GT Advanced Technologies Inc. (NASDAQ: GTAT) could be a key beneficiary from the current trend where use of sapphire by the major Tier-1 mobile consumer electronics companies is viewed as a key part of their differentiation strategy. GT is the largest sapphire equipment supplier and likely beneficiary of this inflection point in mobile devices.
Based in Merrimack, New Hampshire, GT is a global provider of polysilicon production technology and sapphire and silicon crystalline growth systems and materials for the solar, LED and other specialty markets.
The company was in the news recently for signing a multi-year deal with Apple (NASDAQ:AAPL) to supply sapphire material starting in 2014. This could be the beginning of nice things to come.
GT is targeting 2015 sales of over $1 billion and 2016 sales over $1.5 billion which should be conservative if GT can convince more customers to adopt sapphire.[Related -Ride Apple's Success With This 'Secret' Stock]
The mobile sapphire equipment opportunity is significant and developing faster than expected, and checks have found significant mobile sapphire demand growth in China.
"We believe the mobile sapphire equipment is a $5bn market opportunity for GT which can drive $4bn a year sapphire material sales for GT's customers for 400 million smartphone cover screens. We now estimate the sapphire equipment product upgrade story for mobile device covers (replacing glass based covers) develops sooner than expected," UBS analyst Stephen Chin said in a client note.
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Sapphire's higher scratch resistance qualities could lengthen the average lifetime of mobile devices, which could slow the replacement demand, which in turn this could slow the build out of sapphire capacity needed to meet the future demand for such devices.
"We don't believe this replacement remand related concern matters in the beginning of the ramp as we noted earlier – the overall market opportunity set to serve the existing market is big," Chin said.
There is higher sapphire content in recent mobile devices. The recently launched Samsung Galaxy Gear (smart watch) has a sapphire glass cover while the home button in Apple's new iPhone 5S, which also covers the finger-print sensor, is made of laser-cut sapphire crystal.
Checks on sapphire demand in China shows that mobile sapphire demand has grown from 5K two-inch equivalent (TIE) to 200K TIE in the past 6 months.
"We conservatively estimate mobile sapphire equipment sales of $300M in 2014 generating $0.32 in EPS," Chin noted.
Moreover, the recent Apple deal limits the need to raise capital for the company and gives solidity to the balance sheet. Apple will prepay GT a total of $578 million and GT expects to exit 2013 with net cash of $210 million.
GT reports in its 10-Q that it will receive Apple's prepayment! in four installments as long as it hits certain milestones. Apple prepayment will be used for sapphire furnaces & related equipment
"This 10-Q disclosure from GT gives us confidence in our estimate that there will be about 1,500 sapphire furnaces at this Mesa fab. We estimate GT's sapphire furnace build for the Mesa fab is 50-100 in 4Q13, 300-400 in 1Q14 and 800-900 in 2Q14," Chin said.
This large amount of furnaces also means this factory is not going to be just making sapphire for the home button on some of Apple's products. However, GT may not sell sapphire furnaces to certain markets is slightly concerning.
That said, GT can still sell sapphire furnaces to customers who are not competing with Apple and may include markets such as LED light bulbs and the military for aircraft windows.
Meanwhile, new opportunities in silicon carbide (SiC) and gallium nitride (GaN) applications could provide upside in 2014. GT's new product opportunities in SiC and GaN are in the late stage of development with early revenue opportunity in the second half of 2014.
"Our industry checks find that this could provide a significant sales upside if GT's equipment can produce these substrates economically. We model a base case of $75M in sales for these new opportunities," Chin noted.
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