Have shaky iPhone sales provided a great price point for IQE?

680% share price growth in two years (what!?!). IQE plc. manufacture semiconducting “wafers” that are used in a range of devices including smart phones. Much of this gobsmacking growth is the upshot of a relationship formed with a certain client you may have heard of, Apple. It’s presumed IQE are supplying components for the latest generation of iPhones. On the 20th of November, the Cardiff based company released a fantastic full year update. Yet, the share price has tumbled over 10% seemingly for the sake of some profit taking, has this presented the perfect price point to go long and make a fortune?

The update was gleaming. Revenue, ahead of expectations, “will be no less than 150m” while pre-tax profit is also ahead thanks to improved margins on the wafers. IQE expects these margins to improve further thanks to the development and opening of a new production facility. The company’s main growth area, photonics, is set to double its sales thanks the adoption of VCSELs (vertical-cavity surface-emitting laser) in the mass market. The company also owns a good amount of intellectual property in this area as well as several “multi-year” contracts. Other areas performed well too, infra-red, which is primarily “see in the dark” technology for military operations, is poised for 10% growth. Sales in the wireless sector however were broadly flat, but this was a tactical decision to focus capacity on the faster growing and more profitable photonics.

So why has the share price tanked 10% after this? In truth, there is no solid answer. Oliver Knott from N+1, attributes it to “christmas profit taking”, a bit wishy washy if you ask me. A price correction on the iPhone component makers lofty P/E ratio of 43 is plausible. We have seen something similar with Boohoo recently, a superb trading update sent the share price on a long slide down 25%. However, I don’t think IQE’s 43 is extraordinarily expensive when compared to other growth star’s like Boohoo and Asos with P/Es of 83 and a staggering 104. Especially considering IQE’s intellectual property and multiyear customer contracts support a competitive earnings multiple against the two online retailers.

A more intricate factor that drags on IQE, is the dependence on iPhone sales. There were whispers in tech world of a “supercycle” of upgrades, in which everyone would rush to swap their now outdated phones to one of the latest anniversary handsets, but his hasn’t happened. So, a lot of institutional investors shorted IQE after the release of the new iPhone X, 8 and 8+ looked set to disappoint. However, some analysts argue the 6 weeks wait consumers faced to turn their heads into an animated poo emoji on the new iPhone X gave a disproportionately poor picture, and supply is now catching up with demand. Apple also have since claimed in a trading update that sales of the latest range are holding. The latest reports from Mixpanel also suggest that take up of the iPhones X since release is doing better than anticipated, despite the eyewatering £999 price tag. There’s no denying the latest generation has failed to come close to the highs of the iPhone 6 but it looks like they won’t be as bad as first thought over the medium term. Meaning these short positions, some of which held from as early as July, look outdated and somewhat obsolete.

Yes, IQE is expensive, but it’s by no means the most expensive growth stock out there, especially when you consider when this full year trading materialises it brings with it a 30% rise in earnings per share, dropping P/E to 33. As we move away from release, this iPhone generation looks to be passed its worst. IQE isn’t going to replicate the insane growth that it has in the past, as there is no bigger step up than going from a relatively unknown component maker to supplying Apple phones. Yet, with a clearly strong position in photonics, there is long term potential to expand into Apples other products, as well as with other device makers. In my opinion, this slide has created a nice price point to pick up this stock for the higher risk proportion of your portfolio for its serious long term potential.

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