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Summary

  • The recent downgrades focus on the short-term, and the fall in the stock price offers a good opportunity to long-term investors.
  • It is important to understand the role of the photovoltaic segment for the future growth of the company in order to gauge the true potential of the stock.
  • Prospects are bright for the photovoltaic segment with the expected success of Hyperion and Merlin.

GT Advanced Technologies (GTAT) has been one of the best performing stocks over the last 6-8 months - the stock has gained more than 100% since the start of November last year. The rise in the stock price mainly came after Apple (NASDAQ:AAPL) indicated that it might be using sapphire in its new iPhone and other products. Investors and smart traders have made considerable profits by trading the stock - long-term investors are also pleased as the future growth prospects of the company look bright. However, there was a small bump in the ride due to some downgrades - GTAT has lost some value over the last few days due to the downgrades from two analysts.

Analysts at UBS and Canaccord Genuity changed their stance on the stock mainly due to the short-term concerns about the sales. UBS downgraded the stock from buy to neutral but maintained its price target of $22. Based on the closing price on July 8, 2014 {$16.52}, this represents an upside of over 33%. UBS also decreased the full year EPS target from 17 cents to 12 cents. Canaccord downgraded the stock from buy to hold and reduced the price target to $20 - current price target still has the upside potential of about 21% based on yesterday's closing price. The rationale behind both the downgrades is that the company's sapphire sales are slow and Apple will not use Sapphire in its new devices being launched in the current year. As a result, the company will fall short of the analyst estimates. The chart below shows the trend in price after the downgrades.

The stock has fallen more than 15% during the last five days. The recent fall in the stock price creates a buying opportunity for the long-term investors, in my opinion. My regular readers will know that I have always advocated investing in GTAT on long-term basis as I believe the real growth for the company will come over the next two-three years as the sales of Hyperion and adoption of Merlin gathers pace. Let me explain my optimism and the long-term growth prospects of the company.

First of all, we have the sapphire business of the company - sales for this segment are falling behind according to the above mentioned analysts and it will cause the company to miss estimates - taking into account the expected full year contribution {80%} of sapphire in the total revenues of the company; it will not be a surprise if GTAT misses the full year estimates if the sales of sapphire indeed fall short of the previous estimates. However, this is a short-term concern. The latest patent wins by Apple and its partnership with GTAT clearly shows that Apple is in it for the long-run, and the future Apple products will surely use sapphire. There is no doubt that sapphire will be an extremely important component of the total revenues of the company over the next few years. Short-term developments in the sapphire segment should not spook the investors, in my opinion.

It is important to understand that while Apple will be an important ally, not everything will be dependent on this partnership. GT Advanced technologies still has two more business segments, which will be important for the future growth of the company. Especially, PV segment {Photovoltaic segment} will be vital for two reasons: Hyperion and Merlin. The image below shows Hyperion and it was taken from the new products and technology briefing by the company.

(click to enlarge)

Hyperion is an ion implanter that has the ability to cut silicon, sapphire and other materials into thickness of 20 microns - 10 times less than the current technology available in the market. The machine will enable the business to reduce the wastage and increase efficiency. Hyperion will result in about 20% savings in cost for the integrated companies operating in the solar industry. Cost of the panels is one of the biggest concerns in the solar industry and it remains a major hurdle in solar energy becoming the mainstream source of energy.

Companies operating in the sector are looking at ways to decrease the costs and increase the efficiency. Recently, SolarCity (NASDAQ:SCTY) has decided to buy a solar panel manufacturer, Silevo, in order to decrease the costs. There have been some questions about the price {$4-15 million} of Hyperion, and there is an argument that it might be a bit pricey for the manufactures. I believe a decrease in costs of about 20% will result in a considerably shorter payback period and it will result in a wider acceptance of the solar energy products which will develop the market. As a result, these manufacturers will be able to sell larger volumes, resulting in even shorter payback period. (You can read Hyperion's detailed analysis here)

The second reason is Merlin, which will further allow the companies to bring down costs. With the help of Merlin, per watt total cost should come down to at least $2.61 from $2.90. Almost all the players are working to bring down the costs for solar energy as the industry cannot rely on subsidies forever - tax credits will eventually be exhausted and the industry will have to find a permanent way to compete with the fossil based energy. The image was taken from the new product and technology briefing. (A detailed analysis of Merlin and solar segment can be found here).

(click to enlarge)

Furthermore, the recent win for its HiCz 200 furnaces for PV project by Qatar Solar Energy shows that the acceptance of the company's technology in the industry remains strong and it is likely that Hyperion and Merlin will also receive solid interest.

Bottom Line

Despite a fall in the stock price over the last few days, the stock still trades at over 36x 2015 earnings - it is clearly trading at a premium. However, the excitement surrounding the company is real as there are a lot exciting developments underway at GTAT. I maintain by view that it will be a solid long-term investment and the investors should not be spooked by the short-term fluctuations in the stock price. I believe this pull-back has given long-term investors a good opportunity to add to their positions.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Source: Is This The Best Time To Buy GT Advanced Technologies?