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Why I’d still shun the IQE share price at less than 60p

The last time I covered wafer manufacturer IQE (LSE: IQE), I concluded that the stock, which at the time was trading 57% below its all-time high, was still too expensive to buy. Even after losing around half of their value in a little under 12 months, the shares were still changing hands for 33.9 times 2019 earnings, compared to the broader semiconductor industry’s average P/E of just 18.

Since then, shares in the company have fallen further and now trade at a 2018 P/E of just under 26. However, despite the decline, I’m still not interested in buying, because IQE’s outlook has only deteriorated over the past few months. 

Falling earnings 

Back at the beginning of December, I highlighted the fact that City analysts had been steadily downgrading their growth forecasts in IQE throughout 2018. 

For example in October, analysts were expecting the company to report earnings of 3.5p for 2018. By December, this target had declined to 2.3p. And I think it could fall further still. 

Analyst downgraded their forecast for the company following a warning from management that full-year profits would come in below expectations, due to a drop in orders at a major chip maker, which supplies 3D sensing technology. As IQE is part of US tech group Apple’s supply chain and relies on the California-based business for a significant chunk of its sales, analysts traced the weakness back to the iPhone producer, blaming weak core product sales for IQE’s woes.

Unfortunately, the news from across the pond hasn’t improved. Only last week, Apple CEO Tim Cook issued the company’s first profit warning in 16 years, telling investors that sales for the fourth quarter of 2018 would be $9bn less than expected, falling to approximately $84bn. Following the announcement, shares in Apple suppliers around the world plunged. 

Uncertain future 

As of yet, we don’t know how much of an impact the Apple profit warning will have on IQE. 

It could be the case that most of the bad news is already factored into the share price following the firm’s last profit warning. So far, IQE hasn’t commented on the development. In my mind, this uncertainty will continue to weigh on the share price until the business issues its numbers for 2018. 

If these figures disappoint, the shares could lurch lower because they still command a premium growth valuation. 

Further declines 

If IQE’s growth evaporates, I reckon the shares could fall back to a sector average multiple (15) which implies a possible further decline of 41%, according to my numbers, which are based on current City estimates.

If the company misses these expectations, then the decline could exceed even this depressed forecast. 

So overall, even though the stock has fallen significantly from its all-time high of 175p, I’m still not interested in the IQE share price today. In my opinion, the firm’s outlook it’s just too uncertain. With this being the case, it’s impossible to determine whether or not the shares are under- or overvalued today.

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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.