Is GT Advanced Technologies Really A Free Lunch?

May.25.12 | About: GT Advanced (GTATQ)

Although long-term studies show that value strategies tend to outperform growth-based strategies, we can still find companies trading at lofty multiples while others seem to be deeply undervalued.

For example, here are some price/sales ratios for today's market darlings: Facebook (NASDAQ:FB) is trading at 21 times sales, Salesforce (NYSE:CRM) at 8 times sales, and LinkedIn (NYSE:LNKD) at 16 times sales. Other sectors, like semiconductor equipment, seem to be trading at very low multiples as highlighted by the following companies: Applied Materials (NASDAQ:AMAT) is trading at 1.4 times sales, Lam Research (NASDAQ:LRCX) at 1.7 times sales, and GT Advanced Technologies (GTAT) at 0.52 times sales.

After having investigated LRCX and AMAT in previous articles (see "Why AMAT Is A Buy" and "Why LRCX Is A Buy"), I'll focus on GTAT -- the third item on the list -- with one simple question:

Does GTAT deserve its punishing $4 per-share price?

GTAT seems to be very cheap when looking at its price-to-sales ratio. Is it a compelling buy, or just a value trap? At the current price, I would vote for a compelling buy.

According to Yahoo finance, "GTAT provides multicrystalline polysilicon ingot growth systems, ... related manufacturing services for the solar industry, and sapphire growth systems for the LED industry." GTAT has three main business units: manufacturing equipment for PV modules, polycristalline wafers, and sapphire ingots for the LED industry.

Why It Is Cheap Today

The solar industry is in a situation of oversupply since the main markets for PV modules (Germany and Italy) cut their subsidies on solar industry. As a result, prices of PV modules plummeted and orders for manufacturing equipment turned south as PV module manufacturers are all struggling for survival. GTAT did not dodge the downturn, and its orders for PV equipment collapsed accordingly. Hence the cheapness.

GTAT is trading below the cash value of its proven backlog and has growth opportunities ahead. GTAT has a market value of $500 million with a backlog of $1.8 billion. Given the 40% average GM, the cash value of the backlog is $720 million. Given the $334 million in customer deposits, the net future cash value of the backlog is (1800 - 334) x 40% = $586 million, not taking into account the net cash available ($350 million to $75 million) = $280 million. Even if some of the backlog does not materialize because of customer bankruptcies, this is quite low.

In addition, there is still probably a "life beyond the backlog":

  • The PV industry is still growing: EPIA's study shows that worldwide PV module shipments grew by 90% in 2011. Several sources (including the latest AMAT earnings call) hint that solar energy is becoming cost competitive in some markets without subsidies. If the growth continues, the oversupply will vanish and new equipment will be needed again.
  • GTAT's main source of revenue is it's sapphire ingot manufacturing business unit. While the LED industry suffers from the same oversupply crisis as the solar industry, the LED ingot industry probably hit a price bottom, according to several recent studies.
  • GTAT is working on new equipment generations that will reduce PV's manufacturing costs and open new market segments. While there is no guarantee regarding the success of such projects, these are additional upsides for an uptake in revenues in 2013. Given GTAT's current valuation, this upside is given for free right now.


It takes a lot of pessimism to value GTAT at $4 per share. In order for the company to be worth that little, the company should only fulfill a fraction of its orders at hand and stop all business activities afterward. Instead, I would suggest viewing GTAT as a rock-bottom value play with a free lottery ticket attached to the new market segments, and/or a recovery in some of its existing business segments to happen in the next 12 to 24 months.

That's certainly a lot of uncertainty, but probably little downside at the current price.

Disclosure: I am long GTAT.