After rising 33% in 3 months, is now the time to buy back into this stock?

Think carefully before jumping on this technology stock bandwagon, says Harvey Jones.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A couple of years ago there was a big fuss and plenty of excitement surrounding British-based processor designer Imagination Technologies (LSE: IMG), but the party came to an abrupt halt amid a flurry of profit warnings. Many investors will have walked away and forgotten all about the company. But lately however, it has been showing signs of renewed life. Is now the time to go back to the future?

Show some Imagination

Investors fell for Imagination Technologies because they hoped it would become the next ARM Holdings, an innovative, fast-growing UK tech giant that designs and licenses chip designs for use in iPhones and other modern devices. Especially since it was forecasting juicy long-term operating margins of 30%-40%. Imagination even came equipped with an ARM-style valuation too, trading at a reassuringly expensive 35 times earnings. But the future didn’t quite happen, with a string of broker downgrades in 2014 and three years of falling earnings per share (EPS) and profits.

At the start of 2015, analysts were optimistically forecasting 2015 earnings growth of 39%, but as the year progressed things started to go wrong. The multimedia and communication technology company’s half-year report, published last December, warned of a slowdown in semiconductor and smartphone markets and ramp-down of customer’s legacy chips, which would hit short-term royalty revenues. Group revenues fell sharply from £82.2m to £71.1m, with the company’s operating loss doubling from £10.3m to £20.8m, overshadowing management claims that “the fundamental medium-term demand drivers remain strong.

Smart work

Despite all the misery, the company valuation remained toppy at around 25 to 30 times earnings, and it looked like investors were paying for a future that wasn’t there. Apple was said to be considering buying Imagination Technologies, then changed its mind. Falling royalty payments and delayed licensing deals culminated in job cuts, restructuring and plans to offload its lossmaking Pure digital radio business. Yet suddenly this year, sentiment changed. Why?

The shares have revived despite a string of disappointing reports and further losses. July’s final results were disappointing, with a 23% drop in revenue from continuing operations to £120.8m, although cash generation rose to £16.7m and net debt fell slightly to £33m. The summertime sale of ARM Holdings to Japanese telecoms group Softbank for £24.3bn gave Imagination a major lift, stirring speculation that it could be next, as its PowerVR graphics business, a key strategic technology used by Apple, could tempt buyers.

Tech trouble

Nothing has come of the takeover speculation so far but at least Pure has been sold off cheaply for £2.6m, allowing new chief executive Andrew Heath to focus on the firm’s intellectual property business, and claim the company has now put its difficulties behind it. Currently, it trades at 43.3 times earnings, which looks pricey given its recent history of problems.

There may be hope for the longterm, with earnings per share forecast to rise 35% in the year to 30 April 2018, and operating margins forecast to recover from minus 51.2% to 11.6%. But it would take a lot of imagination to treat this as the British technology company to replace ARM.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »