But I’m always on the lookout for price drops, which I believe can often give us fresh buying opportunities. And they can be especially attractive if we can see a good reason why the price might start climbing again.

Technology growth

Shares in semiconductor materials specialist IQE (LSE: IQE) have fallen nearly 75% over the past five years. But that was largely due to a massive spike in 2017 that saw the shares rise to an unsustainable valuation.

The IQE share price has regained a little since its 2022 lows back in May. And I can’t help wondering if first-half results, due on 6 September, might provide the spark to set the fire going again.

The company describes itself as “the leading supplier of compound semiconductor wafer products and advanced material solutions to the global semiconductor industry“.

We’ve been suffering from a global chip shortage. And that means IQE should be well positioned as the industry ramps up again to support worldwide demand, right? Well, I hope so.

The big risk is that IQE is not currently profitable. But forecasts suggest that should change by 2024.

Back in fashion?

I’m hoping that interim results from boohoo.com (LSE: BOO) might give shareholders a bit of respite. They’re due on 28 September, so we have some weeks to wait yet. The boohoo share price, meanwhile, has crashed by 80% over the past 12 months.

Partly that’s down to shifting post-pandemic shopping habits. But the company has had a number of well-publicised problems of its own.

UK sales figures for the first quarter were flat, though US sales dropped by 28%. There’s a big hit from global infrastructure issues there. And it represents the loss of some early inroads into the American market that might be hard to regain.

The company expects adjusted EBITDA to be only just positive, and the City predicts a reported loss this year. So there’s financial risk, clearly. But forecasts suggest profit in 2023/24, with a P/E dropping as low as 11.5 by 2024/25.

Technology trust

My final pick is one that’s already started to climb back from 2022 falls. I’m talking about Scottish Mortgage Investment Trust (LSE: SMT), whose shares hit a low in June.

The trust invests in global technology stocks, and has Moderna, Tesla. and ASML among its biggest holdings.

When the US Nasdaq index crashed into a bear market in 2022, Scottish Mortgage shares went with it. Over the past couple of weeks, despite a recent recovery, they’ve followed the technology index back down again following its latest dip.

There are no updates due in September, so nothing there that might give the shares a boost. But if Nasdaq sentiment does improve further, might we see a bull run for the investment trust?

Risks

I’m speculating, and there’s plenty of risk with all three stocks here — especially, I think, the two earmarked for losses this year.

But for the long term, I rate all three as good value.

• Top UK tech stock movers included semiconductor and cyber security specialists
• One recent IPO was forced to cut its profit guidance
• A popular consumer brand looks expensive to me

UK tech stocks didn’t escape February’s market sell-off. But there were some big winners too.

February’s top UK tech risers

The share price of semiconductor materials specialist IQE rose by more than 30% in February, making it the top UK tech stock riser with a market cap over £50m. February’s gains continued a rally that started in January, when IQE said its 2021 results should be in line with November’s reduced forecasts.

I’m reassured that IQE hasn’t issued another profit warning. But IQE’s share price is still down by 45% compared to one year ago. However, new chief executive Americo Lemos has now started work and seems determined to return the business to growth. IQE has performed well in the past. I think it might be worth me watching.

Other top tech risers in February included recent IPO Microlise. This transport management software specialist released a solid trading update at the end of January, confirming that the group’s 2021 results should be in line with expectations. I think this could be an interesting business. But the shares look too expensive for me on 45 times forecast earnings.

One other winner that caught my eye was cyber security specialist Darktrace, which gained around 10% in February. Darktrace didn’t release any financial results during the month but did report a new “million-dollar deal” with “a multinational electronics corporation”.

Darktrace also went on the acquisition trail last month. It paid €47.5m for Dutch firm Cybersprint, which is an “attack surface management company”. I reckon Darktrace remains interesting for me to watch, but hard to value.

UK tech stocks that fell in February

The biggest faller in the UK tech sector last month was recent IPO Made Tech, which provides technology services to the public sector. Unfortunately, the shares fell by 55% last month, despite the company reporting a 131% rise in half-year revenue. 

The problem was that these results came with a warning that full-year profits will be lower than expected. Management said this is due to staff recruitment costs rising sharply. As a result, broker earnings forecasts for the current year have been cut by around 25%. I wonder if this business is trying to expand too fast. One for me to watch, perhaps.

Some of the other big fallers in February in the tech sector included consumer review website Trustpilot and LED lighting specialist Luceco. Both were down by around 20% at the end of the month, although neither company issued results during the period.

Luceco warned of tougher market conditions in 2022, but the shares look decent value to me at current levels.

I’m not so sure about Trustpilot. This online business is still loss-making and looks expensive to me. Its market cap of £616m is nearly five times 2021 forecast sales. Admittedly, sales growth has been strong. Trustpilot could grow into its valuation over the next couple of years. But the risk/reward balance doesn’t look attractive to me at current levels.

IQE is a UK-based firm, designing and manufacturing vital semiconductor parts. Semiconductors are core components in many hot new technologies at the moment. Some of these include the rollout of 5G, as they are used in 5G masts. Hybrid automobiles also require semiconductors. The rise in hybrid vehicles as many vehicle manufacturers are moving away from petrol and diesel vehicles means demand is set to explode in the coming years.

Penny stocks are those that trade for less than £1. As I write, IQE shares are trading for 42p. At this time last year, the shares were trading for 80p, which is a 47% loss over a 12-month period.

There has been a well documented shortage of semiconductors recently. I believe this is one of the reasons the IQE share price has tumbled. 

Penny stocks have risks

The global semiconductor market is unique in the sense that there is no one major player and it seems to be scattered throughout the world. Reviewing other semiconductor manufacturers, it seems IQE has lower profit margins, of just 17%, compared to others in the market. The market average is 25%. One competitor, Taiwan Semiconductor Manufacturing Co., has a 40% margin. This could hurt future growth for IQE.

The recent rise in inflation and costs has led to a spike in raw material costs. These surging costs mean IQE’s profit margins could take a hit too. The global supply chain crisis is affecting the shortage of semiconductors as well as the parts needed to manufacture them. This will also affect performance and progress.

A penny stock I’d buy

Many penny stocks do not have enough information or track record to review in regards to determining investment viability. IQE does and I can see it has a good track record of performance. Looking back, I can see revenue and gross profit have increased year on year for the past two years.

Coming up to date, IQE released a post-close trading update at the end of last month. It said revenue was expected to be in line with guidance, and close to £164m. This is less than 2020 levels but still strong performance based on market headwinds. Full results are due at the end of March.

The surging demand for semiconductors, which is currently outstripping supply, is one of the main reasons I am bullish on IQE shares. There are many applications of semiconductors, aside from the 5G rollout and hybrid vehicles, such as in TVs, smartphones, and gaming devices. As the adoption of technology continues, accelerated by the pandemic, I think IQE’s performance will continue to grow too.

Overall I’d happily add IQE shares to my holdings. I think the shares are currently very cheap and there seems to be enough demand that could last a very long time to boost IQE’s performance and balance sheet. I believe it is a excellent penny stock with long-term potential and returns ahead.

There’s an old saying: “When the facts change, I change my mind. What do you do, sir?” Here, I’ll discuss the changes at IQE and explain why I’ve promoted the stock to my watchlist.

Short-sellers attack IQE shares

In 2017, the IQE share price reached as high as 178.75p on 16 November. This gave the company a market capitalisation of £1.35bn. However, short positions (hedge funds betting on the share price falling) increased sharply through the second half of the year. By 23 January, more than 10 funds were shorting 12.4% of IQE’s shares.

In early February, two short-sellers — ShadowFall and Muddy Waters — published research reports claiming IQE was, in the words of Muddy Waters, “an egregious accounting manipulator.” IQE issued rebuttals.

The shares rallied but have never got back to that 178.75p level. Their 2021 high, made on 21 January, was 88.3p, and they’re currently trading at 47.5p. I can now buy 46% cheaper than in January and at a 73% discount to the November 2017 price.

Short-selling and boardroom changes

A few things have changed since the short attack. Only one fund now holds a disclosable short position in IQE shares (Ennismore at 0.91%). IQE has a different chief financial officer, his predecessor having died in tragic circumstances shortly after the ShadowFall and Muddy Waters reports. Finally, IQE’s founder and chief executive officer Dr Drew Nelson is set to handover to a new CEO.

The significantly reduced interest of short-sellers and the executive changes allay some of my past concerns about IQE’s accounting and management.

IQE shares are on my watchlist

Another of my previous concerns was that after two decades as “the global leader in the design and manufacture of advanced semiconductor wafer products,” IQE had generated little in the way of free cash flow (FCF). As I noted in an article in 2019: “Periods of elevated investment and heavily negative FCF have been followed by little meaningful FCF advance in subsequent years.”

At the time of that article, IQE was in a period of heavy investment. Capital expenditure and capitalised research and development totalled £41.8m in 2019 and FCF was negative to the tune of £25.4m.

However, this period of investment does appear to have led to a meaningful FCF advance. In 2020, on lower capital expenditure and capitalised research and development of £10.4m, IQE delivered positive FCF of £22.7m.

It may be the company has now reached a level where economies of scale are beginning to kick in. And with “record revenue of £178m underpinned by the start of the 5G mega-cycle,” the future could be very bright.

I’m not quite confident enough to buy IQE shares just yet. I’m expecting capital expenditure and capitalised R&D in 2021 to be in the region of £30m–£35m. And FCF to be insipid at best. I want to see a bit more evidence that IQE can deliver consistently higher FCF. But I’ve put the stock on my watchlist.

Semiconductor shortage and share price fluctuations

IQE designs and manufactures compound semiconductor materials. These semiconductors are vital components in many burgeoning technologies right now such as hybrid vehicles as well as 5G masts.

There is a well documented shortage of these semiconductors, however. I recently wrote about this affecting hybrid vehicle manufacturer NIO and other manufacturers too. IQE is one of a number of players in the semiconductor industry scattered throughout the world. This is an issue as the pandemic means different parts of the world are experiencing economic recovery at varying rates. For example, China is recovering a lot faster than the US and UK. Production levels will vary based on location and economic recovery.

The IQE share price has dropped 35% in value so far in 2021. At the beginning of January 2021, I could pick up shares for 74p per share. As I write, shares are trading for 47p. This price drop is one thing that has attracted me to what I consider an excellent penny stock.

After a market crash low price of 22p per share, the remainder of 2020 was a good one for the IQE share price. It rose to 74p before the calendar year ended. I believe this drop off can be attributed to market-wide production issues linked to the pandemic.

Results and penny stocks risks

IQE announced full-year 2020 results in March. Revenue increased by 27% to £178m. In addition, EBITDA rose from £16.2m to £30.1m. I was encouraged by these results.

Despite IQE reporting a rise in sales and operating losses decreasing in the 2020 results, profit margins can be described as underwhelming compared to some competitors and market wide. For example, competitor Taiwan Semiconductor Manufacturing Co has underlying profit margins of close to 40%. The market average EBITDA is 25%. IQE’s sits at close to 17%.

I have three primary concerns with IQE just now. First, I find competitors in the market seem to be doing better than IQE, as I mentioned earlier. Next, the 5G rollout has slowed due to the pandemic. I expect this to continue, but it may not be a priority due to the ongoing pandemic and it seems there could be further restrictions and variants worldwide. This would affect IQE. Finally, IQE could be hindered further by production issues linked to the pandemic and recovery. This would no doubt affect its balance sheet.

My verdict

The reason I am most impressed by IQE and consider it one of the better penny stocks opportunities for my portfolio is its growth achieved to date and potential in the future. I am referring to recent growth in its top line and its product’s place in the global rollout of technology via multiple channels.

Drivers are being encouraged to drive electric vehicles and the 5G rollout is a must for the telecoms and tech industry. I believe IQE is well positioned to benefit from this demand for semiconductors despite production issues. At its current price point, I consider it one of the cheaper penny stocks I would buy for July.

The IQE (LSE:IQE) share price had some stellar performance in 2020. The company saw its stock rise by nearly 200% between March and December as the electronics industry started returning to normal operations. But since the start of this year, the company has produced some lacklustre returns. In fact, it’s down by around 30%. But it is worth noting that the IQE share price is still up 50% over the past 12 months.

What caused the enormous growth in 2020? And is the recent decline a buying opportunity for me?

The rising IQE share price

As a reminder, IQE designs and manufactures compound semiconductor materials. This is quite a cyclical industry, to be sure. But at the moment, there is a distinct shortage of these chips that is beginning to cause problems.

A large portion of global electronic device manufacturing is performed in China. And its economy has already made a substantial recovery since the start of the pandemic. However, while countries like the UK and the US are making good progress with the vaccine rollout, these economies are ultimately recovering at varying rates. Therein lies the problem.

Semiconductor chip producers are scattered all around the world in different economies. And many facilities remain either non-operational or at a reduced production capacity, thus creating the current chip shortage. Consequently, Renault has lowered its 2021 guidance on car production levels by 100,000 vehicles. And Samsung Electronics has stated it may have to delay the annual launch of its latest smartphone for the first time since 2009.

Looking at its 2020 full-year results, total revenue increased by 27% to £178m, while its EBITDA nearly doubled from £16.2m to £30.1m. Seeing this strong performance is encouraging. So I’m not surprised that the IQE share price exploded last year. But why is it falling now?

The risks and opportunities that lie ahead

The increase in sales is undoubtedly good news. But there remains a high degree of uncertainty amongst investors surrounding the profitability of the business. Operating losses did narrow last year. But underlying profit margins continue to underwhelm when compared to its competitors.

Its EBITDA margin currently sits around 17% versus the industry average of 25%. And some of its peers, like Taiwan Semiconductor Manufacturing Co, have underlying profit margins of about 40%.

Overall, it seems investors were expecting more so the IQE share price experienced a bit of a sell-off. Yet I can’t help but wonder if the stock is trading too cheaply. After all, its chips are essential for 5G telecommunication networks, which have just started being implemented.

The bottom line

While the lack of profitability does raise some concerns, I am quite impressed with the level of growth the firm has achieved in its top line. The chip shortage has undoubtedly helped boost sales. But I believe this increase will only continue to expand as the 5G rollout accelerates.

Based on the current IQE share price, the company has a market capitalisation of around £450m. That’s a price-to-sales ratio of 2.5 for what I believe could be explosive growth stock over the long term. Therefore I am considering adding it to my portfolio.

Share price rebound

UK shares have been a mixed bag this year, with many companies suffering severely at the hands of Covid-19. While the IQE share price collapsed as much as 69% in March, it has since rebounded to be almost 20% higher than its January opening price.

Its market cap is £497m and earnings per share (EPS) are 0.13p but its price-to-earnings ratio (P/E) is an astronomical 480!

The group expects to be delivering a mid-single-digit million pound adjusted operating profit for FY20. This will raise EPS and reduce the P/E, but it’s unlikely to come in at a sensible level. Therefore, I believe the positive sentiment surrounding IQE’s future is already well priced in to the share, and I don’t think IQE shares are a bargain at their current price.

Learning from past mistakes

IQE’s past earnings history doesn’t make for great reading, it’s been known to hype investors up with anticipation, only to leave them bitterly disappointed with the results. Nevertheless, it appears to have won some business in recent months, and its 2020 revenues have been better than expected. It also revised its full-year revenue expectations to be at least £170m.

IQE recently won a large contract for the military and defence sector worth over $10m. And it hopes to reduce its net debt for 2020. The IQE share price remains down 65% from its 2017 all-time high. This is a point of pain for long-term holders.

Looking to the future

The advent of 5G, autonomous vehicles and the Internet of Things are all areas that have been hyped to the max this year, fuelling investor speculation and a price rise in related stocks. I think it’s true that these areas will continue to rise in demand. 5G deployment is set to get going again once the pandemic is behind us. Also, 3D sensing products are increasingly required for use in consumer electronics, the automotive industry, and healthcare. These are all sectors that IQE operates in.

Dr Drew Nelson, IQE’s founder and chief, is stepping down to make way for a new visionary. A successor has not yet been found, but management is seeking someone who can lead IQE to capitalise effectively on the growth opportunities presenting themselves. This may bode well for the IQE share price and future shareholder returns.

If I owned IQE stock, I’d continue to hold, but I’m not tempted to buy at the current share price. I don’t consider it among the best UK shares to buy now and can think of quite a few cheaper stocks I’d prefer to own. 

Investor sentiment towards the semiconductor consultant and manufacturer has improved following a positive trading update from the company at the beginning of June.

However, despite this performance, and the company’s improved outlook, several factors suggest it may be best to avoid the IQE share price.

IQE share price problems

The IQE share price has outperformed since March and the group now expects to return to profitability in 2019. In its latest trading update, the company said it expects at least a 27% jump in revenue for the first half.

It anticipates a return to profitability due to the strong performance of its wireless equipment & light sensors businesses. Management believes the rollout of 5G phones using IQE’s kit will offset any coronavirus related impact on operations.

Previously, IQE was expecting to return to profit in 2021. So the recent update implies the business is a year ahead of projections.

However, the company has a history of missing expectations. Profits have fallen every year since 2015. Over the same period, sales have risen by about 23%. These figures infer that the company is struggling to compete in a highly competitive market. As such, the recent positive performance may not last.

The group’s balance sheet has also deteriorated. Since 2017, the IQE share price has spent £46m in cash and taken on £64m in debt. As profits have only fallen during this time, there’s little to show for this additional spending.

Overvalued

On top of the company’s lack of progress over the past few years, it also looks expensive at current levels.

At the time of writing, the IQE share price is dealing at a 2021 P/E of 52. That makes the business one of the most expensive companies on the London market. It’s even more expensive than the group’s larger, more profitable international peers.

As such, while the IQE share price might have benefited from the coronavirus crisis, it may be best to avoid the stock after the recent gains.

There’s no guarantee the company can meet the market’s expectations for growth, especially considering its track record. If the group fails to live up to those expectations, the shares could fall substantially in the near term. With that being the case, it may be sensible to take profits after the stock’s recent performance. 

However, if you’re willing to take on the risk, this is one of the few semiconductor companies trading in London today. As technology investments go, the IQE share price is one of the best ways for investors to bet on the sector, despite its problems.

Therefore, if you’re interested in owning the stock, putting the IQE share price in a diversified portfolio may be the best approach.

One arch-bull reckons Tesla’s share price could hit $7,000 within the next five years. In contrast, fundamentals-focused bears argue the stock is already grossly overvalued at $900. Some suggest it’s the best shorting opportunity in a generation.

As a value investor at heart, I certainly wouldn’t touch Tesla with a bargepole. And there are some UK stocks I’d similarly avoid. Here are three.

Bonkers

Baillie Gifford, which manages FTSE 100-listed Scottish Mortgage Investment Trust (LSE: SMT), owns 7.5% of Tesla. It’s the second-largest shareholder after Tesla founder Elon Musk. Scottish Mortgage also counts the likes of biotech firm Illumina, streaming platform Netflix, and Chinese e-commerce group Alibaba among its largest holdings.

Many of the stocks trade at bonkers valuations, according to the principles of classic Benjamin Graham/Warren Buffett-style value investing. However, owning such stocks has paid off big-time for Scottish Mortgage. Its shareholders have enjoyed a return of 602% over the last 10 years.

At a current price of 652.5p, Scottish Mortgage’s shares are at a 2% premium to net asset value (NAV). The NAV is detached from reality and fundamental value, in my view. And with the shares trading at a premium, I see little margin of safety and considerable downside risk for buyers today.

Nosebleed

I’ve previously expressed my scepticism about the prospects of FTSE AIM-listed IQE (LSE: IQE). This self-styled “leading global supplier” of epi-wafers to the semiconductor industry is valued at £458m at a current share price of 57.5p.

Over two decades, IQE has gone through periods of high investment and heavily negative free cash flow (FCF). However, no real step-change in earnings and FCF has subsequently materialised. Indeed, when the company releases its 2019 results next month, things will have gone backwards.

Management has warned of an operating loss, and year-end net debt of between £15m and £20m, compared with net cash of £21m at the start of the year. Meanwhile, the company is valued at over three times management’s mid-point revenue guidance of £150m. And, looking ahead, at over 100 times analysts’ earnings forecasts for 2020. I’m getting a nosebleed just thinking about how high the valuation is.

Jam tomorrow

Fellow AIM-listed stock Versarien (LSE: VRS) – valued at £79m at a current share price of 51p – is another on my avoid list. Founded in 2013, the company has made six acquisitions.

Three of these (acquired for a total of £4.2m) were generating combined revenue of £11.7m in the year prior to their acquisition. For its latest financial year, Versarien reported total group revenue of £9.1m. As such, I’d find it hard to value the three revenue-generating businesses at much above the £4.2m Versarien paid for them.

This would leave £75m of Versarien’s market value attributable to the three non-revenue-generating acquisitions: 2-DTech (acquired for £0.4m), Cambridge Graphene (£0.2m), and Gnanomat (£2.6m). Commercial deals for these businesses’ products have proved persistently elusive, and I just don’t see how they can be worth anywhere near £75m. The promise of jam tomorrow is growing stale, in my view.

In retrospect, that was the right call. Since that article, IQE shares have fallen to just 48p, meaning they’ve lost around 56% of their value.

What’s the best move now though? Has this share price weakness created a buying opportunity, or should the stock still be avoided?

Short interest remains high

Looking at recent announcements, I would continue to leave the shares alone for now, as the company is clearly still struggling.

For example, in a trading update earlier this week, IQE said it had experienced “very challenging conditions in 2019” and advised that it now expects to generate revenue of £136m-£142m this year (and that includes a forex tailwind of £3m), compared to previous guidance of £140m-£160m. That’s significantly below last year’s revenue of £156.3m.

In addition, the company said it’s expecting a mid-single-digit operating loss for the full year. This comes after the group reported a pre-tax loss of £3.7m for the first half of the year in September, compared to a £6.6m profit the year before.

It’s also worth noting that short interest here remains very high. According to shorttracker.co.uk, the stock is currently the sixth most shorted stock in the UK right now, with 8.7% of its shares shorted. That’s a worrying sign. All things considered, I’d steer clear of IQE shares for now.

Exciting tech stock at an attractive valuation 

One tech stock I do like the look of right now, however, is dotDigital (LSE: DOTD) – a fast-growing company specialising in digital marketing solutions. Its flagship product, Engagement Cloud, which is used by the likes of Virgin Active, Jet2.com, and TM Lewin, enables companies to create powerful, data-based marketing campaigns in just minutes.

DotDigital’s full-year results, issued last month, showed the company has plenty of momentum right now. For example, for the year ended 30 June, revenue jumped 19% to £51.3m, while adjusted earnings per share (EPS) from continuing operations surged 33% to 3.88p (ahead of market expectations). The group also advised this year has started well and that it’s “very excited” about its growth opportunities. That sounds positive to me.

Yet despite this growth, the shares remain attractively valued. With analysts expecting EPS of 4p (I think the company can potentially top this) for the year ending 30 June 2020, the forward-looking P/E ratio here is just 21.5. In my view, that’s a steal. I rate the stock as a ‘buy’ right now.