The technology sector has historically been filled with companies that offer high earnings growth potential. While this is clearly very appealing, in many cases such stocks also come with high valuations as investors have priced-in their future potential. As such, the margins of safety on offer for new investors may be somewhat narrow.
However, having experienced an upgrade to its outlook in recent months, IQE (LSE: IQE) is a technology stock which could still have share price appreciation potential. Therefore, now could be the perfect time to buy it for the long run.
IQE focuses on the research, development and provision of engineering consultancy services to the compound semiconductor industry. So far, its share price performance in 2017 has been exceptional. It has soared by around 350% since the start of the year, and investor sentiment appears to be improving rather than declining.
One reason for this could be the company’s future prospects. IQE is forecast to grow its bottom line by 27% in the next financial year. Its growth potential for after 2018 also appears to be strong. A recent fundraising has improved the company’s investment potential and could allow it take advantage of new opportunities which require greater scale and investment.
Despite its positive outlook, the stock trades on a price-to-earnings growth (PEG) ratio of just 1.5. Given its improved earnings outlook following the cash injection it recently received, this appears to be a fair price to pay. Judging from the track record of various technology companies, if IQE can deliver on its potential then its valuation could move substantially higher. Therefore, while volatile, it could be a worthwhile buy for less risk-averse investors.
While technology sector peer D4T4 Solutions (LSE: D4T4) also appears to have a bright long-term future, the company’s performance in the first half of the year has been disappointing. Its share price fell by over 20% on Tuesday in response to the release of its interim results. They showed a loss of 0.57p per share versus a profit of 5.44p per share in the prior year.
The main reason for this was the timing of client contracts during 2017. The balance of business intake has been similar to that experienced previously in 2014-15, insofar as a large proportion of business is expected to close and be delivered in the second half of the year. Furthermore, many of the contracts currently in negotiation are with existing clients who wish to either increase the footprint of D4T4’s software, or extend the use of its managed private cloud environments.
Therefore, in the long run there could be a buying opportunity for less risk-averse investors. However, in the short run it would be unsurprising for D4T4’s share price to come under further pressure as investor sentiment has changed significantly. As such, it may be worth waiting for confirmation of improved performance before buying it.
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Peter Stephens 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.