Apple supplier IQE's latest plunge creates fresh interest

Following a late warning yesterday, management has sought to reassure first thing Tuesday. Graeme Evans explains what's going on at IQE.

A dramatic 24 hours at Apple tech supplier IQE kept short-sellers in the ascendancy today, with just a few crumbs of comfort for the AIM stock's large fanbase.

Sentiment was rocked by a Wall Street profits warning from Lumentum, a supplier of 3D sensors used in Apple facial recognition technology. The ripples from its update were certainly felt in South Wales on Monday afternoon, with IQE shares down as much as 27% at a 17-month low.

Without referring directly to Lumentum or Apple, IQE said 10 minutes before the close of the stockmarket last night that it expected a "material reduction in its financial performance" this year due to a customer of a major chip company in its supply chain materially reducing shipments.

Just as excitement over IQE's reported role in the Apple supply chain helped shares soar 300% in 2017, so the stock has become subject of volatility every time there are jitters or trading disappointments in relation to the tech giant. 

Specifically, analysts are speculating that trading updates from suppliers including Lumentum raise questions over demand for Apple's new iPhone Xr.

The nervousness has been reflected in a sharp deterioration in the IQE share price this year, partly driven by short-sellers who have viewed the stock as over-valued at a 30x price/earnings multiple. More than 10% of shares are currently out on loan, which is a significant level for an AIM-traded stock.

Source: TradingView (*)      Past performance is not a guide to future performance

Whether it is caused by hedge funds closing out positions or a round of bargain hunting, the company’s shares at least staged a recovery today to climb 6%.

The mood was helped by a more detailed trading update from IQE this morning, with founder and CEO Dr Drew Nelson reiterating long-term guidance for each of the company's photonics, wireless and infrared businesses.

He sought to reassure investors that a drive for increasing customer diversification will "in time produce a better balanced and more uniformly distributed demand profile".

Facial recognition in mobile phone handsets is just one potential use of the Vertical Cavity Surface Emitting Lasers (VCSEL) wafer technology in which IQE's photonics division specialises.

Smart sensors also have potential uses for Internet of Things applications or for optical communications, industrial heating, machine vision and heat assisted magnetic recording.

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Based on early indications, Dr Nelson still thinks Photonic wafer revenues growth will return to previously guided levels of between 40% to 60% in 2019.

He said: "We believe that we have retained approximately 90% share of the VCSEL epi-wafer market that we enjoyed last year and based on early initial indications, we expect a similar market share in FY 2019, but with a significantly broader OEM end customer spread as the technology penetrates many more devices and applications."

However, the fact that it has taken longer than expected this year for the industry to unwind an inventory overbuild will mean revenues growth of 11% in 2018 rather than the range of 35% to 50% previously forecast.

As a result, the group now expects to deliver full-year revenues of about £160 million for this year, compared with £154.6 million for 2017 and £73.4 million at the half-year stage. Adjusted EBITDA will be approximately £31 million, down from £37.1million last year.

IQE shot to fame during the 1999-2000 tech boom, reaching £7, before falling back to earth. One question for investors has been whether IQE should be viewed as a growth or cyclical stock and whether it is able to replicate Arm Holdings, which was bought by Japan's Softbank for £24 billion.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.