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Apple iPhone 6 Sans Sapphire: Time to Dump GTAT?

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A number of stocks took a plunge after Apple’s (AAPL - Free Report) Sep 9 event. But the worst hit was GT Advanced Technologies , which was supposedly supplying sapphire top glass for the iPhone 6.

These rumors were spiked by a $578 million agreement between the two for the purchase of sapphire goods back in Nov 2013. GTAT shares soared nearly 70% since then and remain around 48% above the pre-agreement level despite the sell-off yesterday. So there is plenty more room for downside and investors could be better off dumping the shares right now.

Shares of GTAT competitor Corning (GLW - Free Report) barely moved, however, with Corning CEO making the cryptic comment “We keep our secrets.” The secret remains as such mainly because Apple chose not to mention Corning as a supplier, although it did say that the display screen was “ion-strengthened” (meaning that the sodium ions in the glass were replaced by potassium ions). This is the process Corning uses in its Gorilla Glass, which Apple has been using in its devices since their inception.

But why did Apple decide against sapphire, at least for now? The reason is likely related to the nature of the material, which while being extremely hard and scratch-resistant is also less elastic. The lower elasticity (or flexibility) makes it more susceptible to cracks that ultimately lead to breaks. This is particularly true when screen sizes are larger, as in the latest iPhones.

The theory also holds water when you consider that the Apple Watch, also unveiled at the event, will use sapphire glass. The smaller screen makes sapphire a better-suited material. In fact, many high-end watches already use sapphire glass.

The high cost and low yields of producing suitable sapphire sheets could also have been a deterrent.  

The current uncertainties in demand and the lofty valuation led Raymond James analyst Pavel Molchanov to downgrade GTAT shares to Underperform last week, after which the shares fell around 4%.

All that being said, the emerging wearables and Internet of Things (IoT) market is likely to be a secular driver of sapphire demand. The technology is far from a write-off, instead it appears to be in the making. Apple itself has increased investment to manufacture the material and it has also acquired exclusive licenses to some GTAT technologies.

Apple, Corning and GTAT carry a Zacks Rank #3 (Hold). But Intel (INTC - Free Report) is a technology stock with a Zacks Rank #1 (Strong Buy) and is therefore a safer bet at this time.




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