Mark Hibben
GT Advanced Technologies: How The Bulls Got It So Wrong
Sep. 17, 2014 3:47 PM ET | 8 comments | About: GT Advanced Technologies, Inc. (GTAT), Includes: AAPL
Analysts and tech writers inflated the importance of the Apple/GTAT agreement by shifting focus to iPhone, a more important product than Apple Watch.
In order to support the iPhone sapphire screen theory, projections of sapphire production capacity were grossly overstated.
The letdown following the iPhone 6 event shouldn't blind investors to the future potential for sapphire in iPhone, but should make them more cautious.
While the September 9 event was a triumph for Apple (NASDAQ:AAPL) and the stewardship of Tim Cook, it marked a setback for GT Advanced Technologies (NASDAQ:GTAT). Since September 8, GTAT has fallen about 30%, merely as a consequence of Apple not using sapphire in iPhone 6. How the expectations of investors and Apple fans everywhere become so disconnected from reality is a question that I feel deserves more consideration than I've given it up until now.
The Big Promise
When the GTAT/Apple deal was announced last year, I immediately thought of what was then called iWatch. Sapphire had long been used for watch crystals, and I took this as a sign that iWatch was on its way. But almost immediately, focus in the media shifted to the iPhone. iWatch was still an unknown quantity with an unknown market potential, whereas iPhone was Apple's flagship product producing roughly half of Apple's revenue. Sapphire on iPhone was big, sapphire on iWatch, not so much.
And Apple seemed to have big plans for sapphire, buying a 1.3 million square foot building in Mesa, AZ, and hiring GTAT to equip and run the facility. By February, 9to5 Mac ran an article stating that Apple had procured enough sapphire production capacity to build 100-200 million iPhone screens per year. This seemed to settle the matter. The next iPhone would have sapphire screens.
The article quoted Matt Margolis, who also has contributed a number of bullish analyses of GTAT to Seeking Alpha. There have been many bullish articles on GTAT since the beginning of the year, but Margolis is noteworthy in the thoroughness of his research. Margolis also demonstrates how even well-done analysis can get things terribly wrong.
A good example of this is his April 27, 2014, article in which he reaches three remarkable conclusions:
1) The Mesa, AZ, facility likely had over 2,000 sapphire growth furnaces, with plans for another 700-1,000 to be installed.
2) GTAT had the ability to produce 500 furnaces per month.
3) The Mesa, AZ, facility reached full production by the end of March.
With 20/20 hindsight, it's obvious that none of these assertions were correct. Since Apple has no near-term plans to offer sapphire screen iPhones, the ~2,700 furnaces would be mostly excess capacity, since only about 100 furnaces are needed to support Apple Watch production, even assuming my lofty expectations of 10 million Watch sales per quarter. Since Apple didn't need 2,700 furnaces, it didn't need to have them installed at the rate of 500 per month. And finally, if the Mesa facility had been able to reach full production by the end of March, we would probably be seeing Apple Watch on store shelves in time for the holidays.