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Is the IQE share price about to explode?

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CORRECTION: This article originally incorrectly stated that IQE is a UK-based semiconductor chip manufacturer.

The IQE (LSE:IQE) share price had some stellar performance in 2020. The company saw its stock rise by nearly 200% between March and December as the electronics industry started returning to normal operations. But since the start of this year, the company has produced some lacklustre returns. In fact, it’s down by around 30%. But it is worth noting that the IQE share price is still up 50% over the past 12 months.

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What caused the enormous growth in 2020? And is the recent decline a buying opportunity for me?

The rising IQE share price

As a reminder, IQE designs and manufactures compound semiconductor materials. This is quite a cyclical industry, to be sure. But at the moment, there is a distinct shortage of these chips that is beginning to cause problems.

A large portion of global electronic device manufacturing is performed in China. And its economy has already made a substantial recovery since the start of the pandemic. However, while countries like the UK and the US are making good progress with the vaccine rollout, these economies are ultimately recovering at varying rates. Therein lies the problem.

Semiconductor chip producers are scattered all around the world in different economies. And many facilities remain either non-operational or at a reduced production capacity, thus creating the current chip shortage. Consequently, Renault has lowered its 2021 guidance on car production levels by 100,000 vehicles. And Samsung Electronics has stated it may have to delay the annual launch of its latest smartphone for the first time since 2009.

Looking at its 2020 full-year results, total revenue increased by 27% to £178m, while its EBITDA nearly doubled from £16.2m to £30.1m. Seeing this strong performance is encouraging. So I’m not surprised that the IQE share price exploded last year. But why is it falling now?

The risks and opportunities that lie ahead

The increase in sales is undoubtedly good news. But there remains a high degree of uncertainty amongst investors surrounding the profitability of the business. Operating losses did narrow last year. But underlying profit margins continue to underwhelm when compared to its competitors.

Its EBITDA margin currently sits around 17% versus the industry average of 25%. And some of its peers, like Taiwan Semiconductor Manufacturing Co, have underlying profit margins of about 40%.

Overall, it seems investors were expecting more so the IQE share price experienced a bit of a sell-off. Yet I can’t help but wonder if the stock is trading too cheaply. After all, its chips are essential for 5G telecommunication networks, which have just started being implemented.

The IQE share price has its risks

The bottom line

While the lack of profitability does raise some concerns, I am quite impressed with the level of growth the firm has achieved in its top line. The chip shortage has undoubtedly helped boost sales. But I believe this increase will only continue to expand as the 5G rollout accelerates.

Based on the current IQE share price, the company has a market capitalisation of around £450m. That’s a price-to-sales ratio of 2.5 for what I believe could be explosive growth stock over the long term. Therefore I am considering adding it to my portfolio.

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Zaven Boyrazian does not own shares in IQE. 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.

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