Seeking Alpha
Contrarian, foreign companies, dividend investing
Profile| Send Message|
( followers)  

Smartphone industry is abuzz with activity. Apple (NASDAQ:AAPL) is planning to use sapphire in their next phone. GT Advanced Technologies (NASDAQ:GTAT) stock price has quadrupled in about a year. Corning (NYSE:GLW) Gorilla glass has been labeled obsolete my many a contributor or commenter.

Some revealing remarks have been recently made at the Corning annual investor meeting. Having read the transcript, I stand by the following opinions:

  1. Sapphire is not comprehensively better than Gorilla glass as a screen cover material.
  2. Gorilla glass will remain the dominant screen cover glass.
  3. Corning remains an excellent long term investment opportunity.

Let us explore these points one by one.

Sapphire is not comprehensively better than Gorilla glass as a screen cover material.

On Feb 7, 2014, during the Corning annual investor meeting, Amitabh Passi from UBS asked the following question:

"And then my second question was there is a lot of debate and discussion going around between sapphire versus Gorilla Glass? I would love understand how you think about risk mitigation if indeed sapphire were to replace Gorilla to cover glass solution? What is your thought process in terms of how mitigate any potential risk from that is question?"

Dr. Jeffrey Evenson responded (emphasis mine):

We don't see it as a large market for cover glass and the reason is mostly around performance...

...The number one concern the consumers have is about breakage of their mobile phones. We believe that Gorilla Glass right now outperform sapphire covers on breakage.

We've shown that if you subject sapphire to normal wear and tear, its takes about 2.5 times as much force to break peace of Gorilla subjective that same wear and tear as it does sapphire. And we are introducing new glasses that perform even better on drop performance.

Sapphire if you adopted it will also give you a lot of limits. It gets exponentially more expensive with the area that you cover. So it's limited to much smaller areas. It's about 60% heavier than our glass and just its density, you can't change that, it's a crystal and it reflects more light. So we don't think it's a great solution for mobile covers.

My earlier suspicion, then, is confirmed by Dr. Evenson. Sapphire is indeed easier to break than Gorilla glass. Sapphire is also heavier than Gorilla.

Because of its high refractive index, sapphire reflects more light than Gorilla glass. A sapphire screen, therefore, will probably be more difficult to read in daylight. Any attempt to add anti-reflective coating to sapphire will make the screen more scratch-prone and defeat the purpose of using the sapphire in the first place.

The cost consideration may be more significant for tablets than phones. Creating and polishing a large tablet-sized uniformly thin sheet of sapphire sounds much more expensive than doing the same for a relatively small phone screen. Additionally, the "jewelry" attribute may be applicable to phones, but I cannot bring myself to see a tablet as anything more than a utilitarian item.

So, do I know something that Apple does not? Of course not. The truth is that it is uncertain what Apple is planning. I suspect that sapphire will be used in iWatch and iPhone lens cover and the iDevice fingerprint reader. Sapphire may even be used in smaller iPods, perhaps those designed for use in sports. If and when sapphire does make it onto iPhone screens, I suspect it will be because Apple simply does not have a choice - please see discussion below.

Gorilla glass will remain the dominant screen cover glass.

During the same investor meeting, Corning talked about antimicrobial and anti-reflective glass:

Last month we launched the world's first antimicrobial cover glass, which combines all the benefits of Gorilla Glass with an antimicrobial agent that inhibits the growth of bacteria, mold and mildew and we have a next generation glass in our labs that kills 99.99% of bacteria.

...We've also introduced antireflective cover glass... We're also developing coatings anti-reflective and anti-glare to complement our new products in consumer electronics...

I suspect that Gorilla glass 4, when it comes out, will be even more scratch and shatter resistant, antimicrobial and anti-reflective, while being cheaper and lighter than sapphire. For most phone manufacturers, there is and will be no reason to move away from Gorilla glass.

Given a recently strengthened connection between Corning and Samsung (OTC:SSNLF), I expect Samsung's new phones and tablets to offer the latest Gorilla glass with all the aforementioned properties. Samsung, no doubt, is going to market the heck out of their new cover glass. Given that Samsung will now own about 7.4% of Corning, Apple may have to play second fiddle to Samsung, its major competitor, in terms of access to premier Gorilla glass products. Therefore, Apple may not have a choice but to diversify away from Gorilla glass.

Corning remains an excellent long term investment opportunity.

While talking about sapphire, Dr. Evenson said (emphasis mine):

Where Corning is coming from on that is we had a large sapphire business in the 1960s and 1970s we were leader in sapphire production...

Currently we are one of the leaders in crystal growth for industrial applications in the world for calcium fluoride, for our polysilicon business, it's a joint venture with as part of Dow Corning and all crystals are grown at basically the same way, batch processes, at very high temperatures over long periods of time works very control.

So if we thought there were significant returns to be had in sapphire, this would be fairly natural business for us to enter.

He then continued:

...Now, having said all that, there's always some risk of technology breakthrough or somebody deciding to use it [sapphire - author] because it's novel or it offers jewelry properties and we do have some risk mechanisms in progress.

The laser technologies that we've developed to cut strengthened glass which we think are by far the best in the world, are also by far the best in the world for cutting sapphire. So if this did take off the most expensive part of sapphire is actually not the production, was actually in the finishing and processing. We believe that we have very advantage technology in that and as it scaled up we would generate revenue from this laser technology.

I interpret this as follows: "We will make money on Gorilla glass for now, and if the market really wants sapphire, we will easily give the market sapphire and continue making money."

Corning has experience in sapphire production and also sapphire finishing and processing. Corning also has what I think is the best substrate to laminate with sapphire (Gorilla glass), if it wants to mitigate the fragility of sapphire screens. Corning has a deep market for its screen cover products - and one of the major device makers (Samsung) almost has to continue buying these products.

Given the above, I see bright future for Corning's Specialty Materials segment, of which Gorilla glass is a large part. While outside the scope of this article, other segments of Corning's business have also been firing on all cylinders. Recent (and likely continued) dividend increases and share buybacks will only help Corning investors.

Source: Sapphire Update: Can It Win Against Gorilla?