Why I just bought shares in IQE plc

I’ve been tempted by big potential at IQE plc (LON: IQE) despite the valuation looking high.

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Back in the tech-bubble madness of 2000, shares in IQE (LSE: IQE) briefly touched 750p. Today, after multi-bagging from its lows, the stock changes hands for around 141p, but I reckon it has a decent shot at fulfilling the potential seen by stock market speculators almost 20 years ago because the underlying business is growing fast.

The future of semiconductors

The company manufactures and supplies advanced wafer products and services to the semiconductor industry globally. Through a process and technology known as epitaxy, IQE combines different semiconducting elements to make more advanced semiconductor materials, which are called compound semiconductors.

According to the firm, many people in the industry believe the future of semiconductors will focus on combining the advanced properties of compound semiconductors with silicon in a hybrid technology known as Compound Semiconductors On Silicon – a complex technology in which IQE has been a pioneer for over 10 years.

The directors say the firm has accumulated a “powerful portfolio of intellectual property (IP) including patents and trade secrets.”  They are optimistic and say the company’s strong pedigree in high tech manufacturing “uniquely positions the firm to commercialise this IP over the coming years and decades.” 

Strong revenues growth

In a trading update on 20 July, the company told us it had seen strong growth in revenues in the first half, which the directors reckon is due to increased demand for Vertical Cavity Surface Emitting Laser (VCSEL) wafers for mass-market consumer applications. When the directors of any company use words such as ‘mass-market’ when describing demand for their products, it’s bound to stir the animal instincts of even the most conservative of investors!

The firm has galvanised itself into action to cope with what it expects will be higher levels of demand going forward. The directors reckon the start of the ramp up for VCSEL wafers marks an inflection point in the commercialisation of the technology. There they go again – inflexion point – another phrase that suggests the potential is huge and that profitable growth is about to make a quantum leap forward.

Multiple contract wins

Indeed, IQE has nailed down “multiple, multi-year contracts” towards the growth of VCSEL, which the directors say reflects the firm’s strong competitive advantages, technology leadership and proven track record in delivering wafers into high volume consumer markets. The development of an expansion plan comes hard on the heels of the firm’s higher investment during the first half of 2017, which itself was designed to prepare for higher levels of growth in the second half. Part of the expansion plan has led to IQE agreeing heads of terms for the lease of new premises in South Wales.

Chief executive Dr Drew Nelson said in July’s update that “the first half of 2017 has been a very exciting time for the IQE Group.” He reckons the firm has “multiple high-growth opportunities ahead,” and it almost went without saying that he expected to exceed market expectations for 2017. Unusually, he went further and thinks it possible “a more significant upgrade to current market expectations could be delivered for 2018.”

I couldn’t resist the improving long-term fundamental story here, so I bought some of the shares last week. However, with a forward price-to-earnings ratio running a little over 37 for 2018, this will be a scary ‘hold’ for me. We’ll find out more with the interim statement due on 5 September. 

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.

Kevin Godbold owns shares in IQE. The Motley Fool UK has no position in any of the shares mentioned. 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

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