Wednesday, October 8, 2014

* GT Advanced (GTAT) - The Surprise that Wasn't; The Retribution from AAPL that May Have Been

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GTAT is trading $1.12, down 7.8% with IV30™ up 2.9%. The Symbol Summary is included below.

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It's not OK to lose money for lack of knowledge

GTAT was trading above $20 not too long ago, up ~300% in less than two-years and backed by a half billion dollar deal with AAPL to provide Sapphire screens to the iPhone and iPad.

Then news came out on 9.9.2014 (The Apple Event") that the new scratch resistant sapphire screens would not be a part of iPhone 6 and GTAT took a hit...

The day before Apple announced the iPhone 6 and iPhone 6 Plus with glass screen covers, the CEO of GT Advanced Technologies sold $160,000 worth of his now-struggling company's stock, shares of which subsequently tanked due to the lack of a sapphire cover on the latest iPhones.

Weeks later the firm declared bankruptcy and pretty much the entire world was "surprised."  In fact, that's the exact word used by Apple itself in a Reuters article.

Did AAPL Tell the Truth About Their "Surprise?"

Here's the thing though... That wasn't a surprise after the news on 9.9.2014.  But there was a surprise... it's that "no one" saw this coming.

It's OK to lose money on an investment, it happens all the time.  It's a part of risk taking.  But it's not OK to lose money for lack of knowledge, and I'm afraid that's what happened to some of the GTAT longs. Let me show you four charts that did NOT predict a bankruptcy, but DID predict an ENORMOUS risk in the firm if bad news came out on 9.9.2014.

First we'll glance to the stock price return chart.

Provided by Livevol

So... that's what happened...

Here's how the risk inherent in GTAT was absolutely explicit.

Revenue (TTM)
The firm saw revenue drop by 85% in three years and this information was known in August.

Net Income (TTM)
The firm saw earnings collapse from a $200M profit to a $200M loss... and this information was known well before even August.

Research & Development over Total Revenue
The firm went from spending $0.03 per dollar of revenue of R&D to over $0.62.  GTAT was imploding as a going concern, but was making an enormous bet on new R&D.  This information was known well before even August.

Here's how revenue and R&D look together in a time series. The risk is pretty obvious.

R&D vs. Stock Price
The stock price was rising, not b/c people were stupid, no, not at all, it was rising due to the promise of R&D return.  The stock moved up as R&D expense increased.

OK.  Here it is.  There's nothing wrong with investing in this firm.  It doesn't make you "wrong" for believing in the R&D and the AAPL deal.  The equity price appreciated with the promise.

Don't tell me that no one knew there was a risk of catastrophic proportions if 9.9.14 didn't go well.

Knowledge is power. Be Powerful.

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This is trade analysis, not a recommendation.

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