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Smartphones and tablets probably wouldn't exist were it not for Corning Inc. (NYSE: GLW), and yet the venerable company has not reaped the monster profits from the mobile revolution that tech companies like Apple Inc. (Nasdaq: AAPL) have enjoyed.
Corning is the primary manufacturer of Gorilla Glass, the scratch- and shatter-resistant glass used in the touchscreens of many of today's smartphones and tablets.
It was late Apple Chief Executive Officer Steve Jobs who learned of Corning's miracle product during the development of the iPhone. The unusually durable glass was one of the final elements Jobs needed to make the iPhone a reality.
It wasn't long before other tech companies came knocking on Corning's door, as they wanted Gorilla Glass for their own touchscreen-based smartphones.
It sounds like an amazing success story for Corning. But while sales of Gorilla Glass have been strong since the mobile revolution started in 2007, Corning stock has not seen much of a benefit.
Instead the opposite has happened. The Corning stock price has languished, slipping from the mid-20s back then to the mid-teens today.
Don't get me wrong. Gorilla Glass is great and the boom in smartphones would have never happened without it. It is found in more than 1.5 billion devices and is leading the company's special materials unit to record sales quarter after quarter.
Sales for the segment increased 8% sequentially to $326 million in the most recent quarterly report, thanks to continued high demand for Gorilla Glass.
But this one product, even with all the praise that has been heaped on it, can't carry the rest of the company. Most of its other segments aren't doing nearly so well.
The Trouble With Corning Inc. (NYSE: GLW)
Corning has five different business segments. Gorilla Glass is part of the Specialty Materials segment that also includes advanced optics, but that only accounts for about 16% of sales.
The Display Technologies unit, which manufactures LCD TV and flat panel displays as well as glass components for notebook computers, accounts for 33% of Corning's sales. Here the company faces the reality of glass becoming more of a commodity, as well as the pricing pressures that go hand in hand with that.
Sales of notebook and desktop computers have put a pinch on this segment of Corning's business, as consumers transition to smartphones and tablets. In addition, the sales of LCD TVs have slowed globally and surprisingly are even slowing in the world's biggest market for new TVs - China.
Corning's Telecommunications segment, which accounts for roughly 30% of sales, showed an improvement of 8.2% sequentially for the quarter. This segment manufactures optical fiber and cable as well as hardware for the telecom industry.
You would think that building out telecom infrastructure would be needed even in rough economic times, but again Corning can't seem to catch a break...
Here is what James B. Flaws, vice-chairman and chief financial officer of Corning, recently said:
"We anticipate that fourth-quarter results will be sequentially lower due to normal seasonal declines in our non-display businesses. This decline will be larger than normal due to a more significant downturn in optical fiber sales volume. The optical fiber decline is occurring primarily in North America and China. We are also seeing slower-than-expected construction of the National Broadband Network (NBN) in Australia."
That doesn't sound very optimistic - either in the short term or the long term.
So, beyond Gorilla Glass, what else does Corning have in its bag of tricks?
There is Willow Glass, which is a very slim and flexible glass that can be used for curved displays.
Samsung (OTC: SSNLF) is said to be using Willow Glass in the curved displays of its soon-to-be-introduced smartphone called the Galaxy Round. Samsung is also incorporating curved display technology in TVs with OLED displays.
But while the promise of curved displays and all the geek-talk surrounding Willow Glass sounds very cool, why should anyone believe this will move the needle for Corning stock?
We know that a similar, equally cool product - Gorilla Glass - couldn't drive up the Corning stock price. I don't see why Willow Glass will be any different.
How Key Partnership Changes Will Affect Corning Stock
Speaking of Samsung, Corning has finalized a deal with the South Korean tech giant that will give Corning full control of the Samsung Corning Precision Materials joint partnership, which manufactures LCD glass in Korea.
Along with new cash flows for Corning, one of the benefits of the deal is that Samsung will remain a long-term customer of Corning's LCD display glass through 2023.
That's definitely a plus, but Corning's long-time partnership with Apple is in flux. Recently Apple has been exploring the use of sapphire-based materials with a mid-cap company called GT Advanced Technologies (Nasdaq: GTAT).
Apple currently uses GT Advanced Technologies material in its iPhone 5S fingerprint sensors and camera lens covers. Not only that, but Apple is retrofitting a plant in Arizona for GT Advanced Technologies and securing new patents for the use of sapphire.
One possible use for sapphire screens is the much anticipated, yet still unannounced, "iWatch." Due to sapphire's extremely hard-to-scratch properties, it is rumored Apple will use it for its new wearable technology.
That could be a first step toward transitioning from Corning products to sapphire-based touchscreens. If Apple hopes to continue charging premium prices, it will need just that kind of distinct selling feature.
All that would be bad news for Gorilla Glass, which would not only lose one of its main customers but could also face some stiff competition from sapphire products. And that would put at risk those juicy margins Corning has been getting from sales of Gorilla Glass.
This may sound far-fetched to some, but I believe it to be a plausible scenario.
But remember, we are still talking about a portion of Corning's business that accounts for less than 16% of sales. So even if you believe that Gorilla Glass has a lot more room to run, where is it running to?
After all, the Corning stock price has done nothing since the peak of the positive buzz surrounding Gorilla Glass. Now that it faces some obstacles, I can't see it doing any better than it did before.
The Corning stock price up about 3.5% over the past couple of weeks - let's take that as an opportunity to SELL and look for better investments in the technology sector.
About the Author: David Mamos brings nearly 15 years of analytical experience to the table, with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation, and execution of trading strategies for aggressive investors.
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