2017 in review: IQE plc

IQE Photonics
IQE Photonics

With a valuation now in excess of £1bn, global wafer supplier IQE(LSE: IQE) has had the sort of year most small-cap companies crave. Let's look at why and speculate on whether this kind of performance can be replicated in 2018.

Top performer

Having already doubled in price over 2016, the shares began the year priced at 38p a pop. While experiencing further positive momentum over the first few months of 2017, it was the company's full-year results -- announced in March -- that really brought IQE to the attention of market participants. Talk of record revenues, profits and cash generation gave some indication of just how quickly things were changing at the Cardiff-based business.

That said, anyone selling early in 2017 would shortly be kicking themselves. As a reminder of the need for investors to run their winners, even bigger gains lay ahead as (still unconfirmed) rumours began circulating about a possible deal with tech giant Apple. Suggestions that the Cupertino-based behemoth's new range of smartphones would include face recognition -- enabled through IQE's vertical-cavity surface-emitting laser (VCSEL) technology -- caused shares in the latter to rocket by 200% in the five months between March and August. Speculation that the firm could eventually replicate the success of UK firm ARM Holdings, sold last year for £24bn to Japan's Softbank, only served to increase investor excitement.

No stock rises in perpetuity, of course. IQE entered a sticky patch in September after the euphoria surrounding the launch of the much-coveted iPhone X was quickly replaced by concerns over delays with its manufacture. Despite an otherwise positive interim report (including a 12% rise in H1 revenues compared to the same period in 2016), a 5% slip in adjusted pre-tax profit to £9.6m also appeared to motivate some holders to bank profits.

It's easy to be wise after the event. Nevertheless, the low of 125p in late September was an excellent opportunity for those only just discovering the business to climb on board. By mid-November and following a successful £95m fundraise with institutional investors, IQE's stock was changing hands at a record 178.75p. The fact that this was 27% above the placing price indicates just how confident the market has become in the company's long-term prospects.

Just the start?

While experiencing "material demand" from one of the biggest companies in the world was largely responsible for the huge rise in interest around IQE over 2017, I think 2018 could prove just as exciting. December's pre-close trading update revealed that full year revenues and profits are now likely to be ahead of market expectations with the former coming in at "no less than £150m".

Having secured the necessary funds, IQE is now in the process of expanding its manufacturing capacity to "address multiple mass-market opportunities" and "accelerate the development of new products and technology". As mentioned before, the potential uses of its products -- from solar energy to electric cars -- suggest that having at least some exposure to the company, even after 2017's substantial gains, might be prudent for those with long investing horizons.

Despite its sky-high valuation, it's also worth mentioning that a forecast price-to-earnings (P/E) ratio of 34 for 2018 doesn't yet take into account the expected huge rise in earnings per share if all goes to plan. Indeed, if initial analysts' projections of around 15p prove correct, IQE still looks significantly undervalued.

Quit the rat race

IQE is surely on its way to bringing some early holders within touching distance of financial freedom, a group of investors that's only likely to get larger over time if all goes to plan.

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Paul Summers owns shares in IQE. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.