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Is the IQE share price a recovery buy after its 40% fall in 12 months?

Wonder why people think investing in shares is a horribly risky business? Take a look at the IQE (LSE: IQE) share price chart over the last year.

It’s a mass of huge swings, culminating in a crash on 21 June that’s left the share price down 42% over 12 months. And from a peak in November 2017, they’ve lost two thirds of their value.

But look back further, and over the past five years we’ve seen a 160% gain. How is anyone supposed to make any sense of all that?

There’s always a risk when a company is one of a relatively small number at the leading edge of its technology, as IQE is with its world-leading semiconductor wafer products. And it’s especially so when that technology gets bogged down in political machinations.

Profit warning

IQE’s latest slump stems from its 21 June profit warning in which chief executive Dr Drew Nelson, speaking of “unprecedented times for the global semiconductor industry,” said: “It is now clear that the impact of Huawei’s addition to the US Bureau of Industry and Security’s Entity List is having far-reaching and long-lasting impacts on global supply chains.”

It’s not just Huawei. Global demand from mobile phone manufacturers is slowing generally, as people are putting off replacing their phones for longer and longer. And while that might have spooked some people, I don’t see it as in any way surprising.

Early booms in sales when technologies are in their development stages just don’t continue when markets start to mature, and that’s exactly what’s happening in the phone business. Phone technology is improving by smaller and smaller increments (in practical terms), and we’re just not crippled by speed and bandwidth limits to anything like the extent we used to be.

More than phones

And it’s not just phones, as IQE has also downgraded its Photonics growth guidance, cut from over 50% year-on-year to under 30%.

IQE has downgraded its revenue guidance for the full-year to something in the range of £140m-£160m, compared to a previous consensus of around £175m, in the “expectation that uncertain market conditions will continue in the short-term.”

The big question is how hard will this hit profits? We don’t know yet, but my colleague Roland Head has suggested adjusted operating profit could come in as low as around £10m this year, pointing out that 2018 saw a big drop too. That would be a fall of more than 60% in just two years, and that’s not what growth shares are supposed to be made of.

Too expensive

Roland also estimates a forward P/E of about 45, and that’s not unheard of in the world of high-tech growth. But I agree it’s too steep, and I see two key reasons why.

One is the whole recovery thing, and I’m becoming more and more averse to investing in recovery situations after an increasing number have carried on worse than expected for longer than expected in recent years.

The other is competition. IQE is one of the market leaders right now, but I wonder if a market slump that I fear could go on for several years could cause it to lose its edge and give others a chance to make inroads. Definitely not one for me now.

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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.