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Why I think the IQE share price could be a top growth opportunity right now

IQE (LSE: IQE) shareholders have had a torrid time since the wheels came off what was looking like a great growth story in late 2017.

But with the share price now well under half its peak, should shareholders average down by buying more, or accept their misfortune and move on?

The reaction to full-year results released Wednesday suggests the mood favours the latter, with the shares down 9% by midday. And a look at the headline financials shows why.

Though revenue ticked up by a modest 1%, operating profit fell by 40%, with fully-diluted EPS down a whopping 59%. And with cash generation weakening, net funds dropped 54% to £20.8m.

Prospects

Chief executive Dr Drew Nelson was not overstating it when he told us that “2018 was a very difficult and challenging year for IQE group from many perspectives,” adding that the year was hit by “a very substantial VCSEL inventory correction in the first half of 2018 and the sudden disruption in a highly significant supply chain.”

But Dr Nelson went on to say: “This overshadows and disguises the excellent position and prospects of IQE which should not be defined by this short-term impact on our growth trajectory and profitability.

He expects a strong return to growth from the firm’s photonics business this year, with a boost from the expansion of 5G mobile networks hopefully presenting some new opportunities too.

The company has made big investments in its production capacity, and it does seem to be gearing up for a significant growth in volumes.

None of the reported weakness should really have been a surprise, as IQE warned us of its troubles well in advance. And I’m a little surprised by the share price dip on the day, as I largely expected the market to take it in its stride with little effect.

Volatility

Back in December, looking at IQE’s prospects, I saw further volatility ahead and I reckoned I’d steer clear until we at least see the return of earnings growth. Since then, the share price has indeed been a bit wobbly, but the freefall period seems to have come to at least a pause.

And while we haven’t seen that return to earnings growth yet, my old instincts have me starting to think that we could be very close to the best time to buy in advance of the stock’s recovery — if, in fact, the recovery does actually happen.

My colleague G A Chester has sounded a note of caution, pointing to how high hopes in the high-risk chip technology industry can so easily be dashed. He also highlights the firm’s tendency to describe itself as “the global leader in the design and manufacture of advanced semiconductor wafer products” — and I do prefer a company’s management to take a more modest approach generally.

Outlook

But forecasts suggest EPS should more than double in 2019, with a further big boost on the cards for 2020. A P/E multiple standing at 28 might well put off some investors, but that would drop to 18 on 2020 forecasts, and it’s really not high for a genuine growth prospect.

If you can handle the risk (and it’s real), then I reckon IQE is looking like a tempting growth prospect now. I might make a small investment myself.

Capital Gains

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Alan Oscroft 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.