Apple Might Not Use Sapphire, Short GT Advanced Technologies

Jul.18.14 | About: GT Advanced (GTATQ)

Summary

Due to the high cost of producing sapphire, Apple may not use it in the iPhone 6.

Recent reports indicate that Apple may not have enough sapphire to use in both the versions of the iPhone 6.

GT Advanced Technologies has a high short of interest and will struggle to justify its valuation.

GT Advanced Technologies is a good short candidate.

GT Advanced Technologies' (NASDAQ:GTAT) performance in the last twelve months has been astronomic to say the least. GT's shares are up 257% in the past six months, as Apple (NASDAQ:AAPL) announced that it is advancing $578 million to GT to employ over 700 people at Apple's Arizona facility to manufacture sapphire. This big deal with Apple is the reason behind its robust rise in the stock price, which puts a curtain on various negative aspects that could adversely affect GT.

However, Apple hasn't confirmed it will be using GT Advanced Technologies' sapphire in the iPhone 6, and there are many factors that point toward the fact it may not happen.

Is GT overhyped?

First, with the smartphone market saturating, Apple will be looking to maximize its profit on the iPhone 6, and given that sapphire displays are expensive, Apple may decide to stick to Corning's (NYSE:GLW) Gorilla Glass.

As of now, the estimated price of sapphire display for an iPhone-sized phone lies in the $9-$12 range. In comparison, Gorilla Glass will cost Apple less than $3 for the same. Given the massive difference in the manufacturing cost, Apple may decide to not use sapphire in the iPhone 6.

In addition, recent reports suggest that the rising cost of sapphire will restrict its usage in the rumored 5.5-inched iPhone. MacRumors recently published:

"The report notes that Apple's sapphire display may cost 1743 yuan (or $280) in materials, which is a significant jump over the $44 estimated for the 4-inch Retina display used in the iPhone 5s. This extra expense could increase the retail price of the next generation iPhone by approximately 50 percent, which may price the smartphone beyond the affordability point for most consumers.

This rumor corresponds with an earlier report from analyst Ming-Chi Kuo, who suggested that supply constraints may force Apple to reserve the sapphire display for premium iPhone models such as the 64GB version of the 5.5-inch iPhone 6."

Under pressure

GT Advanced Technologies is already trading at a rich valuation, and failing to land a spot in the bigger iPhone will have a negative effect on the stock. Moreover, Apple has a history of pressuring its suppliers, and this will further diminish GT's profits.

In addition, rumors suggest that GT Advanced Technologies is already producing large amounts of sapphire, and under this deal, it's highly unlikely that GT Advanced Technologies will be allowed to supply the sapphire to Samsung or other smartphone making companies. This means that GT Advanced Technologies will be left with huge amounts of sapphire if Apple decides to stick with Gorilla Glass for the 5.5-inched iPhone.

Being merely an equipment supplier won't do the job for GT anymore and it needs to start building equipment for its own use. GT has to start operating ASF furnaces and equipments, and producing sapphire screens in large quantities.

While this business transition is going to be tough, the agreement with Apple will close many profitable options for GT Advanced Technologies, and will keep options open for Apple. Conclusively, GT already has lowered adjusted EPS view to a loss, along with a lowered gross margin projection.

Sapphire is the second-hardest known naturally occurring material, behind diamond, and scores 9 on the Mohs scale of mineral hardness. While this scale measures only the hardness of the material, Gorilla Glass proved to be way better than sapphire when tested for shatter resistance, that is, it is less brittle than sapphire.

Insider Selling And High Short Interest Makes GT A Short Bet

It was recently reported that GT Advanced Technologies' Director, Thomas Wroe, Jr. sold 10,845 shares of the stock on the open market. Also, last week, GT's VP Ho Il Kim sold 6,305 shares.

The company's executives are selling their shares just months before the launch of the iPhone 6. The iPhone launch could have been a huge growth driver for GT if it had sapphire, but given that they are selling their shares, it is possible that it won't have sapphire.

In addition, as of May 30th, approximately 33.9% of GT Advanced Technologies' shares were short. The high short interest has kept a lid on GTAT's stock price. However, GT is already trading at an inflated valuation, and I think it will struggle to justify it, thereby making it a good short candidate.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.