Should you avoid the IQE share price like the plague after Apple’s profit warning?

Royston Wild explains why IQE plc (LON: IQE) is best avoided given the current sales problems over at Apple Inc (US: AAPL).

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 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

Investing Articles

3 FTSE 100 shares with ex-dividend dates next week!

Fancy grabbing some juicy dividends in the coming weeks? These FTSE 100 shares all go ex-dividend during the next seven…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Can the Tesla share price beat September’s 22% climb in October?

All the techie attention seems to have drifted away from the Tesla share price at the moment. But October could…

Read more »

Investing Articles

Up 27% yesterday, but I think my favourite growth stock under $10 still has room to run

Our writer looks at why up-and-coming growth stock Joby Aviation (NYSE:JOBY) just exploded 27% higher on the New York Stock…

Read more »

Investing Articles

1 stock I’d love to buy from the FTSE 100 in October

I think this FTSE 100 business has great potential to perform well long term and the valuation looks attractive to…

Read more »

Investing Articles

If I’d put £1,000 in Lloyds shares 5 years ago, here’s what I’d have now

Lloyds shares are among the most closely watched on the FTSE 100. The stock might not have delivered for investors…

Read more »

Investing Articles

Top UK shares I’d consider buying for growing dividends

Some UK shares have been super-reliable when it comes to throwing cash back at investors. Paul Summers picks out some…

Read more »

Investing Articles

After a bumper first half gives the Tesco share price a boost, should I buy?

The Tesco share price is having a great year, and these first-half figures show us why. Here's how the stock…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Fear sends FTSE 100 stocks flashing red. But why are these two stocks winning?

The FTSE 100 continues to deliver a strong performance despite several stocks dipping earlier this week. Our writer looks at…

Read more »