Is Imagination Technologies Group plc a value buy after falling 65% today?

Apple plans to stop using chips from Imagination Technologies Group plc (LON:IMG). What’s next for this struggling firm?

| More on:

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.

Shares of Imagination Technologies Group (LSE: IMG) fell by up to 70% on Monday morning, after the firm warned that tech giant Apple plans to stop using its chips in new products.

This is a huge blow for Imagination, whose chip designs are used in Apple’s iPhones, iPads, iPods, TVs and watches.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

According to the firm, Apple has been developing its own graphics technology. Imagination chips will be phased out of new products in “15 months to two years’ time”.

The news comes almost exactly one year after Apple ruled out speculation that it might bid for Imagination. Now we know why — Apple decided to develop its own chips instead.

What’s the impact?

The potential impact on Imagination is huge. Licensing and royalty fees from Apple accounted for £60m of the group’s total revenue of £120m last year.

However, I believe the impact on profit is likely to be even greater. In this morning’s statement, Imagination said that it “has minimal direct costs associated with this revenue stream.” My reading of this is that Apple generates more than half of Imagination’s profits.

It’s not over yet

Imagination’s management is understandably trying to fight back. In today’s statement, the firm said it believes that it would be “extremely challenging” for Apple to develop replacement products without infringing Imagination’s intellectual property rights.

I suspect legal action is likely, but this could be a high-risk gamble for Imagination, which had net debt of £40m at the end of October and only £9m in cash.

Imagination also says that it is discussing “potential alternative commercial arrangements” with Apple. I’d imagine the group is trying to extract some extra cash from Apple. This might be through contract termination fees or perhaps additional charges to support ongoing development of key products.

However, without knowing more about the companies’ existing contracts, I don’t think it’s possible to take a view on the likely outcome of these discussions.

Can Imagination survive without Apple?

Apple provides half of Imagination’s revenue and — I suspect — more than half of its profits. Given Apple’s plans to stop using Imagination chips in new products, we could see a steady decline in sales and profits from mid-2018 onwards.

I’d be surprised if Apple reverses this decision. The US tech giant must already be heavily committed to developing its own alternative products, and can easily afford to challenge any legal action from Imagination.

Although Imagination does have other customers, this loss of licensing and royalty volumes could mean that the group’s other operations become unprofitable. A second risk is that Imagination may struggle to sign new customers if it is locked in a costly legal battle with Apple.

In my view, there’s no way for investors to accurately value the remainder of Imagination’s business. Even after today’s fall, I’m not convinced that the shares are cheap enough to be worth buying speculatively.

I’d rate Imagination Technologies stock as a sell.

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

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 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.

More on Investing Articles

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

This cheap share fell 30% last week. I’d buy now

This huge US corporation saw its shares crash by 30% last week. But I'd buy this surprisingly cheap share now…

Read more »

Various denominations of notes in a pile
Investing Articles

These 7 shares produce passive income of 7% to 11% a year!

Passive income is extra money I make without working. By buying these seven shares, I could earn 8.9% a year…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

6.6%+ dividend yields! 2 FTSE 100 dividend stocks to buy

Finding the best dividend stocks to buy requires extra care today as soaring inflation takes a bite out of shareholder…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

At 85p, are Rolls-Royce shares a slam-dunk buy?

The Rolls-Royce share price is in penny stock territory. Roland Head explains why he thinks this FTSE 100 stalwart looks…

Read more »

Business development to success and FTSE 100 250 350 growth concept.
Investing Articles

‘Big Short’ investor Michael Burry is buying this quality growth stock! Should I?

In the first quarter, Michael Burry bought more of this growth stock. Is this a hint that I should also…

Read more »

A beach at sunset where there is an inscription on the sand "Breathe Deeeply".
Investing Articles

Stock market crash: here’s why falling prices is good news

Over in the US, a stock market crash is battering high-priced stocks. But I see falling shares as an opportunity…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

These 5 FTSE 100 shares crashed in 2022. I’d buy 1 today

Although the FTSE 100 index is flat in 2022, some Footsie shares have crashed hard this year. But I see…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How investors can boost their passive income when the FTSE is falling

Stock markets are plagued with fears right now. Here's why I firmly believe those fears improve our passive income prospects.

Read more »