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IQE plc could still make you brilliantly rich

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By the time most people notice runaway growth stocks, it is normally too late. The train has departed, the big gains have been banked, you are left sweeping up the tracks. That is the risk you face when investing in Apple supplier IQE (LSE: IQE) today. So can you still have some fun with it? I reckon so.

Tech bubble?

Over the last two years, IQE has delighted investors by rising a whopping 700%. Over six months, the gain is 263%. The momentum has continued, the stock is trading 60% higher than just six months ago. Although some stocks, like these two, have also flown. There are now signs that IQE is running out of steam.

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The first thing to note is that Cardiff-headquartered IQE is no flash in the pan, despite its recent eye-catching performance. The £1.04bn AIM-listed company has more than 25 years’ experience in the compound semiconductor industry, supplying advanced wafer products and services.

The light side

Just before Christmas, management announced it was on track to achieve record financial results in 2017, with revenues driven by the mass market adoption of VCSEL photonics technology, with the group building “a strong and sustainable lead in this complex materials technology,” according to chief executive Dr Drew Nelson.

Photonics is the science of light and VCSEL has a diverse range of consumer and industrial applications including sensing, LIDAR, optical communications, heating, machine vision and heat assisted magnetic recording. This is just one of IQE’s broad portfolio of materials technologies. 

Imaginative leap

Dr Nelson is confident for the future, following the company’s recent successful fundraising to pump prime its expansion, which raised £95m by placing 67.9m new ordinary shares at a price of 140p each. He now predicts “strong, diverse and sustainable growth”.

IQE’s rise stems from its supporting role as the sole supplier of epitaxial wafers to Apple’s TrueDepth 3D camera, leaving it nicely placed to benefit from growth in the market for 3D sensors. A note of caution here: UK chip designer Imagination Technologies supplied graphics processors for iPhones, iPads and iPods to the US technology power player for many years, only to see its share price crash when Apple announced its separate, independent graphics design.

Premium play

President Donald Trump’s plan to cut the corporation tax rate from 35% to 21% should give IQE’s US operations a long-term boost, albeit with an upfront tax charge. The inevitable problem after its recent dizzying performance is that it trades at a pricey 45 times earnings for 2017 so will have to carry on flying to justify that. However, Barclays reckons this will fall to just 24 times by 2020, and is not stretched despite today’s premium valuation. The bank has set a target price of 210p, which suggests a 53% gain on today’s 137p. These 2 cheaper growth stocks may also be worth a look.

IQE’s share price has dropped 24% since peaking at 181p in mid-November, which may convince some that the glory days are over, while others will see this as a buying opportunity. I still think the future is bright for IQE. This may be your opportunity to hop on board before it accelerates away again.

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Harvey Jones has no position in any of the 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.

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