The Motley Fool

Forget IQE shares. Here’s a high-growth tech stock I’d buy instead

The last time I covered IQE (LSE: IQE) – which makes semiconductor wafers for chips used in smartphones – was all the way back in January last year when its share price was around 110p. At the time, I noted that shorters were targeting the stock heavily (it was the fourth most shorted stock on the London Stock Exchange) and, for this reason, I said it was sensible to steer clear of the shares.

In retrospect, that was the right call. Since that article, IQE shares have fallen to just 48p, meaning they’ve lost around 56% of their value.

What’s the best move now though? Has this share price weakness created a buying opportunity, or should the stock still be avoided?

Short interest remains high

Looking at recent announcements, I would continue to leave the shares alone for now, as the company is clearly still struggling.

For example, in a trading update earlier this week, IQE said it had experienced “very challenging conditions in 2019” and advised that it now expects to generate revenue of £136m-£142m this year (and that includes a forex tailwind of £3m), compared to previous guidance of £140m-£160m. That’s significantly below last year’s revenue of £156.3m.

In addition, the company said it’s expecting a mid-single-digit operating loss for the full year. This comes after the group reported a pre-tax loss of £3.7m for the first half of the year in September, compared to a £6.6m profit the year before.

It’s also worth noting that short interest here remains very high. According to shorttracker.co.uk, the stock is currently the sixth most shorted stock in the UK right now, with 8.7% of its shares shorted. That’s a worrying sign. All things considered, I’d steer clear of IQE shares for now.

Exciting tech stock at an attractive valuation 

One tech stock I do like the look of right now, however, is dotDigital (LSE: DOTD) – a fast-growing company specialising in digital marketing solutions. Its flagship product, Engagement Cloud, which is used by the likes of Virgin Active, Jet2.com, and TM Lewin, enables companies to create powerful, data-based marketing campaigns in just minutes.

DotDigital’s full-year results, issued last month, showed the company has plenty of momentum right now. For example, for the year ended 30 June, revenue jumped 19% to £51.3m, while adjusted earnings per share (EPS) from continuing operations surged 33% to 3.88p (ahead of market expectations). The group also advised this year has started well and that it’s “very excited” about its growth opportunities. That sounds positive to me.

Yet despite this growth, the shares remain attractively valued. With analysts expecting EPS of 4p (I think the company can potentially top this) for the year ending 30 June 2020, the forward-looking P/E ratio here is just 21.5. In my view, that’s a steal. I rate the stock as a ‘buy’ right now.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called “1 Top Small-Cap Stock From The Motley Fool”.

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle.

Click here to find out all about it — it's completely free to do so.

Edward Sheldon owns shares in dotDigital Group. The Motley Fool UK has recommended dotDigital Group. 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.