Is IQE plc a millionaire-maker stock?

IQE(LSE: IQE) describes itself as "the global leader in the design and manufacture of advanced semiconductor wafer products," which in plain English means that the company produces an essential component for the production of microchips.

A silicon wafer is an ultra-flat disk, polished to a mirror-like surface. This disk then forms the underlying layer of semiconductors and is a critical component in the manufacturing process.

There are plenty of companies that produce such wafers, but IQE is a market leader thanks to its size and reputation.

Indeed, sales and profits have multiplied over the past five years as customers have demanded more from IQE. City analysts are expecting the company to report sales of £143m for 2017, up 63% since 2012. Over the same period, pre-tax profit has rocketed 270%.

And it looks like the growth story is only just getting started.

Management optimism

Even though there's been an explosion in demand for tech over the past 10 years, it looks as if demand growth is only going to accelerate as manufacturers adapt products to conform to the Internet of Things market.

IQE's management certainly seems to be excited about the potential the IoT market presents. At the end of last month the company issued a trading update stating: "In light of recent progress and its increasingly confident outlook, the Board expects the Group will now exceed market expectations for the full year and whilst it remains early into the start of the mass-market adoption of our technology, it is possible that with the current contract momentum, a more significant upgrade to current market expectations could be delivered for 2018."

Management's optimism seems to have spread to shareholders who have bid shares in IQE up to a valuation of 32.7 times 2017 earnings. But is it too late to profit from the growth?

Only just getting started?

Over the past 12 months, shares in IQE have risen 382%, and these gains, coupled with the group's lofty valuation seem to indicate that the shares have got ahead of themselves.

However, the positive trading update implies that the company will substantially outperform City analysts' growth targets next year, which are currently calling for earnings growth of 14%. Some analysts have speculated that IQE's earnings per share could hit 15p if new products and capacity rollouts go to plan.

If the company does hit this target, then it's clear the shares are extremely undervalued at current levels.

The median P/E for the semiconductor manufacturing sector is around 33 at the time of writing. Combining this valuation with earnings per share of 15p gives a potential share price of 495p, excluding dividends or cash returns.

So, in the best case, shares in IQE could be worth 280% more than their current price. This might not be enough to make you a million, but these are only early estimates. As it continues to grow, the sky is the limit for the company.

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Rupert Hargreaves has no position in any shares mentioned. 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.

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