2018 was a disappointing year for those holding shares in IQE (LSE: IQE). Instead of shooting up, the shares plunged, wiping out most of the gains seen during 2017.
The advanced wafer products supplier rounded off its year of a plunging share price with a hefty profit warning. A trading update on 13 November revealed photonics wafer revenues at constant currency rates would likely show growth of 11% for the full year. Considering the directors expected 35% to 50%, that’s a big miss.
Shipments down The problem is a major chip company in the Vertical Cavity Surface Emitting Laser (VCSEL) supply chain told IQE that one of its big customers for 3D sensing laser diodes would be materially reducing shipments for the final quarter of the year. Although it’s not stated, I reckon that could be linked to Apple’s recent profit warning, which arose because of poor iPhone sales.
The overall outcome for IQE is that full-year revenue will likely come in at around £156m, up from £154.6m in 2017 but adjusted EBITDA will likely be around £27.5m, compared to just over £37m in 2017. Yet it’s just a setback and not a disaster because the directors expect “to return to previously guided levels of 40% to 60% revenue growth in FY 2019.”
The stuffing has been knocked out of the share price, which is down almost 60% since its November 2017 peak, but I think that’s a good thing. The valuation seemed to be getting ahead of itself during 2017, driven by speculation surrounding the company’s exciting growth prospects. At today’s share price close to 75p, the forward earnings multiple drops to a percentage in the low teens for 2020 due to some City analysts’ estimates for earnings, which is a more palatable rating.
Positive long-term outlook The new chief financial officer (CFO), Tim Pullen, is due to start on 4 February, and he’ll bring all his experience with him that he gained as CFO of ARM Holdings (LON:ARM), his previous appointment. I’m hoping his arrival will coincide with a re-energised dash for growth, which is certainly supported by the directors’ own positive long-term outlook. The forward-looking predictions for earnings growth remain robust, despite the recent setback, and the share price has been looking perky recently.
Many growth firms in the past have seen big undulations in their shares before finally taking off on a sustained bull run and it’s possible that IQE could do well for investors from where it is now. I’m optimistic that the slide in the shares has finished and we could see the price claw back up. So I’d be tempted to dip a toe back in the water with IQE by buying some of the shares today and holding on to them with a five-year-plus time frame in mind. But I expect a lot of volatility going forward.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple (NASDAQ:AAPL). 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.
Motley Fool UK 2019
Kevin Godbold has no position in any of the shares mentioned. 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.