GTAT Short-Term Outlook: Tremendous Risk or Reward
Posted by: Matt Margolis October 2, 2014
Original content was published to PTT Forensics subscribers on September 25th.
Shares of GTAT Advanced Technologies have traded down to a low of $10.76 over the past week. The company has yet to schedule next week’s webcasted business update, which will not be focused around the “fall technology briefing” to discuss the Merlin and Hyperion offerings.
It is imperative that GTAT address 2014 guidance, the Mesa sapphire plant ramp and the status of the final prepayment from Apple. Additionally the timing is right for GTAT to briefly touch upon its 2015 guidance and give investors and analysts a status update on the pending sales orders associated with Hyperion and Merlin.
GTAT’s Q3 is expected to close on Saturday September 27th. In the short-term GTAT’s shares represent tremendous risk or reward. On the downside shares could fall another 30% to $8 and on the reward side shares could rise 60% to 80% back to $18 to $20 in a heartbeat.
The two items that investors and analysts are laser focused on will be GTAT’s 2014 guidance and the status of the final prepayment. I was asked by someone in the Forensics Member Forum if GTAT can still hit the low-end range guidance for 2014, which is $600m. My answer was and still is “yes” but I would handicap this achievement at only 50/50 odds.
GTAT recorded $81m of revenue in the 1H of 2014. In order to hit 2014 guidance of $600m the company would need to book $519m of revenue in the 2H of 2014. In order for GTAT to hit the low end of guidance GTAT would need to record $425m of sapphire revenue in the 2H of 2014 between Apple materials and ASF equipment. The remaining $94m can be achieved through Poly, PV and Specialty Furnace revenue, which is still has a balance of about $50m that is expected to be recorded by the end of the year.
GTAT reported an ASF equipment backlog of $333m as of June and would likely need to deliver up to $225m of equipment in the 2H of 2014 or 68% of the ASF equipment backlog. On the Apple materials side, GTAT would need to record $200m of Apple material sales in the 2H of 2014. My current estimate for Q3 Apple materials revenue is $25m to $35m, which leaves a balance of $165m to $175m that needs to be shipped in Q4.
Can GTAT Ship $165m To $175m To Apple In Q4?
Yes, but a successful ramp up in October along with the receipt of the Apple prepayment will be required to hit guidance. GTAT is currently scrambling and has been struggling for quite some time to deliver quality large boules to Apple. Although GTAT has ordered and received almost 700 tons of alumina in the past month, it does not guarantee GTAT is ready to ramp up the Mesa facility in October. However, the data points do inform us that GTAT is prepared and appears ready to ramp up the production at the Mesa, AZ facility.
Since August 25th, GTAT has been receiving a steady supply of alumina and has taken in over 520,000 kg of raw materials between August 25th and September 12th. An additional order was received on September 19th, but I won’t be able to view the size of the shipment until the database is refreshed this week. Assuming the delivery is the same size (103,500 kg) as the previous shipments the total amount of alumina delivered to Mesa will exceed 623,000 kg or almost 700 tons of alumina over a four week period. Assuming GTAT can consistently produce 200 kg boules it would amount to enough feedstock to run over 3,000 growth cycles. In addition to the alumina deliveries, GTAT has sourced large amounts of crackle from Europe over the past few months.
On the positive side, GTAT has the equipment, materials and staff in place to ramp up the Mesa facility.
On the negative side, it is unknown whether or not GTAT has managed to figure out how to produce large high-quality boules on a consistent basis.
My Final Thoughts Heading Into Next Week For GTAT Shareholders
GTAT shareholders will be rewarded with an incredible share price recovery or could face another 30% sell-offs based on GTAT’s business update coming next week. At this point, I have a foot in each camp because it is simply too close to call. On one hand, GTAT has all of the necessary pieces in place in terms of infrastructure and staff to ramp successfully ramp up the Mesa facility operations. On the other hand the unknowns regarding how close GTAT is to producing large high-quality on a consistent basis makes GT a 50/50 bet heading into next week.
I’ve learned a lot from the Apple event on 9/9, and one thing I have learned is that I can’t always trust the data because what I don’t know can be devastating. In this case the data supports a successful ramp of the Mesa sapphire facility; on the other hand if GTAT can’t consistently produce large high-quality boules they will not be able to successfully ramp the plant in October.
I personally will hold onto my shares, and I’m prepared to weather whichever situation to plays out. For other investors that decide to hold shares of GTAT heading into next week I think it is important to read the passage below to reemphasize why the big picture supports Apple and GTAT’s long term successful partnership. Even if GTAT requires more time to work out the growing process I believe Apple will continue to be supportive because success of the Mesa sapphire plant has a lot riding on it from both sides.
The Big Picture Supports Apple And GTAT’s Long Term Successful Partnership
Apple has invested $578m into GTAT in the form of an interest-free loan to fund the equipment build out to operate the Mesa, AZ sapphire facility. Apple has also paid $113m to buy a 1.3m square foot facility from First Solar and has invested another $1B plus of capital equipment into the Mesa building and the supply chain.
In addition to the billions of dollar invested by Apple and hundreds of millions spent by GTAT to buy equipment and hire 700+ employees, there are political reasons why Apple and GTAT need this project to be successful. Apple spent years looking for the right site to build this facility before deciding on Mesa, AZ. The city of Mesa incentivized Apple with tax breaks to land a deal. The sapphire plant in Mesa is expected to generate more than 102 million in tax revenue over five years in addition to creating over 700 quality manufacturing jobs.