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Is growth stock IQE plc the tech buy of the decade?

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Having come under an onslaught of short selling earlier in the year following concerns about its accounting policies, shares in Cardiff-based advanced wafer specialist IQE (LSE: IQE) have bounced back to form over the last few weeks.

Today’s full-year numbers — while failing to impress a perhaps overly expectant market — suggest that the positive momentum since mid-February should continue so long as the company continues to provide investors with evidence that it really is delivering on its promises. Let’s take a closer look.

Mass-market adoption

For those unfamiliar with the AIM-listed mid-cap, it might seem strange that IQE’s share price should fall on the back of today’s results.

Thanks to the adoption of its technology in “mass-market consumer applications” in the second half of the financial year (read: Apple’s iPhone X), revenue jumped a very solid 16.4% to £154.5m in 2017. Indeed, with sales in its Photonics division more than doubling to £47.6m, it’s no surprise that the company reported a stellar 58.4% rise in adjusted operating profit here and a 19.2% rise (to £26.4m) overall.

Elsewhere, IQE reported good progress on the building of its new ‘Mega Foundry’ in Newport. As a result of its ambitious growth strategy, investment rose from just over £19m in 2016 to just under £35m in 2017 as the company attempts to capitalise on what it regards as “near-term and foreseeable growth opportunities“. 

Not that IQE is now short of cash. In contrast to the £39.3m debt on its books at the end of 2016, it finished last year with £45.6m as a result of raising £95 from investors in November.   

Worth the risk?

It’s understandable if some investors remain reluctant to build a position in IQE at the current time. Clearly, the buzz around the company is based on its potential to expand substantially over the next few years, something that requires a huge dollop of faith from its owners. As a result, IQE’s stock price has come to depend as much on fear, greed and investor psychology as anything else.

Nevertheless, I remain encouraged by today’s comments from CEO Dr Drew Nelson. In addition to reflecting on an “outstanding performance” in the last financial year, he went on to state that the company’s board looked forward to the future “with a high degree of anticipation and confidence“. That’s sufficiently bullish for me.

Looking ahead, IQE sees “continued growth” in 2018 with revenue from its Photonics division predicted to rise by between 35% and 60% and market opportunities providing “potential for yet higher growth rates“.  

It doesn’t stop there. The company reckons it will continue to see massive adoption of its 3D sensing technology well into 2019 and beyond. Today’s statement predicted that compound annual growth rates over the next three to five years were likely to be 10% in Wireless, 40%-60% in Photonics and 5%-15% in InfraRed — the kind of growth that explains why the company’s stock is valued so highly based on traditional metrics. 

While the growing relationship with Apple has clearly captured investors’ attention, it certainly shouldn’t be regarded as a simple play on the success of the latter’s products either. With an intellectual property portfolio of over 180 patents, it now has its sights set on becoming “a globally leading ‘advanced materials solutions’ company“. With this in mind, I feel IQE could be a great long-term hold for risk-tolerant investors.

Capital Gains

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Paul Summers owns shares in IQE. 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.