Corning (NYSE:GLW) is trading at its 52-week high. The company's shares have gained more than 23% in 2014. However, the good times might not last long for Corning investors. The company that's known for its Gorilla Glass product is facing the impending threat of GT Advanced Technologies' (GTAT) sapphire technology. Apple (NASDAQ:AAPL) is almost ready to use sapphire in the iPhone, while Samsung (OTC:SSNLF) is also charting a similar territory.
Apple going the sapphire way
As per a recent Apple patent filing, 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."
Apple partner GT Advanced Technologies is already making rapid strides to improve sapphire technology and production. GT had entered into an agreement with Apple, which was worth $578 million, to supply sapphire for use in iDevices. Now, Apple and GT are expanding the sapphire plant in Arizona. As reported by TechCrunch:
"A planned expansion could suggest that Apple is looking to do more volume with its sapphire production late this year and into next than it had previously intended. Rumors suggest that the company is looking into the possibility of releasing two new devices by the end of the year, including both a 4.7- and a 5.5-inch iPhone."
Moreover, GT's sapphire technology is improving at a good pace. Its ASF165 technology leads to an increase of over 40% in batch size, and also reduces production cost. Moreover, the technology is backward-compatible, which means that existing 115 kilogram installations can also be ported on to it.
Samsung, on the other hand, is also thinking of using sapphire in its phones going forward. As reported by Forbes, Samsung has enquired regarding sapphire screen samples from ingot and wafer manufacturers. Both these events are bad news for Corning, as it supplies its Gorilla Glass to both Samsung and Apple.
The latest versions of the Galaxy and iPhone flagships carry Gorilla Glass, and both these phones have sold in the millions. So, the loss of these two big players would be a negative for Gorilla Glass' prospects. In addition, if other smartphone manufacturers also move toward sapphire, Corning's Gorilla Glass might lose its popularity.
The effect on Corning
Hence, it looks like Apple is on track to build its upcoming iPhones with sapphire technology. International Business Times also states the same when it says that, "The Cupertino giant is expected to release a 4.7-inch and 5.5-inch models of iPhone 6 with scratch-free sapphire crystal glass screen." So, it won't be long before Corning sees a hit to its business because of the loss of a customer such as Apple.
The magnitude of the hit cannot be determined, as Corning does not break out the revenue that it generates from Gorilla Glass, and in the previous quarter, the sales figure were inflated due to the acquisition of Samsung Corning Precision Materials. However, late last year, the specialty materials segment, which includes Gorilla Glass sales, accounted for 16% of revenue. So, if Gorilla Glass loses traction, Corning might see a drop in revenue.
Corning's response to sapphire
Corning doesn't think too highly of sapphire. Tony Tripeny, a senior vice president at Corning Glass, is of the opinion that sapphire won't succeed in consumer electronics devices such as Apple. According to Tripeny:
"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... means either dimmer devices or shorter battery life. It continues to break. I think while it's a scratch resistant product it still breaks and our testing says that Gorilla Glass [can take] about 2.5 times more pressure that it can take... Sapphire on. So when we look at it, we think from an overall industry and trend that is not attractive in consumer electronics."
In addition, Corning's diversification should allow it to weather the loss of the Gorilla Glass revenue from Apple. According to a report on Forbes:
"Sales from Gorilla Glass are accounted for in Corning's specialty materials segment. In 2013, the specialty materials segment posted sales of $1.17 billion. Corning does not specify how much of the segment's sales are generated from Gorilla Glass or how much does it generate from sales to Apple. However, Corning does mention its customer concentration in its 2013 10K SEC Filing. It states, "In the specialty materials segment, three customers accounted for 47% of segment sales in 2013." Since these three customers account for a major portion of the specialty materials segment's sale, these three must also be the most important. We assume that Apple is one of these three customers. Additionally, if we assume that these three customers contribute equally towards the 47% of sales for the segment, it means that Apple's share of contributing towards the specialty materials segment sales is around 16%.
This implies that Gorilla Glass sales to Apple amount to around $187 million dollars, which was just 2.3% of Corning's overall sales in 2013."
Hence, it is clear that even though Gorilla Glass might lose its popularity, Corning should be able to come out of the slump. However, one concern is Corning's declining LCD business, as discussed below.
Already seeing some weakness
Corning's LCD business is also facing weakness. When the company reported its first-quarter results, it reported a decline in profit. This was mainly on account of a heavy decline in the prices of its LCD glasses. Management had already forecasted this price decline in the previous quarter because of intense competition from its rivals. Its display volume was also down in the mid-single digits for the quarter, due to a technical issue at a particular customer.
With growing advancements in Gorilla Glass and the high probability of sapphire being used in key smartphones such as the iPhone and the Galaxy series, Corning's Gorilla Glass might take a hit. As a result, the company's overall performance would suffer and lead to downside going forward, making Corning a risky investment.
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