Still mourning ARM? Why not replace it with IQE plc and Imagination Technologies Group plc?

ARM isn’t the only UK tech play that could deliver stellar returns over time. IQE plc (LON:IQE) and Imagination Technologies Group plc (LON:IMG) could be worth a look.

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ARM Holdings is one of the UK’s biggest business success stories. For years it has supplied the likes of Apple and Samsung with top-of-the-range microchips. The company delivered for shareholders too. If you’d bought ARM at its IPO and held it until it was acquired by SoftBank Group back in September you’d have racked up a total return of over 4,400%!

If you’re evaluating your portfolio this Christmas and find yourself mourning ARM, or regret missing out on those gains like I am, a combination of IQE Group (LSE: IQE) and Imagination Technologies (LSE: IMG) could be the perfect start to the New Year.

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IQE

IQE is one of the leading global suppliers of wafer products and services to the semiconductor industry. In plain English, this means it supplies manufacturers in the wireless communications, solar power, infrared and LED tech spaces with customised wafers, which are then used to create microchips. If you want to start your research by finding out more about its manufacturing process, just click here.

The company has grown revenue from £73m in 2010 to £114m last year, with operating margins increasing from 9.9% to 13.3% in the same period. The company is creating more profitable intellectual property, for which it then receives licensing fees in a model similar to ARM’s.

So far so good. But the business only generated £3.5m, or 5.5%, of revenues through licensing in the first half. Yet it could be a very scalable, and thus profitable, operation for IQE.

In a trading update, it said it will beat earnings forecasts this year thanks to the strong performances across “across multiple markets, particularly in the photonics business.”

IQE is a niche player with plenty of tailwinds behind it, including the fact that smartphones are now an indispensable part of all our lives, as well as the internet of things (IoT) and LED technology. At only 13 times last year’s earnings, the company could deliver impressive returns from here.

Imagination Technologies

Imagination Technologies shares more similarities with ARM. Its tagline is Developing and Licensing Core IPs.

Like ARM, it designs chips for use in smartphones and tablets. It also makes its cash purely from licensing, allowing it to dodge the high capex costs that saddle anyone who actually creates products.

Imagination has had a tough year or so, swinging from a £5.7m operating profit to a £61.5m loss in 2016 due to poor performance in a number of non-core businesses.

I appreciate the decisive moves made by management, including the ongoing disposal of those non-core assets such as Pure, IMGsystems and IMGworks. The company is now focusing on the areas where it has the greatest advantages.

Its restructure should result in a return to profit next year, but with a market cap of £700m, a purchase at these prices requires unwavering faith in its IP.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Zach Coffell 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.

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