- Investors are placing their faith in future sales and the believed to be lucrative agreement GTAT has struck with Apple.
- This has caused shares of GTAT to more than double since the agreement between the two parties was announced last November.
- If you are on this train then it probably best to remain in your seat until it comes to a complete stop.
"So get my money on time, if they not money, decline" -- Iggy Azalea
The parallel between these lyrics and GT Advanced Technologies, Inc. (GTAT) is that the company is being pre-paid to build a facility to produce cover screen materials that could be used for Apple's (NASDAQ:AAPL) iWatch (get it time/watch?).
I must admit two things. As an old guy I don't know what she means or until a few weeks ago even who she was. I saw an article about a new social-media tracking company two weeks ago that talked about up-and-coming artists, before that article I had not heard of Iggy A. My daughter clued me in and subtly told me all I needed to know with the comment, "You are not going to like her Dad!" With as much snarkiness as I can muster in an article -- What's not to like? She has probably some of the best lyrics out there.....since I don't know MC Hammer! Who would not enjoy this "music?" But you are not reading this to get my insights on pop-culture, right?
So, here are my thoughts on the hype surrounding the momentum of the juggernaut known as GT Advanced Technologies:
- GTAT is transforming itself from a pure-play solar company in 2009 to one that will rely on sales into consumer electronics and LED channels for the bulk of its revenues going forward.
- You cannot value the company off of 2014 financial outlook considering consensus revenue is pegged at just shy of $700 million and EPS projected at $0.09 per share. This is what the company itself is calling a transitional year. The value people see in the company is based off of projections that GTAT will supply AAPL with its cover screens for future Apple products.
- By all rights they are getting their "money on time" considering Apple has made prepayments of approximately $440 million. The total arrangement was for $578 million in Apple prepayments that GTAT will use to fund its capital outlays related to its project in Arizona. As re-printed by Barron's, UBS believes the lack of 4th payment so far indicates that the number of furnaces used for sapphire material production is larger than prior estimates.
AAPL and GTAT entered their supply agreement in Nov. 2013 which provides the basis for recurring sales of GTAT's sapphire materials. GTAT has in its investor presentation a growth forecast of 50% CAGR for the sapphire materials market over the next four years.
So here's the tricky part. How much revenue can GTAT generate from Apple in a single year if it is supplying materials for iPhones?
Here is what I know:
- Apple sold 150mn iPhones during FY13 (ending September) and is on track to sell ~ 170 million units in FY14. If you assume the next version (i.e. iPhone 6) sells 75 million units during its first full year of sales then 100% share of this product as a supplier of cover screen materials costing $20 screen would equate to 1.5bn in annual sales. I doubt that GTAT will end up being the sole supplier (but one never knows). So, if they are half the market, then that implies $750 per annum being generated off their agreement with Apple during 2015. This figure appears to be in ballpark with what Wall Street is thinking considering that the company has guided to $800mn in 2014 revenue and consensus for 2015 is $1.5bn.
- For an on-the-come tech company with what prima facie appears to be a solid future relationship with Apple, GTAT's market cap of $2.6bn may turn out to look like a real bargain in a year or so if it executes according to its plan. The flip side is that tech sector is up ~7% over the past 3 months and starting to look frothy. High beta plays like GTAT tend to get hit a little harder during retrenchment periods. So, the timing is not ideal.