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One small-cap growth stock I’d consider before IQE plc

While I don’t mind paying a premium for an exciting, profitable, small-cap growth stock, there comes a point where the valuation is too high for me. Here’s a look at one stock that looks too pricey right now and one more reasonably valued.

IQE

I’ve covered IQE (LSE: IQE) shares twice so far this year. The company manufactures wafer products to the semiconductor industry.

In January, the tech firm appeared on my growth screen as a fast-growing small-cap trading at an attractive valuation. Its share price and market cap were just 40p and £272m respectively, and the forward P/E ratio was an attractive 13.7. At the time, I said “the company still looks attractively valued at the current price and it would not surprise me to see the share price run further this year.”

By the time I covered the stock in August, IQE’s share price and market cap had soared to 140p and £860m. I commented at the time that the stock’s P/E of 40 was a little high for me.

Well here we are in November, and the share price has continued to rise. The shares now change hands for 178p and the market cap is a high £1.2bn. That’s despite a recent placing whereby the company raised an extra £95m, 9.9% of the existing outstanding issued capital. With analysts forecasting earnings per share of 3.3p this year, the stock now trades on a forward P/E ratio of an eye-watering 53.6.

Have I changed my stance on whether IQE offers value? No. At the current price I won’t be buying. A glance at the chart reveals a bitcoin-esque rise over the last 18 months. Buying after a rapid rise like that is always dangerous, in my view. Furthermore, looking at shorttracker.co.uk, IQE currently has a 6.6% short interest, with three funds shorting it. That’s another reason I won’t be investing for now. IQE certainly looks to have exciting prospects, however, the stock simply looks too expensive for me at present. 

IMImobile

One small-cap tech stock that does appear to be attractively valued, is IMImobile (LSE: IMO). The £124m market cap cloud communications software specialist helps its clients use mobile and digital technologies to communicate and engage with customers. Notable clients include Vodafone, Pizza Hut and the BBC.

Through a combination of organic growth and acquisitions, IMO has grown at a formidable rate in recent years, with sales rising from £39m in FY2012 to £76m last year. Earlier this month, it announced that revenue and gross profit this year are expected “to be above current expectations.”

Half-year results released this morning show further progress. Revenue surged 48% year-on-year to £53.1m, including 12% organic growth, while EBITDA rose 8%. The company saw particularly strong growth in India and South East Asia. Earnings growth was a little underwhelming, however, at just 1%. Chief Executive Jay Patel said: “We remain confident about the Group’s prospects for the remainder of the year. We expect revenue and gross profit to be in line with market expectations that were recently upgraded following the trading update given on 1 November and underlying EBITDA to be in line with expectations.

Analysts current expect earnings of 11.1p for this, placing the stock on a forward P/E of 18.3. At that valuation, I believe IMImobile warrants a closer look.

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Edward Sheldon 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.