Good idea: opening a Stocks and Shares ISA and filling this tax-efficient vehicle with some top growth and dividend stocks. Bad idea: loading the ISA with IQE (LSE: IQE) shares.
The semiconductor manufacturer continues to suffer from drooping demand for its expensive tech and yet still trades on a sky-high forward P/E ratio of 124.3 times. Elevated multiples are part-and-parcel of the tech sector but surely such a rating leaves IQE in danger of more share price weakness in a challenging trading landscape?
Its value has already slumped 46% over the past year and, judging from half-time financials just released, there seems to be plenty of reason to expect it to keep on plummeting.
Demand still drops
Look, IQE’s latest trading update wasn’t just filled with horrors aplenty. Construction at its ‘mega foundry’ in Newport has now been completed. Taiwanese capacity has been hiked by 40%, a move which should allow it to service critical Asian supply chains more effectively. And the business also reported some “continued strong results” in terms of 5G product development.
Investors were unmoved by the news though, as it announced it had swung to an unexpected adjusted operating loss of £3.7m for January-June, from a profit of £7.6m a year earlier. And why is IQE’s bottom line suffering so badly? A shocking drop-off in demand which means the profit warnings keep coming thick and fast (and as recently as late June).
The problem is that sales of its high-tech product is slumping for a multitude of reasons. IQE is battling against a “weak smartphone handset market” as consumers wait longer and longer before updating their phones. The need to be seen with the latest, shiniest iPhone or Galaxy handset is clearly a thing of the past.
At the same time IQE also continues to endure “reductions in demand in the context of a technology market slowdown, international trade tensions and fall in demand from a major InP laser customer.” It’s no wonder market makers headed for the exits again following last week’s trading statement.
Phone sales keep falling
And, if recent trading from the industry’s major players is anything to go by, it doesn’t look as production at the semiconductor giant will be ramped up any time soon, or that revenues (which dropped 9% in the first half) will recover either. Industry researcher IDC predicted this week global smartphone sales will drop 2.2% in 2019, driven by a sharp slump in sales of Apple product which are tipped to drop 14.8% year-on-year.
Now IDC expects global smartphone sales to bounce back 1.6% in 2020 but there are a couple of important caveats to add here. Firstly, this is dependent upon Apple adopting 5G in the near future, which is by no means a foregone conclusion. And lastly, a ramping up of trade bickering between the US and China, and/or a sharp deterioration in the global economy, could also blow this forecast off course.
IQE shares are worth less than a third of what they were back in November 2017 and there’s no evidence it can arrest this steep decline either. For this reason, I reckon it should be avoided like the plague.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK has the following options: short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. 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.