It’s been a testing time for investors in IQE (LSE: IQE) of late. By the time it came to put out a worrying trading update in mid-November — an update in which it advised of that a “material reduction” in full-year profits was on the cards — the wafer manufacturer’s share price had halved in the space of 12 months.
Unfortunately news has worsened in the last couple of weeks. As my Foolish colleague Rupert Hargreaves recently pointed out, the profit warning in November was linked to US tech giant Apple (NASDAQ: AAPL), a company for which IQE is a critical part of the supply chain.
What’s curious is that IQE investors didn’t flock to the exits when the Cupertino company issued a profit warning of its own at the top of January on the back of frightful iPhone sales. Even as reports subsequently circulated that Apple was planning to slash smartphone output by as much as 10% in the next few months the wafer maker’s share price has remained mostly stable.
Presumably share pickers believe these troubles were fully included in IQE’s shock profit warning of November. It’s one heck of a gamble to expect this to be the case, though, and to hold the stock, particularly given that the AIM-listed company deals on a slightly-expensive forward P/E ratio of 17.3 times.
Sliced Apple
This valuation doesn’t exactly make the blood vessels pop, but it is built upon the premise that City analysts predict the firm will rebound from a predicted 46% earnings collapse in 2018 with an 81% rise this year.
I would argue that expecting IQE to meet these forecasts is pretty risky business. Apple has taken steps in recent days to address the main cause of slumping iPhone sales of late (sinking Chinese demand) by taking the axe to prices of its handsets in the country. It also plans on launching three new phone models this year to excite tech lovers’ interest once again.
The jury is out on whether these steps will prove successful. There’s no doubt that Apple has lost some of its lustre as competition has increased in recent years, its technologies, which were once considered to be cutting edge, now lagging behind those of its rivals in some aspects. And the struggling Chinese economy will make it even harder for Apple to recharge revenues growth from this critical market.
Buy, or walk on by?
In this environment, another poor statement on current trading, even another profit alarm, could be just around the corner for IQE, possibly as soon as when full-year results are released on March 20.
Back in November, the Welsh business scaled back its 2018 revenues growth forecasts for its photonics wafer products (at constant currencies) to 11%, from 35% to 50% previously. But it predicted that sales expansion would return to previously-guided levels of 40% to 60% in 2019.
Any signs that this year’s forecasts are coming under pressure could force IQE’s share price to sink once again. It would be foolish to say that Apple can’t recover from its current problems, such is the strength of its brand and its incredible track record of innovation. But given the near-term cloud sitting over it and its flagship products, and the possibility of more shipment slippages, I reckon key supplier IQE should be avoided right now.