The Motley Fool

Is it time to buy the IQE share price after falling 50% in a year?

Once one of the markets most sought-after growth stocks, shares in semiconductor producer IQE (LSE: IQE) have slumped in value over the past 12 months.

Year-to-date, shares in this business have fallen 21% and, over the past year, the stock is off 51%, underperforming FTSE 100 by a staggering 53% including dividends. Such a decline is bound to attract value investors, especially when City analysts still expect IQE’s earnings per share to jump a staggering 46% this year, and a further 126% in 2020. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

With this being the case, I’m going to try and establish whether or not it’s worth buying the IQE share price at current levels, or if it’s worth staying away ahead of further declines?

Mixed outlook

I mentioned above that City analysts expect IQE to report a 46% increase in earnings per share this year, an impressive rate of growth when taken alone. However, when we look at this growth in comparison to the company’s performance over the past six years, a very different picture emerges. For example, last year, IQE’s earnings per share fell a staggering 73%.

Such an aggressive decline in earnings is usually the result of asset write-downs, so it’s not unusual for profits to rebound the following year. That seems to be exactly what has happened this time around.

But even if the company does manage to meet City growth expectations for 2019, profits will come nowhere close to matching the level reported for 2017. That year, IQE reported a net profit of £14.6m and earnings per share of 2.9p. For 2019, analysts have pencilled in a net profit of £9m and earnings per share of 1.11p. 

Still, analysts are currently expecting net profit to hit £21m in 2020 which, if achieved, will be a record for IQE. 

A lot can go wrong

I’m sceptical the company can meet this target. Two years is a long time, and IQE is suffering from the ongoing trade war between Donald Trump and China.

Last month, the company warned investors that 2019 revenues would miss forecasts and it’s issued another warning about trading conditions today (although management reports there’s been a slight improvement). These warnings mean it’s almost impossible to trust City growth forecasts.

On top of this uncertainty, the IQE share price looks quite pricey at current levels. Right now, the stock’s dealing at a forward P/E of 46.6, falling to 21 if the company meets the City’s growth targets for 2020. With so much uncertainty clouding the outlook for this business, I think this high multiple is a liability for the stock price. Therefore, I’m not a buyer of the IQE share price at current levels.

Even though the stock might look cheap compared to its history, in reality, the company is struggling to grow its top line due to factors outside of its control. Even a slight deterioration in its prospects could see the shares suddenly lurch lower. It’s not worth paying such a high price for a business with such an uncertain outlook, in my opinion.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Rupert Hargreaves owns no share 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.