The IQE (LSE: IQE) share price has had a mixed start to the year. After jumping 270% to 179p in 2017, the shares slumped to a low of 100p in mid-February following the firm being labelled an “egregious accounting manipulator” by short-seller Muddy Waters.
According to the short-seller, and another entity called ShadowFall, IQE has been boosting its revenues via transactions with joint ventures, an accusation management vehemently denies. Indeed, the company, which supplies parts for iPhones, quickly fired back against these accusations of weak governance and misleading reporting by appointing a new auditor, KPMG, and declaring that it wants to “go above and beyond” disclosure requirements to defend its reputation.
Then at the end of March, the firm boosted its defences further by reporting a 16% rise in full-year revenue to £154m and an 18% rise in adjusted pre-tax profit to £24m for 2017. These efforts have helped the IQE share price return to where they were trading at the beginning of the year, and I believe that, as the company continue to recover, the shares could head much higher.
Further room for growth
IQE’s management has already taken aggressive steps to reassure investors that the business is not doing anything wrong, but as the shares continue to trade below their all-time high of 179p, it seems the market is not yet entirely convinced.
Specifically, I think the company has to prove to investors that its growth trajectory has not been disrupted. City analysts are expecting the firm to report earnings per share growth of around 40% for the next two years. If IQE can hit these targets, I would be amazed if the shares did not return to their all-time high.
Earnings growth isn’t the only catalyst that I believe could drive the IQE share price higher. The company has quite a lot of value tied up in its patent portfolio, which includes 180 patents and is expanding all the time. Not only does this intellectual property allow the group to differentiate itself in the marketplace (management is aiming to become “a globally leading ‘advanced materials solutions’ company”), but it’s also a highly attractive asset for any competitors who want to gain a strategic advantage in the semiconductor manufacturing business. Bid speculation or monetisation of these intellectual assets could produce a significant return for shareholders. Indeed, in IQE’s full-year report, the firm said that its IP portfolio “sets the Group for continuing diversification and growth.”
These innovations are also helping the company evolve from its reliance on iPhone production. As one of Apple‘s major suppliers, there is a risk overhanging the stock that Apple could suddenly turn its back on IQE, as it has done with suppliers before, or iPhone sales could miss expectations.
By branching out, investors may place a higher valuation on the shares as customer risk falls. For example, the company is trying to move into infrastructure applications such as base stations, radar and CATV. For 2017, the contribution from more profitable products helped operating profit from wafer sales rise 58%.
Overall, there are many growth avenues it can pursue over the next few years, and as the group builds on its existing success, and restores investor trust, I believe the shares can return to all-time highs.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.