At 51.5p each, IQE (LSE: IQE) shares have lost 65% of their value since their lofty peak in November 2017, but can they fall much further before we see signs of a recovery? Unfortunately, I think they can.
IQE’s semiconductor technology is, apparently, the bee’s knees among those who know, and demand had been growing year-on-year, with earnings rising in parallel. The growth story was motoring along, but in 2018 the wheels came off.
Trade wars
Donald Trump decided China was the root of the world’s economic evils and instigated his still-escalating trade war (which, for some unfathomable reason, he didn’t seem to think would harm US consumers or businesses in the slightest). With Huawei sanctioned over apparent security fears on top of that, demand for semiconductor wafers took a dive.
It came at a time when mobile phone growth had started slowing, which was inevitable really. Improvements in handset technology are becoming more and more marginal every year (“Ooh, look, curvy edges. And you can bend this one… er, oops“). The market does seem to be reaching a maturity plateau.
The result was a big hit to 2018 profits, with earnings per share crushed by 60%. With revenue guidance for the 2019 full-year downgraded to £140m-£160m, analysts are predicting a further 33% fall in EPS this year.
2019 results
First-half results are due Tuesday, and I don’t really see a short-term upside for the IQE share price. Any further weakness, and I can see a renewed fall, especially as it could give short-sellers extra motivation. IQE is already one of our most heavily shorted stocks, and that’s an extra burden that any recovery in sentiment will need to overcome.
Even if it’s just business as expected, I can’t help feeling the market won’t be satisfied — shareholders are, I think, looking for signs of recovery to justify their continued holding. Forecasts for 2020 suggest a big rebound in EPS, but that’s from 2019’s expected painful low, and earnings would still be way below 2017. And in the current economic climate, 2020 is still a long way away, and I’m treating forecasts for that year as no more than pure guesswork right now.
Predictable?
Should we have seen the catastrophe coming? I don’t think anyone could have predicted what Donald Trump was going to do, but I do think there were clear growth stock alerts flashing over IQE’s share price trajectory.
Even after the big slump, IQE shares are still up 150% over five years, and most investors would be very happy with that kind of performance. But that was fuelled by a massive 900% rise from summer 2016 to 2017’s peak, and it was yet another clear example of investors piling on a growth bandwagon with little understanding of the downside risk. And exuberance like that always breaks down when something, even something small, goes wrong.
Valuation
Where does that leave us regarding IQE shares today? We’re looking at a forward P/E multiple of 66, which I think is way too high. The recovery suggested for 2020 would drop that to around 23, but I see that as still too demanding considering the huge uncertainty.
I hate to say it, but I could see IQE shares falling by another 50% before any sustainable recovery gets going.
