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Why I’d still shun the IQE share price at 50p

Over the past few months, the IQE (LSE: IQE) share price has outperformed the broader market. Indeed, the stock is up more than 100% from its March low.

Investor sentiment towards the semiconductor consultant and manufacturer has improved following a positive trading update from the company at the beginning of June.

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However, despite this performance, and the company’s improved outlook, several factors suggest it may be best to avoid the IQE share price.

IQE share price problems

The IQE share price has outperformed since March and the group now expects to return to profitability in 2019. In its latest trading update, the company said it expects at least a 27% jump in revenue for the first half.

It anticipates a return to profitability due to the strong performance of its wireless equipment & light sensors businesses. Management believes the rollout of 5G phones using IQE’s kit will offset any coronavirus related impact on operations.

Previously, IQE was expecting to return to profit in 2021. So the recent update implies the business is a year ahead of projections.

However, the company has a history of missing expectations. Profits have fallen every year since 2015. Over the same period, sales have risen by about 23%. These figures infer that the company is struggling to compete in a highly competitive market. As such, the recent positive performance may not last.

The group’s balance sheet has also deteriorated. Since 2017, the IQE share price has spent £46m in cash and taken on £64m in debt. As profits have only fallen during this time, there’s little to show for this additional spending.

Overvalued

On top of the company’s lack of progress over the past few years, it also looks expensive at current levels.

At the time of writing, the IQE share price is dealing at a 2021 P/E of 52. That makes the business one of the most expensive companies on the London market. It’s even more expensive than the group’s larger, more profitable international peers.

As such, while the IQE share price might have benefited from the coronavirus crisis, it may be best to avoid the stock after the recent gains.

There’s no guarantee the company can meet the market’s expectations for growth, especially considering its track record. If the group fails to live up to those expectations, the shares could fall substantially in the near term. With that being the case, it may be sensible to take profits after the stock’s recent performance. 

However, if you’re willing to take on the risk, this is one of the few semiconductor companies trading in London today. As technology investments go, the IQE share price is one of the best ways for investors to bet on the sector, despite its problems.

Therefore, if you’re interested in owning the stock, putting the IQE share price in a diversified portfolio may be the best approach.

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Rupert Hargreaves has no position in any of the shares 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.