GT Advanced Technologies (GTAT) is on a terrific run in 2014. The company's shares have gained more than 80% so far this year on the back of its relationship with Apple (NASDAQ:AAPL) to supply sapphire for the Cupertino-based giant's upcoming devices. However, GT shares were in pullback mode after the company released its first-quarter report.
GT missed revenue estimates, sparking a minor sell-off. However, the long-run investor shouldn't be concerned with this minor hiccup as GT looks well-positioned to outperform in the long run.
The future looks strong
The anticipated growth trajectory of GT's business remains consistent for the long term. Management is quite confident regarding the prospects of the company owing to several reasons. The dynamics in its served markets continue to trend in the positive direction due to strong interest in its Advanced Sapphire Furnace (ASF), Polysilicon, HiCz, and DSS solutions.
GT is getting ready to bring several new technologies to the market with its next generation solar and sapphire products in an effort to tap a multi-billion dollar addressable market. Its sapphire materials business is expected to provide a solid stream of recurring revenue once the build-out of its Arizona plant is complete.
GT's sapphire business is expected to contribute over 80% of its revenue this year given the production ramp in Arizona. Hence, GT remains very enthusiastic about its sapphire materials and equipment business.
The Apple angle
The expected growth in the sapphire business doesn't come as a surprise because Apple is expected to use the element in the upcoming iPhones. According to the latest reports, an Apple patent filing indicates that the iPhone 6 will be drop-proof and will be made of sapphire and LiquidMetal. As reported by Fox News:
Apple's patent describes the new use it has in mind for LiquidMetal and how it will aid in stabilizing the sapphire glass displays in future iDevices. Stabilization is necessary, so that when you inevitably drop your iPhone, the glass doesn't shatter or simply pop off. Back in 2007, Apple used a plastic chassis and a rubberized gasket to protect the display from sudden impacts. This technology is still used in all other iPhone models up to the iPhone 5S.
The new patent aims to avoid all these annoying in-between steps and go directly from the metal chassis to the display, using LiquidMetal in a new metal injection molding process. That way, Apple can form sapphire glass directly into the iPhone or iPad's metal bezel. The patent indicates that plastic can also be used, but the emphasis is on the idea of using LiquidMetal to ensure the strongest bond and protection between the glass display and metal chassis.
Clearly, this technology is very cutting edge, but its application is untested in mobile devices, so don't get too pumped up, thinking LiquidMetal will debut with the iPhone 6 this September (or August, depending on which rumors you believe. However, given Apple's agreement with GT Technologies to manufacture enormous amounts of sapphire glass, it's probably safe to assume that a sapphire glass display is forthcoming on the long-awaited iPhone 6.
Hence, there's a high probability that GT's sapphire is all set to make its way into the next iPhone, and this will enhance its long-term prospects.
Strengthening the sapphire segment
GT is also focusing on capacity expansion and product development. It sees significant sapphire opportunities in the merchant market. Also, management states that sapphire demand appears to be rising at a faster pace than supply. In addition, prices are expected to rise further.
GT's ASF customers are running at high utilization rates, and are considering capacity expansions in the second half of the year. GT has sufficient capacity to meet a surge in demand and expects a high level of interest in its recently announced ASF165 technology, which increases batch size by over 40% and significantly reduces production cost.
The ASF165 technology is backward-compatible to existing 115 kilogram installations. GT expects its customers to upgrade their existing investment in sapphire technology and facilities to the 165 kilogram configuration.
GT has started the conversion of its Crystal Systems acquisition into a dedicated production facility supporting its sapphire materials business. The company expects to finish the conversion by the end of the second quarter. GT is also expanding its Merrimack, New Hampshire, operations within the existing footprint. It'll be adding sapphire production capacity in Merrimack to support its continued R&D initiatives, provide pilot production capacity for its LED business, and add space for some of its other new technology development programs.
Thus, it is quite clear that GT Advanced Technologies is making aggressive moves to satisfy the expected demand from Apple for sapphire. The company is improving its sapphire technology, and at the same time, it is focusing on capacity expansions. Apart from these positive developments, GT appears to be cheap at just 18 times next year's earnings. Given that the company's earnings are expected to improve at a terrific annual rate of 48% for the next five years, I think GT Advanced Technologies could be a solid growth pick.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.