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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. 

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.

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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.