Shares of GT Advanced Technologies GTAT are up 257% in the past six months, and they have jumped 30% in the past two weeks since Apple AAPL announced that it was Apple is advancing $578 million to GT, and GT will employ over 700 people at Apple’s Arizona facility to manufacture sapphire.
On the surface, the big deal with Apple seems like a windfall for GT but it has many negative aspects that seem to have gone unnoticed as reflected by the rise in the stock price.
Second, there are exclusive provisions in the agreement. It appears that GT is not going to be able to service companies such as Samsung.
Third, gross margins from Apple’s business are likely to be substantially lower than GT’s historical gross margins.
Fourth and most important, GT will have to make a transition from primarily an equipment supplier to building equipment for its own use, owning and operating ASF furnaces and related equipment, and producing sapphire screens in large quantities.
The business transition is not without risk. The agreement with Apple seems to foreclose lots of lucrative options for GT but keeps options open for Apple. GT has already lowered its FY13 adjusted EPS view to a loss of $0.50 – $0.40 from previous projection of a gain of $0.25 – $0.45; consensus estimate of analysts has been $0.32. The company has also lowered FY13 gross margin projection to 30 – 32% from previous projection of 35 – 37%. This is due to the adverse effect of change in the business model…Read more at Forbes
