GTAT – Understanding The Biggest Risk Facing GT Advanced Technologies

The following article contains information about GT Advanced Technologies (ticker: “GTAT“).  It should be noted that as of the date of this article, the author is an active investor in this company.

The Greatest Risk Facing GT Advanced Technologies

GT Advanced Technologies (ticker: GTAT) has been an explosive stock in the Technology sector in 2014.  The primary driver behind the 340% 52-week return experienced by shareholders of this company was a well-substantiated rumor that GTAT entered into an agreement to provide sapphire to Apple for use in the new iPhone 6.

In fact, GT Advanced Technologies is currently developing two new sapphire production plants, in Mesa AZ and in Salem, MA.

These two new plants will require more than significant capital investments, using up valuable (and scarce) liquid resources right at the same time the company is struggling to obtain profitability.

But management (and, apparently, Mr. Market) believe the capital outlays necessary to facilitate this new relationship with Apple to be worth the risk. And based on the stock price, which recently was as high as $19/share despite negative earnings, Investors share this same feeling.

But do these investors really understand the risk?  Or are they so enamored with the thought of a GTAT – AAPL relationship that they ignore the risks posed by doing business with the 8 Gazillion pound gorrilla.

So what, exactly, is the risk?

Any first year business student could probably spell it out for you. In fact, if you are honest with yourself, you probably already know.

The risk is that GT Advanced Technologies, for all intents and purposes, is staking its entire future on the agreement with Apple.  Sales to the tech juggernaut could represent as much as 80% of company revenues going forward.

This stunningly high customer concentration has the ability to make the company, and thereby its investors, incredibly successful, if everything goes according to plan.

But it also has the potential to completely crush GTAT.  Before investing in GTAT, ask yourself this:  What happens if the agreement with Apple doesn’t work out?

What if, after investing millions and millions of dollars in these new sapphire production shops, and shifting the company’s primary focus away from the solar sector and affixing it on Apple, a competitor manages to worm its way in with Apple, and erodes the relationship with GT Advanced Technologies?

The easy answer to this question is:  Doom, doom, and more doom.

Sure, GTAT could always fall back on its roots in the solar industry.

But then, investors could expect the stock to fall back to its roots…in the low single digits.

The fact is, management is rolling the dice, putting all of its eggs in one basket, and any other investing cliche you choose to use, and risking it all on a single relationship with one of the largest companies in the world.

Here at The Guerrilla Trader, we still believe that GTAT is a “BUY”…but with the caveat that investing in this company is not for the feint of heart. And the risk level of this stock, due to its extremely concentrated future, is very high.

Before investing in this company, be sure that you fully understand, and can live with, the risky waters that management is steering the ship towards.

Previous post: