Is IQE plc a millionaire-maker stock?

Could IQE plc (LON: IQE) help you achieve financial independence?

| 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.

IQE (LSE: IQE) describes itself as “the global leader in the design and manufacture of advanced semiconductor wafer products,” which in plain English means that the company produces an essential component for the production of microchips.

A silicon wafer is an ultra-flat disk, polished to a mirror-like surface. This disk then forms the underlying layer of semiconductors and is a critical component in the manufacturing process.

There are plenty of companies that produce such wafers, but IQE is a market leader thanks to its size and reputation.

Indeed, sales and profits have multiplied over the past five years as customers have demanded more from IQE. City analysts are expecting the company to report sales of £143m for 2017, up 63% since 2012. Over the same period, pre-tax profit has rocketed 270%.

And it looks like the growth story is only just getting started.

Management optimism

Even though there’s been an explosion in demand for tech over the past 10 years, it looks as if demand growth is only going to accelerate as manufacturers adapt products to conform to the Internet of Things market.

IQE’s management certainly seems to be excited about the potential the IoT market presents. At the end of last month the company issued a trading update stating: “In light of recent progress and its increasingly confident outlook, the Board expects the Group will now exceed market expectations for the full year and whilst it remains early into the start of the mass-market adoption of our technology, it is possible that with the current contract momentum, a more significant upgrade to current market expectations could be delivered for 2018.”

Management’s optimism seems to have spread to shareholders who have bid shares in IQE up to a valuation of 32.7 times 2017 earnings. But is it too late to profit from the growth?

Only just getting started? 

Over the past 12 months, shares in IQE have risen 382%, and these gains, coupled with the group’s lofty valuation seem to indicate that the shares have got ahead of themselves.

However, the positive trading update implies that the company will substantially outperform City analysts’ growth targets next year, which are currently calling for earnings growth of 14%. Some analysts have speculated that IQE’s earnings per share could hit 15p if new products and capacity rollouts go to plan.

If the company does hit this target, then it’s clear the shares are extremely undervalued at current levels.

The median P/E for the semiconductor manufacturing sector is around 33 at the time of writing. Combining this valuation with earnings per share of 15p gives a potential share price of 495p, excluding dividends or cash returns.

So, in the best case, shares in IQE could be worth 280% more than their current price. This might not be enough to make you a million, but these are only early estimates. As it continues to grow, the sky is the limit for the company.

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.

Rupert Hargreaves has no position in any shares mentioned. 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 us better investors.

More on Investing Articles

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Q1 results boost the Bunzl share price: investors should consider the stock for stability

As the Bunzl share price edges higher, our writer considers whether this so-called boring FTSE 100 stock looks like a…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

The top 5 investment trusts to buy in a resurgent UK stock market?

These were the five most popular investment trusts at Hargreaves Lansdown in April. And they're not the ones I'd have…

Read more »