If anyone deserves a bit of respite, surely it’s IQE (LSE: IQE) investors, who have seen the value of their shares fall by more than half over the past two years. To put that into perspective, though, if you’d bought shares five years ago, you’d have quadrupled your money.
First half
The 20% share price rise in September follows directly from first-half results released by the semiconductor wafer technologist in which CEO Dr Drew Nelson said: “I am pleased that IQE has delivered results which are in line with the trading update from June this year and to reiterate our full-year guidance.” That was in a tough first half for the industry in general, but the optimism has to be seen against a 9% fall in revenue, leading to an adjusted operating loss of £1.9m and an adjusted loss per share of 1.29p.
IQE’s products are closely tied to the growth of 5G mobile phone technology, with forecasts suggesting around a quarter of all UK mobile subscriptions will be 5G by 2024, so could the 20% share price response be a forerunner for another sustained bull run?
IQE shares had been flying, as often happens with high-growth technology shares. But a couple of things happened in 2018 that took the shine off the growth story and sent the share price crashing back down to earth.
Troubles
The escalating Trump-China trade wars have made Chinese phone technology development look a lot less exciting place to be investing, and it came at a time when mobile phone sales growth was slowing. After all, 5G or not, I can’t see that today’s phones really offer much that last year’s don’t — in terms of what people actually want. After years of rapid growth, mobile phone technology does seem to have reached a level of maturity that is less conducive to the annual phone replacement mania of the recent past.
Valuation
Forecasts suggest a further slump in earnings from IQE this year after a pretty horrible 2018, and if the soothsayers prove right, then that would put IQE’s shares on a very high forward P/E multiple. And we’re not talking of two or three times the market average here, we’re looking at a forecast P/E of 230.
A predicted return to better earnings in 2020 would drop that ratio to a more manageable 30, which is only a little over twice the FTSE 100‘s long-term average. And for a genuine growth stock, I wouldn’t find that too stretching at all. But the problem for me is that I just don’t see how we can really put any confidence in forecasts for such a fickle industry as this — before the slump got going in 2018, forecasts were still rosy and turned out to be badly wrong.
Risk
Looking back at those interim figures, by 30 June IQE had slipped from having net cash of £40.6m on the books a year previously to net debt of £0.8m (and that doesn’t include IFRS16 lease liabilities).
IQE might indeed be on the verge of a new bullish phase for both earnings and the share price, but right now I’m seeing too much risk — and a share valuation that’s way too high to allow for that risk.