Apple could take GTAT's sapphire furnaces
Apple financed the furnaces GTAT has been using to manufacture synthetic sapphire glass, and Apple also happens to own the factory where the sapphire is being made. The sapphire furnaces are collateral for the pre-payments Apple made to GTAT, and already has licenses for some of the manufacturer's intellectual property with the option to acquire more.
Mr, Caso said, “Based on these details, following GTAT's bankruptcy, we would expect AAPL to simply take possession of the equipment that acted as security for the prepayments (particularly since AAPL owns the building), and for AAPL to exercise their option to purchase any sapphire IP that they haven't already licensed.”
GTAT announced on Monday that it was filing for Chapter 11 bankruptcy protection in a move to restructure its debt and finances. The news came as a surprise because the company was known to be working with Apple for sapphire production, presumably for the Apple Watch and new iPhone models.
When the iPhone 6 and iPhone 6 Plus were announced with Ion-x glass displays instead of sapphire, that may have been a red flag that GTAT wasn't able to produce the quantities of glass Apple needed at the quality levels it demanded. It's also possible Apple never intended to use sapphire for the iPhone display and has been looking to just Apple Watch production. Apple has confirmed that two of its three smartwatch models will sport sapphire glass displays.
“While it would appear that AAPL structured the agreement with GTAT to protect its interests,” Mr. Caso said, “it would seem likely that these events would at least complicate efforts to use sapphire covers on future versions of iPhone.”
Assuming Apple does take possession of GTAT's furnaces and factory, there's still the matter of actually producing the glass needed for Apple Watch faces. Apple would need people to operate the equipment and if there's any down time during GTAT's restructuring, or if Apple takes over operations, that could put production behind schedule.
Apple could also find another manufacturing partner to take over for GTAT and continue with a similar relationship where it owns the equipment and factory, but a third-party handles the actual glass production.
All of these options fit nicely with Bryan Chaffin's idea that maybe GTAT wants to get out from under Apple's control, although GTAT's executives aren't saying that's the motivation for their bankruptcy filing.
What we know for sure is that GTAT says it plans on business as usual during its restructuring process, and there's a chance the sapphire glass Apple needs for Apple Watch production may be a little harder to come by.
Mr. Caso is maintaining his “Positive” rating, but raised his target price for Apple's stock from US$115 up to $120. Apple is currently trading at $99.34, down 0.28 (0.28%).
[Thanks to Barrons for the heads up]
[Some image elements courtesy Shutterstock]