Imagination Technologies (LSE: IMG) has fallen by as much as 12% in early trading today, after the company issued a poor trading update.
The group lowered its expectations for licence revenue growth, and now expects to report full-year licence revenue in line with the previous year. Management blamed this warning on “muted” licencing activity, although there’s the potential for single-digit licence revenue growth if Imagination’s remaining deals close on time.
Sadly, this news is a huge setback for the company and disappointment for investors. Indeed, Imagination was targeting licence revenue growth of around 10% this year, reversing years of poor trading performance.
Still, Imagination’s trading update wasn’t all doom and gloom. The company noted that the reduced demand had more to do with timing, rather than “any fundamental change in demand” for its products. Additionally, customers continue to place orders for Imagination’s products and the group’s order backlog is growing.
Shipments of the company’s MIPS units were stronger than expected in the fourth quarter. Shipments of its MIPS embedded processors are now expected to rise by 5% to 10% this year, compared to previous guidance of “marginal” volume growth.
Overall, Imagination is now projected to report a reduced underlying loss for the full year. A strong performance in some markets and strict cost control will offset muted growth in other markets.
As most of Imagination’s operating costs are billed in US dollars, the company has been negatively affected by negative current movements.
Buying opportunity?
On balance, today’s trading update from Imagination presented a mixed picture of the company. On one hand, Imagination is making progress but on the other, the company’s growth is struggling to gain traction.
Nevertheless, it’s clear that Imagination is not the high-growth tech darling that it once was. However, the company’s shares still trade at a premium valuation, which leaves little room for disappointment, as evidenced by today’s sudden move downwards.
At present levels Imagination is trading at a forward P/E of 31.9, although this figure is based on historic analyst figures. Analysts are likely to tear up their forecasts following today’s update from the company and earnings estimates could be revised lower.
So on that basis, it looks as if Imagination’s shares are just too expensive at present levels, especially when the company is struggling to drive growth in key markets.
Further, Imagination has a history of disappointing shareholders. Long-term investors have seen the value of their holdings fall by a miserable 5% over the past five years as the company has continually failed to live up to expectations. In my opinion, Imagination is going to struggle to shake off this reputation…
