In November 2013, Apple (NYSE:AAPL) announced a $578 million deal with GT Advanced Technologies (GTAT) wherein GTAT would supply sapphire substrate, or sapphire glass, to Apple. Since then there has been speculation over the application of sapphire glass in iPhone and iWatch. When this news went public, Corning’s (NYSE:GLW) stock fell around $0.70 because of the possible implications it would have on Corning’s Gorilla Glass, Apple’s current choice of protective cover glass on the iPhone. The deal meant that Apple might be looking at replacing Gorilla Glass with GTAT’s sapphire glass, leading to a decline in sales for Corning.
There has already been a lot of discussion in various forums regarding the technical specifications of Gorilla Glass and sapphire and counter arguments given by Corning and GTAT on what substrate is best suited for use in mobile phones. In this article, we look at the financial impact that the possible adoption of sapphire by Apple may have on Corning’s sales and our price estimate of Corning.
We have currently have a stock price estimate of $18.88 for Corning.
Impact On Corning’s Sales
Sales from Gorilla Glass are accounted for in Corning’s specialty materials segment. In 2013, the specialty materials segment posted sales of $1.17 billion.  Corning does not specify how much of the segment’s sales are generated from Gorilla Glass or how much does it generate from sales to Apple. However, Corning does mention its customer concentration in its 2013 10K SEC Filing. It states, “In the specialty materials segment, three customers accounted for 47% of segment sales in 2013.” Since these three customers account for a major portion of the specialty materials segment’s sale, these three must also be the most important. We shall assume that Apple is one of these three customers. Additionally, if we assume that these three customers contribute equally towards the 47% of sales for the segment, it means that Apple’s share of contributing towards the specialty materials segment sales is around 16%.
This implies that Gorilla Glass sales to Apple amount to around $187 million dollars, which was just 2.3% of Corning’s overall sales in 2013. Therefore, if Apple were to completely stop purchasing Gorilla Glass, Corning’s sales would decline by 2.3%.
Impact On Our Stock Price Estimate for Corning
Using the amount for Gorilla Glass sales to Apple and the Trefis widget for Corning’s specialty materials revenue (below), we can assess the impact Apple’s move to sapphire will have on our stock price estimate. By reducing the specialty materials revenue by $187 million for 2014, we will be able to simulate a loss of sales when Apple stops purchasing Gorilla Glass from 2014 onward. We can see that our stock price estimate for Corning declines from $18.88 to $18.56, a decrease of $0.32. (Our stock price estimate for Corning has been calculated using the Discounted Cash Flow method. Details of our methodology are available here.)
A decline of $0.32, or 1.7%, in stock price is not substantial, considering every day fluctuations in Corning’s stock price. However, we have been looking only at the intrinsic value of the stock or the value based on analysis of Corning’s financial statements. Investor sentiment towards the deal may amplify or reduce the impact depending on investor confidence in the company.
Alternatives Available To Corning
Neither Apple nor Corning has confirmed whether Apple will replace Gorilla glass with sapphire in its iPhone. However, we believe that even if this did happen, Corning does have other options from where it may recover the lost sales.
For example, Corning recently announced its productive capability in a new technology to shape Gorilla Glass into any three dimensional (3D) form. This opens up a $3 billion opportunity for Corning. Also, at its recent annual investor meeting, Corning confirmed that it is working with automobile manufacturers, such as BMW, to incorporate the use of Gorilla Glass in sunroofs and windshields.  Corning has already ventured into the application of Gorilla Glass in marker boards.  
Given the above reasons, we believe that there may not be much of an impact on Corning’s sales or intrinsic value if Apple replaces Gorilla Glass with sapphire.Notes:
- Corning’s 2013 10K SEC Filing, www.corning.com [↩]
- Corning’s CEO Hosts Annual Investor Meeting Conference (Transcript), February 7 2014, www.seekingalpha.com [↩]
- Egan Visual premiers EganAero markerboards featuring Corning Gorilla Glass, June 12 2013, www.prweb.com [↩]
- Corning® Gorilla® Glass and Krystal™ Glass Writing Boards Deliver Creative Approach to Markerboard Market, September 3 2013, www.corning.com [↩]