After four-bagging in a year, IQE plc looks better than ever
Oh how I wish Welsh semiconductor firm IQE(LSE: IQE) hadn't flown quite so far below my radar. The stock has grown 420% over the past year, making big money for sharper-eyed investors than me. The question now is where this high-IQE play goes next.
IQE, which calls itself the leading global supplier of advanced wafer products to the semiconductor industry, reported its half-year results for the six months to 30 June this morning. The stock is up more than 4.5% at time of writing, as markets broadly liked what they saw. Chief executive Drew Nelson is certainly happy, confidently stating that the company's outlook has "never looked better", which suggests there could be further multi-bagging fun to come.
The AIM-listed company, whose wafers are used in smartphones and other electronic devices, has just reported a 12% increase in revenues to £70.4m, which is good, although undercut by less underwhelming figures elsewhere. Adjusted profit before tax fell by 5% to £9.6m, with profit for the period down 27% to £7.3m. Earnings per share (EPS) also fell sharply, down 8% to 1.35p year-on-year.
Wafers and jam
Figures like these could trigger a share price collapse in a very different type of company, but with IQE you are buying growth tomorrow rather than profit today. It is still ploughing money into the business, ramping up capital investment 102% to £15.4m in a bid to drive further growth, ahead of the anticipated mass-market adoption of VCSEL wafers, which has had many investors licking their lips. Net debt rose £2.4m since 31 December to £41.9m, but leverage at 18% does not look too demanding.
Sales rose in all three of IQE's primary markets with wireless up 9%, photonics up 48% and infrared up 19% year-on-year, plus a foreign exchange tailwind of around 10%. It is also expanding capacity to meet the higher levels of demand expected in the second half of 2018, including a lease signed on new premises in South Wales.
Nelson says the compound semiconductor industry is moving through "an inflection point" and IQE is nicely placed to benefit. "Many of the key innovations that are taking place in the technology world would not be possible without the advanced properties of compound semiconductor materials," he said. IQE's products are key parts of planet-changing innovations such as 3D sensing, biometric sensors, electric and autonomous vehicles, high speed wireless, and advanced manufacturing.
Given the mass-market opportunities and bullish talk from the board, it isn't hard to see why investors have developed a taste for this £989m company. With a strong pipeline and increasingly diversified revenues, IQE is on course to meet recently upgraded full-year earnings expectations.
Less exciting is today's price evaluation of 43.53 times earnings. Tech stocks are risky, and no company multi-bags forever. Yet this is an exciting technology play, and if City analysts reckon that EPS will only rise 2% this year, for 2018 they are pencilling in growth of 17%. The real action will happen after that. IQE could prove a very bright investment, just think carefully about the risks.
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Harvey Jones has no position in any of the 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.