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Why I’d buy this small-cap growth share over IQE plc

Shares of IQE (LSE: IQE) have certainly attracted a lot of attention after more than quadrupling over the past year.

Leading supplier

The Welsh technology firm is a leading supplier of compound semiconductor wafer products for use in smartphones and other electronic devices. Founded in 1988 by chief executive Dr Drew Nelson, IQE has grown through acquisitions to become a £950m company. It now boasts an international client base, with a global market share of more than 50%.

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The AIM-listed company has clearly gone from strength to strength over the years. It has increased sales in each of its three primary markets and sees multiple promising growth opportunities ahead. Adjusted earnings per share have expanded rapidly from 1.86p in 2011 to 3p last year, while revenues have nearly doubled from £75.3m five years ago, to £132.7m in 2016.

IQE is set to release its 2017 interim results on 5 September. Ahead of its results, the company announced that it expects to deliver revenues of around £70m. What’s more, in addition to revenue growth of about 11% for the six months to 30 June, City analysts expect earnings to climb roughly 13% from the same period last year.

Valuations

Although expectations for the firm’s near-term revenue and earnings growth are certainly impressive, valuations seem stretched after the recent rally in its shares. Based on this year’s expected adjusted earnings per share of 3.23p, shares of IQE trade at a forward P/E of 42.7. And even after factoring-in estimates of a further 17% increase in its bottom line, its forward P/E would fall to a still pricey figure of 37.1 by next year.

The semiconductor maker may have much working in its favour, but it’s not the only UK-listed technology stock promising long-term growth potential.

A better buy?

Small-cap vehicle tracking specialist Quartix Holdings (LSE: QTX) may be relatively unknown to most investors, but I reckon the up-and-coming technology firm is a great share to own for the long term.

The company is a leading supplier of vehicle tracking systems and services to the fleet and insurance sectors. Its award-winning vehicle tracking service helps firms improve operational efficiency, by enabling them to stay on top of vehicle activity. Quartix also makes driver-monitoring telematics equipment, which is used by insurers to provide increasingly popular ‘black box’ car insurance policies.

Things are going well for the company’s fleet business, with installations up 45% to 14,324 in the six months to 30 June. Its customer base increased by 11% to 10,076, while customer attrition remained relatively low, at 10.1%. On a less positive note, insurance installations fell by 35% on the same period last year, reflecting the company’s recent shift in strategy to focus on higher margin business, instead of pure volume growth.

Quartix seems more sanely valued, with shares trading at 30 times its expected earnings this year and 26.5 times its forecast earnings in 2018. These are still higher valuation multiples than the market average, but for those hunting long-term value, this is probably the place to be. The firm has a solid business model with plenty of growth potential and a prospective yield of 2.2% to boot.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Quartix. 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.