IQE plc set to trounce market expectations

If you're looking for a classic growth share, try IQE(LSE: IQE). The company produces advanced semiconductor wafers using smart new crystal growth technology, and it counts a number of big companies, including Apple, among its customers.

IQE shares have quadrupled in value over the past 12 months, to 144p as I write, but they have been higher -- breaking the 180p level in November, before dropping back a bit. And curiously, the price fell 7% on Wednesday, after the company released an impressive full-year trading update.

Revenues are now predicted to come in ahead of market expectations, at not less than £150m. And the firm expects "strong double-digit growth" in wafer sales for the year, stressing its continuing market diversity.

Accelerating growth

IQE's sales to the photonics industry have shown strong growth over the past few years as the company has rolled out new products, and 2017 looks set to be a cracking year. With an acceleration in growth in the second half of the year, due to the firm's VCSEL development shifting to mass-market production, we should be looking at a doubling of sales in 2017.

One of the things that concerned me when I last examined IQE was the hot competition there is in the semiconductor business. But the company reckons it has a sustainable lead in the market due in part to its intellectual property and its ability to scale its production to mass-market levels.

In its InfraRed division, IQE boasts of "global leadership in the supply of advanced antimonide wafer products," and expects to see a 10% rise in 2017 sales. It sounds like more of a niche market, but it's apparently expanding away from its core in the defence sector.

Sales of wireless products are expected to be flat, though a good part of that is due to the firm's increasing focus on Photonics.

Pre-tax profit is also set to beat market expectations, with the firm's net funds position pretty much in line with what the market expects.

Chief executive Dr Drew Nelson reiterated the company's defensive moat, saying "IQE has created strong differentiation in the industry through its broad portfolio of materials technologies and it ability to scale and supply reliably in the mass-market."

In two minds

But I still have reservations, as we're looking at a strongly progressive technological market here, and it's anyone's guess which proprietary technology will be leading the wafer market in 10 years time, or even in five years.

I'm also still a little concerned by IQE's current valuation. The meteoric share price rise of the past year or so has resulted in a predicted P/E multiple for the full year of 44 -- around three times the long-term average for FTSE 100 stocks. And while there's a tempting 30% rise in earnings per share pencilled in for 2018, that would drop the P/E only as far as 33 -- better, but still a bit troubling.

I'm torn. IQE is clearly a quality company and is doing all the right things, and my previous fears are somewhat soothed by the production take-off of the past few months and the competitive advantage that it's creating.

But I can't help seeing the classic exuberant growth picture here, and I wouldn't be surprised to see the shares continue to decline slowly in the coming months. There could be better buying opportunities ahead.

Safer growth

One way to offset the risk of an investment in IQE would be to diversify your portfolio with stocks in completely different sectors. That doesn't necessarily mean boring old FTSE 100 dividend stocks (though I do like those), as there are plenty of other hot growth candidates out there.

The company analysed in this free report has already seen its share price treble in five years, but it's still on a low valuation and I reckon it looks like a bargain.

To know more, click here now for your very own copy at the unbeatable price of nothing at all.

The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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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