1 beaten down penny stock I’m backing to explode in the future!

Jabran Khan details a penny stock which has been falling, and details why he believes it is primed for growth in the future.

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One beaten down penny stock I think could be a great long-term addition to my holdings is IQE (LSE:IQE).

IQE is a UK-based firm, designing and manufacturing vital semiconductor parts. Semiconductors are core components in many hot new technologies at the moment. Some of these include the rollout of 5G, as they are used in 5G masts. Hybrid automobiles also require semiconductors. The rise in hybrid vehicles as many vehicle manufacturers are moving away from petrol and diesel vehicles means demand is set to explode in the coming years.

Penny stocks are those that trade for less than £1. As I write, IQE shares are trading for 42p. At this time last year, the shares were trading for 80p, which is a 47% loss over a 12-month period.

There has been a well documented shortage of semiconductors recently. I believe this is one of the reasons the IQE share price has tumbled. 

Penny stocks have risks

The global semiconductor market is unique in the sense that there is no one major player and it seems to be scattered throughout the world. Reviewing other semiconductor manufacturers, it seems IQE has lower profit margins, of just 17%, compared to others in the market. The market average is 25%. One competitor, Taiwan Semiconductor Manufacturing Co., has a 40% margin. This could hurt future growth for IQE.

The recent rise in inflation and costs has led to a spike in raw material costs. These surging costs mean IQE’s profit margins could take a hit too. The global supply chain crisis is affecting the shortage of semiconductors as well as the parts needed to manufacture them. This will also affect performance and progress.

A penny stock I’d buy

Many penny stocks do not have enough information or track record to review in regards to determining investment viability. IQE does and I can see it has a good track record of performance. Looking back, I can see revenue and gross profit have increased year on year for the past two years.

Coming up to date, IQE released a post-close trading update at the end of last month. It said revenue was expected to be in line with guidance, and close to £164m. This is less than 2020 levels but still strong performance based on market headwinds. Full results are due at the end of March.

The surging demand for semiconductors, which is currently outstripping supply, is one of the main reasons I am bullish on IQE shares. There are many applications of semiconductors, aside from the 5G rollout and hybrid vehicles, such as in TVs, smartphones, and gaming devices. As the adoption of technology continues, accelerated by the pandemic, I think IQE’s performance will continue to grow too.

Overall I’d happily add IQE shares to my holdings. I think the shares are currently very cheap and there seems to be enough demand that could last a very long time to boost IQE’s performance and balance sheet. I believe it is a excellent penny stock with long-term potential and returns ahead.

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.

Jabran Khan 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 us better investors.

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