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Why the IQE share price could double in the next 5 years

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In the last five years, the IQE (LSE: IQE) share price has risen from 21p to 106p. Certainly, the stock has been hugely volatile during that period, but investors in the company have generally enjoyed a hugely prosperous period in recent years.

Looking ahead, the company seems to be in a strong position to generate further share price growth. Its earnings growth prospects appear to be bright, while its valuation still seems to offer a wide margin of safety. However, it’s not the only stock that could double in the long run. Releasing news on Monday was another company that seems to have significant upside potential.

Growth outlook

IQE’s growth prospects appear to be strong. The wafer manufacturer, which includes Apple among its customers, is expected to maintain the momentum of the last five years that has seen its bottom line rise at an annualised rate of over 19%. In the current year it is expected to report an increase in earnings of 8%, followed by further growth of 39% next year.

The company’s capital raising last year appears to have boosted its prospects for the long term. It now has improving mass-market growth opportunities for its VCSEL technology, while its photonics division has delivered high sales growth and its wafer division has benefitted from the continued popularity of products such as the iPhone.

Valuation

Certainly, any company which has seen its share price move five times higher in the space of five years is fairly likely to have a high valuation. After all, investor sentiment is likely to be upbeat – especially with the prospects ahead for IQE.

However, the company continues to offer good value for money. It trades on a price-to-earnings growth (PEG) ratio of around 0.6, which suggests that it has a wide margin of safety. Its stock price could, of course, remain volatile and there is scope for disappointment in areas such as future sales of the products in which its technology is used. However, the reality is that a further doubling of its share price would not be a surprise given its valuation and forecast growth rate.

Improving prospects

Also offering the opportunity to generate high capital growth over the long run is technical services provider to the global video games industry Keywords Studios (LSE: KWS). Its share price has risen by 12 times over the last five years, delivering stunning growth in earnings during the period.

News released by the company on Monday has the potential to improve its growth outlook yet further, with it acquiring production services specialist Blindlight. The deal is worth $10m and will be funded through a mixture of cash and shares. Blindlight is based in Hollywood and works with game producers across the world in procuring specialised talent and managing the production process for parts of video games that use Hollywood production resources.

Looking ahead, Keywords Studios is expected to record a rise in earnings of 50% in the current year. With the company trading on a PEG ratio of 1, further share price growth could be ahead over the long run.

Capital Gains

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Keywords Studios. 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.