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GirlsUnder30 (96.48)

About the Apple GTAT deal

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5

November 05, 2013 – Comments (11) | RELATED TICKERS: GTAT , AAPL , JBL

Everyone is so excited about the deal that brings about 500 million in cash to GTAT but what is Apple really buying? Is Apple buying GTAT ovens to grow and manufacture GTAT sapphire products? No. Will the large inventory of GTAT ovens still belong to GTAT?  Yes. Will GTAT have the responsibility of producing items for Apple up to their stringent specifications and have the risk that a percentage of what is produced will be rejected similar to what happend to Jabil last year? Yes. Does this mean that this is a prepayment representing a liability for GTAT on its books? Yes. Does this deal represent the same gross margin as would have resulted from an outright sale? No. So, will the nice fat margin numbers GTAT has shown in the past be negatively effected? Probably. Does this also mean that this venture could actually lose money for GTAT? Umm, yes. Is it also conceivable that if this venture fails, it will result in a massive write down of this sapphire oven inventory resulting in crippling losses? Ummmm, aaaaah, yes, possibly. Does this news completely overshadow the fact that GTAT came up short on other key aspects of its business? Okay, you guys have ben warned.

 

11 Comments – Post Your Own

#1) On November 05, 2013 at 10:47 AM, awallejr (81.55) wrote:

Guessing the shorts are getting crushed.

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#2) On November 05, 2013 at 10:50 AM, GirlsUnder30 (96.48) wrote:

Yep, They're having a hard time holding but I still think they'll have their day pretty soon. This deal looks like a stinker to me.

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#3) On November 05, 2013 at 11:07 AM, SolarisKing (27.97) wrote:

My guess is that APPL entered the agreement under the assumption that it was good for APPL. Therefore, APPL does not think that GTAT is going bankrupt. Nor do they think that GTAT will turn out a shortage, or inferior product.

APPL thinks that GTAT will successfully upgrade Apple's products. Which they probably will.

Which is very good for GTAT.

There will likely be a pullback, similar to the GLW/Samsung deal, and in that way you may be right, but APPL did not enter this agreement with the intention of destroying GTAT. It would serve them no purpose to do so.

So, long thesis is probably good.

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#4) On November 05, 2013 at 1:02 PM, ikkyu2 (99.15) wrote:

Pretty sure I'm not taking advice from someone who doesn't know Apple Inc.'s ticker symbol.

GU30, thanks for the post; if you wanted to take a little more time and put numbers to your worries, I'd sure read it. 

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#5) On November 05, 2013 at 5:05 PM, GirlsUnder30 (96.48) wrote:

ikkyu
Wouldn't it have been kinder to just tell SolarisKing it's AAPL 8^)
As far as numbers go, alot depends on how much market share Apple keeps and how much competitive pressure effects margins. I haven't read the contract but suspect the relationship is not exclusive for Apple so if problems arise, I don't think Apple would hesitate switching suppliers and suing for the return of the prepayments and/or losses. This would be disastrous for GTAT, not only for the financial implication on that fairly heavily invested segment but also for the loss of reputation and future sales of their ovens and other products. I mean, imagine the scenario if they can't produce to spec, who would buy their ovens if even they couldn't get satisfactory product out of it? Last I looked, they still have a crapload of those ovens collecting dust and taking up space. Look, I like GTAT long term too but I am reducing on each new peak and waiting for lower buy in opportunities. This was a very nervy move by management and I really do hope it works out for them but it is fraught with risk. Everyone expects this to be a slam dunk, I know it ain't. Another sleeping headache that everyone seems to have forgotten are the 40,000,000 shares that are waiting to be floated so you'll need to temper any earnings by one third to get the net real number. For now, I am strongly in the wait and see what happens camp.

SolarisKing
Apple has many sourcing options so I don't think they will lift a finger to help GTAT if they get into trouble. There is historical precedence to accept this premise. To me, this deal burdens all the responsibility on GTAT with limited profitability. Why didn't Apple just buy the ovens if they were confident in GTAT's longevity? It's not like they are cash strapped or couldn't use the depreciation. No, the real risk for Apple was in purchasing technology that had no future support or upgrade path and that is why the deal was penned this way. I'm sure you are aware that there are other sapphire suppliers and let's not forget that Corning's R&D is not sleeping. Also keep in mind that AMAT is aggressively preparing to dominate the solar space with their own high efficiency technology. It's nice to be in the company of cheer leaders who always see an optimistic outcome but I can assure you that it's a very poor way to invest.

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#6) On November 05, 2013 at 8:42 PM, banmate7 (< 20) wrote:

Ok, this time you provided some solid analysis...whichever one of you actually came up with it...paralleling some of mine. Consider:

1) GTAT secured a $578 million loan from Apple, which must be paid back over 5 years, beginning in 2015.
2) GTAT must guarantee capacity, but Apple does not need to guarantee volumes.
3) Misses in the past few quarters amount to more than $578 million.

This deal gives GTAT considerably more runway. Today's deal might catalyze analysts and institutions into giving GTAT irrational exuberance status, chasing & promoting growth. A lot of us longs can still find more gains here...but I suspect GTAT will have to earn it with a solid quarter of growth, much like SalesForce, WorkDay, and LinkedIn consistently did as they scaled up.

I'd be a liar if I said GTAT was built on anything but hopes & prayers. I still don't see too much financial substance here. I concede all I still have here is faith...faith in GTAT having a moat deep in solar and sapphire markets, acknowledging that these markets are yet to materialize. But if they do, well, this will win big.

I'm up 120% now in GTAT. I wonder if I should take profits. One thing is for sure: I'm much more weighted in GLW and still convinced that this is the correct way to hedge. When the smoke clears, something tells me I won't be losing money with GLW. Obviously I'm not so sure with GTAT. There simply are too many variables to be to deterministic a judge...other than to say this remains a wild gamble.

I guess there's still no tangible margin of safety with GTAT, is there?

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#7) On November 08, 2013 at 1:40 AM, lagunab1 (< 20) wrote:

There is a LOT about this deal that we do not know. That is not to say it is bad. Some observations:

APPLE always makes sure it succeeds and thus the deal with GTAT was likely a very savvy bet. They did due dilligence.

Apple exclusivity hinted at in the call implies that other SmartPhones will not be customers....seems ripe for a restraint of trade suit to me.

I still do not understand the negativity in the solar equipment market given the extraordinary return of solar stocks. One would expect them to be looking for more competitive materials and possibly capacity expansion. (This obviously would be a HUGE upside for GTAT)

I will never understand why shorts did not buy in under $3. What is win/loss potential to that? 

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#8) On November 08, 2013 at 7:59 AM, GirlsUnder30 (96.48) wrote:

lagunab1
The fact that there was minimal short covering when the price was that low is an absolutely spot on observation! Someone wasn't believing all the positive press releases and backed up that lack of belief with a very large short position. We had predicted liquidity issues in the other blog about this stock and GTAT got around that problem with this Apple deal and not by selling the ovens like they projected. Buying GTAT today is buying more than 25x NEXT YEAR earnings. I don't know about you guys but I wouldn't pay that kind of coin for a stock that is still in a tenuous financial state and has failed to deliver on too many of their most recent projections. Their other businesses are not likely to deliver either given the competitive environment they will be facing. AMAT is aggressively positioned in the solar sector with their own high efficiency offerings. Given the choice of a long term solar partner between the two, GTAT will be a very hard choice. In addition, the fruits of the FD-SOI venture is not likely to produce results until 2016 and by the way, that will also be a capitally intensive venture! I see mostly grief for GTAT shareholders for at least one more year with more stock floats devaluing your share of their future. This blog post got only two recommendations? I guess the work and insight provided here isn't making people feel good. It's no fun being the bearer of bad news.

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#9) On December 04, 2013 at 9:55 AM, GirlsUnder30 (96.48) wrote:

Ahem,,,does anyone know the exercise price of this recent offering that further dilutes your share in this company? 

8^) 

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#10) On March 31, 2014 at 8:33 PM, sbanwari (< 20) wrote:

Girlsunder30, can you pls provide a reference to the 40 million shares which are waiting to be floated? Thanks

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#11) On June 08, 2014 at 7:26 AM, GirlsUnder30 (96.48) wrote:

The dilution is even higher now. Here are some links to do the math for yourself:

http://www.davispolk.com/GT-Advanced-Technologies-Inc-220-Million-Convertible-Senior-Notes-Offering-and-Convertible-Note-Hedge-and-Warrant-Transactions-10-01-2012/ 

http://investor.gtat.com/releasedetail.cfm?ReleaseID=728689 

http://www.thestreet.com/story/12137884/1/gt-advanced-technologies-inc-prices-190000000-of-300-convertible-senior-notes-due-2020-and-8650000-shares-of-common-stock.html 

 

Just divide the convertible debt by the excercise price. 

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