and ID button on some smart phones. In early November, AAPL and GTAT announced a deal under which AAPL would advance some $578 million for GTAT to create a large sapphire production facility in Mesa, Arizona. Although, the contract has been filed with the SEC, unfortunately certain key terms have been redacted for confidentiality purposes. On the surface, it appears to favor AAPL in that AAPL has no set obligation to purchase whereas GTAT has an obligation to ensure a certain level of supply.
However, AAPL is advancing a great deal of money, and it seems likely that AAPL anticipates substantial use of sapphire in future smart phones and/or in other devices (including, perhaps, wearable devices). Sapphire has certain advantages over Gorilla Glass but is more expensive. A recent article makes a strong case for Gorilla Glass, but sapphire does not have to take the entire market away in order for GTAT to have huge growth. Sapphire may - at least initially - have high end appeal (like leather car seats or alloy wheels) and gradually migrate into the middle market. And, of course, the huge ramp up in production that this deal enables may help close the price gap.
GTAT's Future - GTAT is very likely to be on the threshold of a period of rapid expansion leading it to a dominant position in the sapphire market. Its other businesses are challenged by some of the problems in the solar market, but the polysilicon business is generally a business of long term orders for large facilities and is likely to roll along at a reasonable pace in 2014. The photovoltaic equipment business appears to be between product cycles with a new generation of equipment emerging late this year. GTAT is well-positioned for the next product cycle and, in a sense, the photovoltaic business is in the toilet and has no place to go but up. GTAT has sapphire business in the LED industry in addition to the AAPL deal, and that should continue to generate revenue. The size and scope of the AAPL deal should enable GTAT to become dominant in the sapphire business and perhaps even to dominate a broader array of crystal production businesses. On the other hand, the absence of a firm order commitment as well as the uncertainty about prices and margins make GTAT's future hard to quantify.
Future Numbers - GTAT's most recent conference call was shortly after the AAPL deal was announced. GTAT CEO Tom Gutierrez provided estimates of 2014, 2015, and 2016 and suggested 2014 gross revenue of between 600 and 800 million dollars, 2015 gross revenue of over $1 billion and 2016 gross revenue of "nearly double" 2014 gross revenue. He suggested that 2016 non-GAAP earnings per share would be over $1 per share. Given that 2013 gross revenue will probably be roughly $300 million, GTAT is definitely projecting strong and sustained growth. GTAT could certainly command a PE of 20, suggesting a price in the $20 range or above.
The Management Premium - We frequently hear complaints about corporate management and wonder about levels of compensation. In the case of GTAT, the resourceful and energetic management of this company has created an enormous amount of shareholder value. If the management team had not taken the bold step of entering the sapphire market, GTAT might well be a solar company facing Chapter 11 or worse. This management raised cash when necessary, made acquisitions when necessary, cut costs when necessary, and committed to new technology when necessary. In a case like this, an investor is justified in calculating a premium value associated with a management team which has demonstrated its commitment to shareholders and its ability to negotiate a treacherous and changing marketplace.
Bottom Line - I have maintained and plan to maintain my position in GTAT and will add to it on dips. I anticipate considerable volatility ahead because of the absence of a "valuation anchor" such as a dividend or easily discernible multiple. There is also considerable short interest, and we may be on a roller coaster for a while. For new investors, I would advise "averaging in" and using dips to accumulate a position. This is still a strong company with a promising future and, while the "easy money" may have been made, I think that there is an exciting future ahead.