Apple (AAPL) May Have Pushed GT Advanced Tech (GTAT) Into Bankruptcy

Raymond James analyst Pavel Molchanov, who had an Underperform rating on the stock going into today's bankruptcy, discussed GT Advanced Tech (NASDAQ: GTAT) saying the filing implies a breakdown of the relationship with Apple (NASDAQ: AAPL).

"GT stunned the market (and us) today by announcing that it is filing for Chapter 11 bankruptcy protection," Molchanov commented. "The reasons have yet to be clarified - presumably the company will have to provide more detail when its formal bankruptcy filings become public. But it seems abundantly clear that there was a fundamental, severe breakdown in the relationship between Apple and GT."

Molchanov added, "One possibility is that Apple unilaterally opted for a different sapphire supplier for purely business reasons. Or perhaps there was an operational reason, i.e. the Arizona sapphire fab suffered serious technical defects and was unable to meet the agreed-upon obligations with Apple. Either way, having built the fab - and having burned $250 million of cash just in 3Q14 - GT essentially ran out of money, hence the Chapter 11 filing. GT reported $85 million of cash on hand as of September 30, and for context, the company's operating expense (SG&A plus R&D combined) was $42.5 million in 2Q14."

Molchanov admits they did not see this coming, nor did they think anyone else did. The firm's Underperform rating since August was premised on unanswered questions regarding the economics of GT`s sapphire deal with Apple, along with the stock's overly pricey valuation, but they did not remotely envision bankruptcy.

"Needless to say, Apple's product launch on September 9 was disappointing for GT, revealing that Apple will use sapphire only in the watch and not the iPhone 6," the analyst commented. "The financial read-through remained a "black box". Having avoided any public comment since Apple's product launch, GT was scheduled to provide a business update last week, and it was then rescheduled for this week. Our inference is that there were negotiations with Apple as recently as last week, but the hoped-for breakthrough failed to materialize, leaving Chapter 11 as the only practical option for GT."

Molchanov said while they are not in a position to estimate the extent of recovery for GT's debtholders, they expect the equity is almost certainly worthless, and will likely end up being delisted.

For an analyst ratings summary and ratings history on GT Advanced Tech click here. For more ratings news on GT Advanced Tech click here.

Shares of GT Advanced Tech closed at $11.05 yesterday.

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