The less money you have to invest, the more cautious you have to be when putting it to work. It’s a given, right?
Sometimes a great growth share comes along that appears to be too good to be true though, and throws such convention out of the window. IQE (LSE: IQE) was once a share whose profits outlook, built on the evergreen popularity of Apple, and its fashionable ranges of hi-tech gadgets, made it a terrifically-compelling buy despite the cyclical nature of its end markets.
With Apple’s products losing their sheen more recently however, component supplier IQE has endured no little trading turbulence. And this was reflected in November’s profit warning, issued on the back of falling demand for its 3D sensing laser diodes used for facial recognition purposes in smartphones.
More bad news
Despite these fears, IQE’s share price had gained ground in recent months, rises which left it susceptible to a fall as Apple continued to struggle selling its technology. Indeed, I warned that the firm’s share price could sink on full-year financials, released last week, and so it has come to pass.
On Wednesday, the company announced operating profit slumped 40% in 2018 to just £16m, worse than the City had been expecting even after November’s shock warning. What’s more, cash generated from activities sunk to £17m from £29.7m a year earlier.
Those dried-up diode orders weren’t the only things to plague IQE’s profits performance last year, though. The semiconductor play was also hit by adverse currency movements, production inefficiencies related to lower output of its VCSEL 3D sensing technologies, and costs related to its new production site in Newport. Big investment in “low and zero margin” technologies for new customers and a higher percentage of lower-margin wireless revenues also took their toll in 2018.
… but is it a buy?
Quite a catalogue of issues, then. And the tech titan isn’t expected to have got 2019 off to a blinder, either. Reflecting on what chief executive Drew Nelson described as “the current well-heralded softness in the smartphone market,” IQE said it expects both revenues and profits to suffer in the first half as inventory levels in the VCSEL supply chain are unwound and general softness persists in the semiconductor market.
Now the firm has described 2019 as a “year of opportunity” because of capacity extensions in the US and Taiwan scheduled for completion as well as maiden production at its Newport facility. I’m not buying it though, as smartphone sales continue to struggle and particularly so in that critical growth market of China. The “temporary” problems IQE is predicting for the first half threaten to stretch much longer into the future, I fear.
Even despite this week’s share price fall, the business still changes hands on a high forward P/E ratio of 24.2 times, and this gives plenty of scope for additional share price falls as the year progresses. Whether I was down to my last £1,000 or had tens of thousands to invest, I’d still steer well clear of IQE today.