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Summary

  • Apple has invested over $500 million in GT Advanced Technologies.
  • The iWatch is rumored to be introduced, creating a new product category for Apple, the smartwatch wearable. Sapphire is de rigueur for today’s mid and luxury wearable watches.
  • GT Advanced Technologies' sapphire screen covers may increase iPhone and iPad profit margins.
  • A new method of processing sapphire could make sapphire a 
cost-effective alternative to Gorilla Glass.
  • Investors shorting GT Advanced Technologies should evaluate their position.

A recent Seeking Alpha article "Apple Might Not Use Sapphire, Short GT Advanced Technologies" by Akshansh Gandhi suggested that Apple (NASDAQ:AAPL) may not use sapphire as the LCD screen/display cover in the iPhone 6. He cited "many factors that point toward the fact it may not happen."

Why then has Apple made substantial investments in GT Advanced Technology? (GTAT)

Here is what we do know:

Peter Corbett of The Arizona Republic AZCentral on June 9, 2014 published the following:

• Apple has paid GTAT $440 million in prepayments, and the glassmaker is eligible to receive an additional $138 million.

• In its first-quarter earnings report last month, GTAT President Tom Gutierrez said his company has received prepayments from Apple for its Mesa project.

• "We continue to expect our sapphire segment to contribute meaningfully to revenue this year," Gutierrez said.

• He calls 2014 transformational for GTAT, as it will manufacture sapphire glass for Apple rather than just selling furnaces to make the glass.

• "Apple is currently working toward meeting its three-year performance benchmarks," said Joseph Valdez, Arizona Commerce Authority spokesman.

• The agreement is that Apple will create at least 700 full-time jobs that will last at least five years, plus 1,300 construction jobs over two years.

• The average wage for plant workers will not be less than $45,000. Plus, Apple is expected to invest $1.5 billion in the project. Apple bought the failed First Solar (NASDAQ:FSLR) plant in 2013 for $113 million with plans to lease the 1.3 million-square-foot facility to GT Advanced Technologies.

Ghandi claimed that "Due to the high cost of producing sapphire, Apple may not use it in the iPhone 6." Clearly, if sapphire display covers really do cost 3-10 times the cost of Gorilla Glass, then we are not likely to see Gorilla Glass replaced by sapphire for iPhone LCD display covers. However that still does not explain Apple's investment in GT Advanced Technologies' sapphire plant. So where could Apple use sapphire if it cannot get even close to cost parity with Gorilla Glass? Let's look at where sapphire is currently being applied and what might be reasonable extensions of its application.

Uses for Sapphire

Apple's current smartphone cameras use sapphire lens covers; however, these are small in size. The application of larger synthetic sapphire is found in mid and high-level watches, barcode sensors and high end digital cameras. Sapphire crystals are de rigueur in today's most broadly used wearable device, the luxury watch. Also, luxury, leading edge digital cameras already incorporate sapphire LCD display covers. A sapphire crystal LCD cover is a standard feature on the Leica M9-P digital camera.

Apple was recently granted a patent its 'iTime' smartwatch design. Although Apple has never publicly acknowledged that it is working on a smartwatch, one is widely expected to be introduced soon. On July 22, 2014 the website appleinsider noted:

As published by the U.S. Patent and Trademark Office, Apple's U.S. Patent No. 8,787,006 for a "Wrist-worn electronic device and methods therefor" describes a device (dubbed "iTime" in one illustration) that fits squarely with speculation regarding a so-called "iWatch" smartwatch.

Estimates of the iWatch, iTime prices have ranged from $300 - $10,000 depending on the quality of the watch bands, cases and whether or not they are positioned more as luxury jewelry than today's smartwatch. A iTime crystal could be in the size range of 1.5-2 inches so the cost would be much less than if used for either 4.7 or 5.5 inch iPhone. Larger sports fitness wearables would also be a possibility for the use of smaller sapphire display covers, a device incorporating the 2.5 inch display size of the iPod nano perhaps?

Would Apple release a smartwatch without a sapphire cover? Whatever form of wearable Apple would produce can reasonably be expected to include a sapphire cover if it is expected to compete in the mid and luxury wearable category. So much of the Apple sapphire production could be expected to be used for its wearables.

Sapphire Display Covers as A Premium Option

Could the cost of sapphire crystal be justified for use as an iPhone display cover or even on an iPad? Investors should be aware of a recently published article by noted technology industry consultant Tim Bajarin. Bajarin's PC Magazine bio states:

Tim Bajarin is recognized as one of the leading industry consultants, analysts and futurists covering the field of personal computers and consumer technology. Mr. Bajarin has been with Creative Strategies since 1981 and has served as a consultant to most of the leading hardware and software vendors in the industry including IBM (NYSE:IBM), Apple, Xerox (NYSE:XRX), Compaq, Dell, AT&T (NYSE:T), Microsoft (NASDAQ:MSFT), Polaroid, Lotus, Epson, Toshiba and numerous others.

In his July, 21, 2014 column on PC Mag titled "How Apple Could Afford an iPhone With a Sapphire Display" Bajarin notes:

This is just speculation, but I believe that Apple could be working on a program where it offers the sapphire screen on an iPhone and perhaps even an iPad as an option.

... a highly durable, completely scratch-proof sapphire display could be attractive to clumsy people and businesses where durability is critical to their work.

... if Apple gave its users the option of ordering one with the sapphire screen on it and charged an additional $100 to $125? For customers who need ultra durables this would still come in cheaper than most competitors who specialize in smartphones or tablets for this market.

...I would bet that a high percentage of Apple's mainstream business customers would opt for sapphire too since these products are used for work and get manhandled much more than they do than in the hands of a typical consumer.

... Apple's investment in this sapphire glass plant goes well beyond wearables and as an option it could deliver even better profits for Apple on any new iPhones or iPads it might launch later this year.

Bajarin's discussion of sapphire used as an option for the iPhone or iPad ties in with rumors earlier this year that Apple would bring out a iPhone that cost $100 more than the standard iPhone. At that time the price differential was explained as a difference in price between 4.7 and 5.5 inch models. What if that rumor relating price to size was incorrect and the $100 price differential actually reflects the premium to be paid for an iPhone clad in sapphire instead of Gorilla Glass?

Another speculative possibility is for Apple to offer enterprise versions of the iPhone and iPad, clad in durable sapphire at a premium, through its new business agreement with IBM.

If we follow Tim Bajarin's line of reasoning, GT Advanced Technologies' sapphire display covers may give Apple an increased profit margin for each iPhone or iPad sold.

How Sapphire Screen Covers Are Manufactured

Synthetic sapphire is grown as a crystal boule in a automated, highly specialized furnace from agglomerated aluminum oxide. The crystal sapphire boule from which a solid sapphire screen cover is sawed into wafers. The sawn cut wafer is then ground and polished into the final thickness and shape of the screen cover.

Display Cover Costs Examined

So what might the cost of an iPhone sapphire screen cover really be?

1. Ghandi cites an unsubstantiated claim in a MacRumors forum post on February 28, 2014 that "an iPhone-sized sapphire screen cover is estimated to cost between $9 and $12. No source or analysis of this "cost" was provided.

2. Ghandi states "Gorilla Glass will cost Apple less than $3 for the same." This was based on the Forbes article, 3/23/2013 by Tim Worstall, Could Sapphire Replace Gorilla Glass In Smartphones? I also note that Bajarin states, "My sources tell me that the Gorilla Glass currently used on the iPhone today costs about $3." Forbes and Bajarin are both in agreement.

3. Ghandi stated sapphire is the second hardest material to diamond; however,sapphire is not the second hardest substance. Wikipedia notes, the MOHs scale is used to measure hardness. Moissanite is 9.25 on the MOHs scale, while sapphire is 9. Diamond being 10 is harder. See the table for Intermediate hardness which incorporates additional substances that fall between levels.

4. Another cost estimate for a large smartphone sapphire screen display is in the range of $30-$35, as discussed in the PC Mag article, How Apple Could Afford an iPhone With a Sapphire Display by Tim Bajarin.

5. An article in MIT Technology Review, "Your Next Smartphone Screen May Be Made of Sapphire" by Kevin Bullis, March 20, 2013 cites Eric Virey, an analyst for the market research firm Yole Développement as stating "a sapphire display would cost about $30. But that could fall below $20 in a couple of years thanks to increased competition and improving technology". However, Kevin Bullis notes:

GT is more optimistic about prices than Virey, estimating that sapphire displays might cost only three to four times as much as those made from Gorilla Glass. People at the company say prices will fall further as GT improves its furnaces, and as the manufacturers that buy those furnaces streamline their operations.

This 2013 projection could be used to justify the price of a sapphire iPhone screen cover today as costing $9 - $12 based on Ghandi's current cost of Gorilla Glass.

Changing Technology

As of July 25, 2014 Kevin Bullis has published an updated article on the manufacturing process for sapphire screen covers, "Cheap and Nearly Unbreakable Sapphire Screens Come into View" - MIT Technology Review. GT Advanced Technologies showed him "a new manufacturing process that produces inexpensive sheets of sapphire roughly half as thick as a human hair, making it possible to add a tough layer of sapphire to just about any smartphone or tablet screen relatively cheaply."

Until now, sapphire has been made by sawing a large, 40 centimeter diameter, crystal boule into wafers. These wafers can be made thinner by sawing, grinding and polishing the sapphire down. The conventional process wastes huge amounts of sapphire and is time-consuming.

The new process from GT Advanced Technologies uses a device called a Hyperion ion implanter to create layers of sapphire thinner than a human hair without requiring sawing and grinding. Bullis says:

The machine shoots hydrogen ions at a wafer of sapphire, implanting the ions to a depth of 26 micrometers. The wafer can then be removed and heated up so that the hydrogen ions form hydrogen gas, which expands and causes a 26-micrometer-thick layer of sapphire to tear off. Ted Smick, vice president of equipment engineering at GT, says the next step is to engineer a system to automate the handling of sapphire wafers in a way that makes sapphire sheets at a fast rate. He estimates that designing and implementing such a process will take about nine months.

Creating the layers this way significantly reduces the waste of sapphire and lowers the cost of production.

The thin sapphire layers produced by ion implantation can be used to laminate glass. Burris now notes that Eric Virey, the analyst for Yole Développement, has revised his 2013 $30 estimate for sapphire screen covers, to reflect that "Laminating glass with sapphire could bring the cost down to $6."

Summary

Apple has invested over half a billion dollars in GT Advanced Technologies to produce sapphire in large quantities. There are several price sensitive ways that sapphire could be incorporated into Apple's product line. Sapphire could initially be used for small display covers in high value items such as the expected new smartwatch product. Sapphire could be a profitable, premium option for iPhones and iPads requiring durability. The new ion implantation method of processing sapphire introduced by GT Advanced Technologies could significantly reduce the cost of sapphire screens and make it a cost-effective alternative to Gorilla Glass. A new low-cost laminated sapphire screen cover could be used across the range of Apple's products, giving Apple a reasonably priced scratch-proof display previously available only on the ultra-luxury Vertu phone. GT Advanced Technologies is now positioned to be the market leader for the supply of sapphire used in the production of cost-effective durable screen covers.

The introduction of a virtually scratch-proof sapphire screen would give Apple a competitive advantage in the mobile device and wearables market. Even if Apple only chooses to use sapphire as a premium option for the durability sensitive market, this may give Apple an increased profit margin for each iPhone or iPad sold.

Investors shorting GT Advanced Technologies should evaluate their position based on the many ways Apple could incorporate sapphire screens in their product line.

Disclosure: The author is long GTAT, AAPL. 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.

Source: What Could Justify Apple's Big Investment In GT Advanced Technologies?