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Summary

  • The Apple deal is a major catalyst moving forward.
  • The solar industry remains a key driver for long term growth.
  • New technologies will push topline growth further.

The tremendous stock appreciation of GT Advanced Technologies (NASDAQ:GTAT) has left many wondering whether shares still have room to grow. The recent deal with Apple (OTC:APPL) has led to speculations on the potential applications of GTAT technology, as it relates to Apple products and adjacent industries. We believe the recent partnership is not enough to continue the momentum. Consequently, we will analyze the potential of several other products currently in GTAT's pipeline that could boost revenue in the next 5 years. Finally, we will discount the growth potential in an attempt to find the fair value of GTAT for the next 12 months.

Main Catalyst

The main catalyst for GTAT is the widely talked about Apple development. Even before the deal, the company enjoyed significant topline contributions from the sapphire segment. Sapphire revenue consisted mainly of the sale of Advanced Sapphire Crystallization (ASF) furnace systems to customers looking to produce sapphire material. Additionally, the company also engaged in the direct production of sapphire materials. The deal with Apple will result in GTAT increasing production of sapphire materials.

Revenue ($ millions)

2011

2012

2013

Sapphire

15.3

216.9

48

% of Revenue

1.7%

22.7%

16%

The deal will result in sapphire becoming the predominant source of revenue in the next year, as 80% of revenue is expected to come from this segment.

The primary use of GTAT's technology by Apple is still uncertain. However, much of the speculation revolves around the use of sapphire crystal as the main material for upcoming Apple mobile devices. This premise has come under scrutiny from competitors. Corning (NYSE:GLW), the supplier of Gorilla Glass, the material used in current iphones and other high end smartphones, recently said this about sapphire:

"When we look at it, we see a lot of disadvantages of Sapphire versus Gorilla Glass. It's about 10 times more expensive. It's about 1.6 times heavier. It's environmentally unfriendly. It takes about 100 times more energy to generate a Sapphire crystal than it does glass. It transmits less light which it means either dimmer devices or shorter battery life. It continues to break. I think while it's scratch resistant product it still breaks and our testing says that Gorilla Glass, about 2.5 times more pressure that it can take than Sapphire on. So when we look at it, we think from an overall industry and trend that is not attractive in consumer electronics."

It seems there are quite a few contrary reasons why sapphire crystal may not be the most cost effective or structurally sound material to use. However, as of now, it is unclear whether Apple will actually use the material for the new iPhone lineup. There is also the possibility of using sapphire crystal for the rumored "iWatch" concept, which is still speculative.

An additional factor to consider is the direction of electronic devices. There is a new trend among mobile devices and flatscreen TV manufacturers to offer curved screens. If sapphire crystal is indeed less resistant, then it may not be used in curved designs. This may not matter if the current trends are short lived, as was the case with the much hyped up 3d capable devices in the past year. Regardless, the side that has most to gain from this deal is undoubtedly GTAT, as share prices almost doubled year to date.

Impact on Revenue

The Apple partnership means GTAT will focus less on selling equipment and more on producing the material itself. The deal involves significant capital spending to develop the manufacturing capabilities of its Arizona plant. The company expects capital expenditures in the range of $500-$600 million for FY2014. As for topline growth, GTAT expects the sapphire segment to add between $480M-$640M, in light of the recent deal. There currently exists $292M in sapphire backlog orders, mostly as a result of LED equipment sales. We can conclude sapphire materials destined for Apple should account for at least $188M in 2014.

New Technologies

While sapphire crystal may be the current revenue driver, the solar segment of GTAT remains a significant potential driver of future sales. The table below shows the global solar industry growth in terms of output in megawatts:

Global Solar Industry

2010

2011

2012

2013

2014E

Output (Gigawatts)

19.9

27.9

31.9

36

49

Estimates as provided by SolarBuzz

Demand has been steadily rising in recent years, but the overall industry is in its infancy. The costs of solar panels to the end user remains a drawback to the growth of this technology, as well as profitability issues for most solar panel providers. As an equipment supplier, GTAT is limited by the quantity of equipment demanded by its customers. Here are two developments that can boost revenue from its solar segment in the long run.

HiCz

Revenue ($ millions)

2011

2012

2013

PV

740.1

375.5

31

Poly

143.6

363.3

220

Sapphire

15.3

216.9

48

Total

899

955.7

299

The PV segment has contributed the least to topline in the last fiscal year. Sales of the company's Directional Solidification (DSS) line of furnaces have been the key revenue driver for the segment. Currently, GTAT is in the process of introducing a new type of furnace, called HiCz. This new system will produce more efficient mono crystalline ingots. Here are some of the benefits of the HiCz:

- Higher yield: more usable crystal per kg of silicon

- Higher throughput: more usable crystal per hour

- Lower hot zone costs per kilogram

The companies that purchase this equipment will benefit from lower costs of production and will have an end product that is more efficient. The new furnace will be available for sale sometime this year and GTAT expects to see significant revenue contributions in early 2015.

Hyperion Ion implanter

The next technology that will shape revenue in the near future is the Hyperion Ion Implanter. This tool exfoliates thin slices or wafers, off the surface of a monocrystalline material. In addition, the system will develop thin sapphire structures and low cost composite glass. The immediate application we can think of is for products relating to the Apple partnership. In actuality, the applications are broader than that, as stated by management:

"Hyperion has an incredible number of applications outside of that area [Arizona] and the growth in Hyperion is dominated by those other applications in our projection through 2016."

The company believes the topline contributions of this new technology could reach the size of the PV segment when it was at its highest. If we look at recent years, PV accounted for as much as $740 million to the topline in 2011. The implications of this technology will be a significant source of growth, once Hyperion becomes commercially available by 2015, as expected by GTAT.

Pricing/Valuation

After looking at the largest product initiative of GTAT, next we will project 3 forecast scenarios for the next 5 years, using our DCF model.

GTAT expects revenue for FY 2014 to be in the range of $600M-$800M and 2015 sales to top $1 billion. The 3 scenarios below outline a worse, mid and best case scenario for 2014-2018 sales.

Revenue ($millions)

2014

2015

2016

2017

2018

Total

600

900

990

1089

1197.9

In the first case, we assumed GTAT will hit the low end of the 2014 projection and miss the $1 billion 2015 mark as a result. For the remainder of projection, we assumed a 10% growth rate, in light of solar limited topline solar contributions.

Revenue ($millions)

2014

2015

2016

2017

2018

Total

700

1000

1200

1440

1728

This scenario assumes GTAT falls in between its projection and hits $1 billion in revenue for 2015. Additionally, the solar segment becomes a large part of revenue, with significant contributions from sales of Hyperion equipment. Beyond 2015, we assumed a 20% growth rate.

Revenue($millions)

2014

2015

2016

2017

2018

Total

800

1200

1560

2028

2636

The third scenario involves the company hitting the high range of its topline targets. Growth is due to increasing uses of sapphire crystals to adjacent market and strong market position among suppliers of solar production equipment. This case assumes an optimistic 30% average annual growth rate. This assumes success from additional technologies GTAT plans on developing in the near future.

For operating margin, we assumed a range between 20%-30%, focusing on the lowest end of the range for the worse case and highest for the best case scenario. Our assumptions are based on a gross margin in the mid 40% and increasing R&D spending, as the company expects to hire additional staff. As a result of the Apple deal, GTAT expects capital expenditures in the $400M-$500$M range, as it develops production capabilities at its Arizona facility. We expect Cap Ex to come down after 2014 in the range of $50-$60 per year through 2018. We factored in a residual growth rate of 5%, in light of the company's strong topline growth potential.

Our model yields a 12 months price target of $15, $25 and $41 for the worse, mid and best case scenario, respectively. We think a fair price target for GTAT would be somewhere between the mild and best case scenario. The solar industry has growth potential, and GTAT has competitive products out there that enable solar manufacturers to further reduce costs. The recent deal with Apple can spur similar deals and the technology applied can serve adjacent markets as well.

Conclusion

Our official price target for GTAT is $25, given current known developments. There are multiple parts to revenue growth moving forward, and Apple is only one of those. To keep the revenue stream growing, new technologies like the Hyperion and HiCz systems will position GTAT for growth within the solar industry and adjacent market.

Source: GT Advanced Technologies Has 50% Upside

Additional disclosure: Additional disclosure: I have no business relationship with any company whose stock is mentioned in this article. The Oxen Group is a team of analysts. This article was written by Adrian Moraru, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.