How IQE shares reacted to latest results

They've been a terrible performer over the past eight months, but Graeme Evans looks at prospects for IQE shares following release of first-half figures.

Having been showered with awards and praise after a 300% rise in its share price in 2017, this year has been somewhat different for advanced semiconductor wafers firm IQE and its large band of followers.

The IQE hangover kicked in early on in 2018 and has subsequently left the AIM stock 42% down on its multi-year high of 178p achieved last November. It continues to be one of the London market's most shorted stocks, with more than 11% of the company’s shares out on loan.

And, despite the popularity of IQE shares on the interactive investor trading platform in recent months, there's an almost even split between buyers and sellers after today's half-year results.

As IQE's CEO Drew Nelson points out, the company is going through a period of transition as it moves from being a supplier of advanced semiconductor wafers to a leader in advanced material solutions.

•    Stockwatch: Five ideas for 2018

It is targeting the fast-growing market for Vertical Cavity Surface Emitting Lasers (VCSEL), which are used by consumer and industrial 3D sensing applications.

Facial recognition in mobile phone handsets is one potential use of VCSEL, although IQE has always been tight-lipped about its role in Apple iPhones. Such smart sensors also have uses for Internet of Things applications or to reduce energy demand at high volume data centres.

IQE is now engaged on VCSEL with over 20 chip companies for sensing, mobile, industrial and data communications, which it says sets the scene for "increasing revenue diversity and growth through H2 2018 and beyond". 

Source: interactive investor      Past performance is not a guide to future performance

In the meantime, however, investment costs resulting from the installation, staffing and run up of high volume production tools in its flagship Newport Epi-Foundry dragged on today's first-half performance.

Currency headwinds were also an issue, with interim profit down 21% to £7.6 million. IQE said profits would have increased by 14.4% to £11.1 million without the one-off factors, with the company adding that it remains comfortable with consensus forecasts for 2018 based on a ramp up in VCSEL activity.

Sales growth at constant currency in all three primary markets improved in the half year, with the fast-growing Photonics division up 30% and followed by growth of 11% for both the Wireless and InfraRed divisions.

Analysts at Barclays, who earlier this month named IQE as "one of the best placed names in the supply chain for the near-term growth in 3D sensing and long-term adoption of compound semis", updated their assessment of prospects.

"IQE shares trade on 17x/13x 2019/20 [price/earnings (PE)] for c30% EPS growth through 2020, valuation we continue to view as very attractive given the strong growth we expect," they wrote.

"While we acknowledge the 1H profit miss is disappointing, we do think it is explainable and justified and look to the FY19 and three-five year profit guidance as evidence of strong growth to come," added the broker, repeating its 'overweight' rating and 170p price target.

IQE, which doesn't pay a dividend, shot to fame during the 1999-2000 tech boom, reaching £7, before falling back to earth. The ongoing question for investors is whether IQE is a growth or cyclical stock, and whether it is able to replicate Arm Holdings, which was eventually bought by Japan's Softbank for £24 billion!