Over the past 12 months, the IQE (LSE: IQE) share price has slumped. This time last year, the stock was changing hands for more than 90p per share. Today, its value has declined to just 50p per share. That’s a loss of nearly 46% over 12 months. In comparison, over the same time frame, the FTSE 100 has returned 5%. The IQE share price has underperformed this benchmark by 51% based on these figures.
Unfortunately, I think this performance is going to continue. Today I’m going to explain why, and why I believe now could be the time to sell.
It seems to me that shares in IQE have been under pressure for a handful of reasons in recent months.
Firstly, the group’s revenues are falling. At the beginning of September, IQE revealed that sales for the first six months of 2019 had dropped from £73.4m to £66.7m in 2018. This had a significant impact on the bottom line. The business reported a loss after tax of £10.7m, compared to a profit of £4.2m in 2018.
The decline in profitability wasn’t the only black mark in IQE’s half-year figures. The firm also reported that its cash balance had declined from £41m at the end of the first half of 2018, to -£800,000.
Lower cash generation from operations coupled with investment at IQE’s Mega Foundry in Newport, South Wales, as well as capacity expansion in Taiwan and Massachusetts, US were the reasons behind this decline.
Management says that the business has now “substantially completed” its major investment programme, so cash demands should decline in the second half. Still, it concerns me that IQE’s cash balance has vanished so quickly. Declining profits hardly instil confidence that the group can rebuild its resources rapidly.
As well as the company’s falling revenues, weak balance sheet and growing losses, shares in it also look quite expensive. Based on current City forecasts, the stock is trading at a forward P/E of 92, falling to 21 for 2020.
These numbers are so far apart it is difficult to come up with a realistic price outlook for the stock. However, on average international semiconductor stocks are changing hands at around 20 times forward earnings. Because IQE is losing money, I reckon the stock probably deserves to trade at a discount to this average.
On this basis then, I think the shares are overvalued at current levels, although because City forecasts are so volatile over the next two years, it is difficult to say by how much.
The bottom line
Overall, IQE’s profits are falling, the company’s cash balance is dwindling, and the shares look overvalued. This combination of factors leads me to conclude that the outlook for the stock isn’t pretty.
As a result, I think it could be a good time to sell the shares and reinvest your money in a company with a much brighter growth outlook.
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.