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. 

Under pressure

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. 

Too expensive 

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. 

The post Why I’d sell the IQE share price right now appeared first on The Motley Fool UK.

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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.

However, the shares have rallied somewhat from the low — trading 2.6% down at 50.5p, as I’m writing — and with a new note out from Edison Investment Research forecasting EBITDA will soar over 90% next year, could now be a great time to buy?

First-half factors

The leading supplier of advanced wafer products and material solutions to the semiconductor industry, IQE said revenue for the first half of the year was “impacted by a weak smartphone handset market and reductions in demand in the context of a technology market slowdown, international trade tensions and fall in demand from a major InP laser customer.”

The bigger fall in EBITDA was due to high fixed costs and under-utilisation of facilities scaled for higher volumes, producing negative operating leverage. The company said it expects EBITDA margins to remain low in the second half of the year, but that the group is positioned well “for future growth and margin expansion as volumes increase, driven by the growth opportunities in 5G and connected devices.”

Second-half outlook

IQE had previously downgraded its expectations for 2019 in a trading update in June. First-half revenue of £66.7m came within the reduced guidance range of £65m-£68m.

Some analysts and commentators had feared IQE could issue a further revenue and profit warning today. However, management reiterated the full-year revenue guidance of £140m-£160m it had given in June.

While this is encouraging, it may be remembered that last year’s guidance was utterly decimated less than seven weeks before the year-end. Furthermore, the company today cautioned that three key factors affect this year’s revenue outlook:

• Continued uncertainty related to the geopolitical landscape, the effects on global technology markets and, in particular, the confidence for supply chains to rebuild inventory.
• The market for smartphone handsets in the second half of 2019.
• The speed of formation of new Asian supply chains, the associated product qualifications and volumes of initial orders.

I think these factors represent quite a high downside risk to management’s revenue guidance for the year, and Edison’s adjusted EBITDA forecast of £22.5m (compared with £7.4m in the first-half).

At the current share price, IQE’s market cap is £400.4m, and with Edison’s year-end net debt forecast of £14.7m, the Enterprise Value (EV) is £415.1m. As things stand, the EV/EBITDA is a high-looking 18.4. This would not only balloon, if IQE misses this year’s expectations, but also call into question Edison’s forecast of EBITDA sky-rocketing to £42.9m next year.

Cash flows

Finally, let’s turn from revenue and EBITDA (what Warren Buffett’s partner Charlie Munger calls “bullshit earnings”) to cash. IQE burnt through £21.6m in the first half of the year, as it continued to invest for future growth. It moved from net cash of £20.8m to net debt of £0.8m (excluding £49.3m lease liabilities, albeit only £3m due within one year).

I’ve previously noted that after 20 years, IQE’s periods of elevated investment and heavily negative free cash flow have been followed by little meaningful advance in free cash flow in subsequent years. The bottom line for me is that unless this changes, I’m perfectly happy to continue avoiding the stock.

The post Is IQE a good investment? appeared first on The Motley Fool UK.

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G A Chester 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.

Reassuringly expensive?

AIM-listed Craneware (LSE: CRW)  develops and licenses computer software for the US healthcare industry that helps hospital managers identify operational and financial risks. It’s a superb company based on its consistently great returns on capital, fat margins, lack of debt and market-leading status.

Unfortunately, holders rushed to sell a couple of months ago after it revealed a big drop in sales that would prevent it from meeting its full-year expectations. The slowdown has been attributed to teething problems relating to Craneware’s new cloud-based analytics platform (Trisus Health Intelligence). 

Having fallen 37% since late June, Craneware now occupies a place on my watchlist. While tempted to buy given the recent price weakness, I’m content to wait for full-year numbers on 3 September before potentially opening a position. The shares still change hands on a lofty 34 times forecast earnings for FY20, after all.

Also reporting next month is a former holding of mine — videogame services provider Keywords Studios (LSE: KWS).

The recent explosion of interest from investors in all-things gaming-related has proven a huge boon for the Dublin-headquartered business with its value soaring 400% from September 2016 to August 2018. Since then, however, the direction of its share price has been less predictable.  

This isn’t to say that Keywords isn’t doing well. In its most recent update, the firm stated that H1 revenue was likely to be around 39% higher at just over €153m thanks to “particularly strong growth” at its Functional Testing and Game Development divisions. Indeed, trading has been so good that the company has been required to expand at a faster rate than expected, requiring additional investment (although this is likely to benefit margins in H2). Adjusted pre-tax profit should come in 15% higher than the previous year at roughly €18.4m.

Perhaps the biggest concern with Keywords is its growth-by-acquisition strategy. This is fine when everything goes smoothly but could come under scrutiny if the firm shows signs of struggling to integrate new parts of its business. For now, the company trades on a steep valuation of 31 times earnings, leaving little room for error. Interim results are out on 18 September.

A final stock that updates next month (interim results, 3 September) is semiconductor wafer producer IQE (LSE: IQE) — another former holding of mine that, regrettably, proved far less successful than Keywords. 

IQE’s stock is currently the most expensive of the bunch at an eye-watering 55 times earnings. That said, analysts are forecasting a treble-digit rise in earnings per share in FY20. If the mid-cap were to achieve this, it would reduce the valuation to 21 based on today’s share price. 

I think this is optimistic, particularly as IQE is currently suffering as a result of the ongoing trade war between Donald Trump and China. It’s already told investors that full-year revenue for 2019 will miss forecasts.

Perhaps unsurprising, IQE remains popular with short-sellers. Worryingly, only Kier Group, AA, Thomas Cook and Wood Group are attracting more attention. That’s not a club any company wants to be a member of.  

Taking all this into account, I’d argue that IQE is the most at risk of crashing in September.

The post 3 highly-valued growth stocks I’d watch out for in September appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Craneware and Keywords Studios. 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.

Year-to-date, shares in this business have fallen 21% and, over the past year, the stock is off 51%, underperforming FTSE 100 by a staggering 53% including dividends. Such a decline is bound to attract value investors, especially when City analysts still expect IQE’s earnings per share to jump a staggering 46% this year, and a further 126% in 2020. 

With this being the case, I’m going to try and establish whether or not it’s worth buying the IQE share price at current levels, or if it’s worth staying away ahead of further declines?

Mixed outlook

I mentioned above that City analysts expect IQE to report a 46% increase in earnings per share this year, an impressive rate of growth when taken alone. However, when we look at this growth in comparison to the company’s performance over the past six years, a very different picture emerges. For example, last year, IQE’s earnings per share fell a staggering 73%.

Such an aggressive decline in earnings is usually the result of asset write-downs, so it’s not unusual for profits to rebound the following year. That seems to be exactly what has happened this time around.

But even if the company does manage to meet City growth expectations for 2019, profits will come nowhere close to matching the level reported for 2017. That year, IQE reported a net profit of £14.6m and earnings per share of 2.9p. For 2019, analysts have pencilled in a net profit of £9m and earnings per share of 1.11p. 

Still, analysts are currently expecting net profit to hit £21m in 2020 which, if achieved, will be a record for IQE. 

A lot can go wrong

I’m sceptical the company can meet this target. Two years is a long time, and IQE is suffering from the ongoing trade war between Donald Trump and China.

Last month, the company warned investors that 2019 revenues would miss forecasts and it’s issued another warning about trading conditions today (although management reports there’s been a slight improvement). These warnings mean it’s almost impossible to trust City growth forecasts.

On top of this uncertainty, the IQE share price looks quite pricey at current levels. Right now, the stock’s dealing at a forward P/E of 46.6, falling to 21 if the company meets the City’s growth targets for 2020. With so much uncertainty clouding the outlook for this business, I think this high multiple is a liability for the stock price. Therefore, I’m not a buyer of the IQE share price at current levels.

Even though the stock might look cheap compared to its history, in reality, the company is struggling to grow its top line due to factors outside of its control. Even a slight deterioration in its prospects could see the shares suddenly lurch lower. It’s not worth paying such a high price for a business with such an uncertain outlook, in my opinion.

The post Is it time to buy the IQE share price after falling 50% in a year? appeared first on The Motley Fool UK.

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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.

IQE says that “a weak smartphone market” has resulted in reduced orders for wireless chips. The firm’s photonics division is also seeing lower forecast orders, which is likely to result in lower orders during the second half of the year.

Chief executive Drew Nelson believes that the US government restrictions placed on Chinese firm Huawei are having “far-reaching and long-last impacts” on the market in which IQE operates. In May, the company said this issue could affect up to 5% of revenue, but in today’s update, management has admitted that the total hit is now expected to be larger.

Profit collapse?

IQE now expects to report revenue of between £140m and £160m for 2019, compared to previous forecasts of £175m. Based on the mid-point of £150m, that’s a reduction of about 14%.

That may not sound too bad, but lower volumes mean that profit margins will fall too. The company says that its adjusted operating profit margin is now expected to be “significantly below” its previous guidance of at least 10%.

Management hasn’t specified how far margins are expected to fall. But based on the use of the word ‘significantly’ I’d expect a revised figure somewhere between 5% and 8%.

Using the mid-point of 6.5% as an example, my sums suggest that IQE’s adjusted operating profit is now likely to be about 45% lower than expected — I’d estimate about £10m.

It’s worth remembering that profits slumped in 2018, too.

Can the firm return to growth? It’s not clear to me. However, I thought that IQE shares looked expensive before today’s announcement, and in my view they still do.

I estimate that at 50p, the shares are probably trading on about 45 times 2019 forecast earnings. That’s too high for me, especially as this capital-intensive business has never paid a dividend. I’m going to continue to avoid this stock.

A quality engineer I’d buy

IQE’s high-tech products and jargon-filled press releases may seem exciting. But the firm appears to be struggling to convert this hype to cold hard cash.

One engineering firm that takes the opposite approach is Castings (LSE: CGS). As its name suggests, this 112-year old company makes metal parts for manufacturers, with more than 80% going to the automotive sector.

Castings has had its problems over the years. Most recently its CNC Speedwell machining division has come unstuck. But throughout the time I’ve been following this stock it’s remained robustly profitable, with a big net cash balance and a reliable dividend.

The latest figures from the firm suggest that trading is improving. Revenue rose from £133m to £150m last year, while adjusted pre-tax profit climbed from £12m to £15.3m. The firm’s foundries are said to be busier and more profitable, while new management is working hard to fix problems at CNC Speedwell.

Although a cyclical downturn is a risk, demand for commercial vehicles is said to remain strong. This is supporting Castings’ order book.

The shares trade on 12.5 times forecast earnings, with a dividend yield of 3.4%. I’d prefer to pay a little less, but this looks a fair price to me for income investors.

The post Is the IQE share price an unmissable buy after 30% crash? appeared first on The Motley Fool UK.

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Roland Head 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.

Business model doubter

Metro was founded in 2010, and is pursuing an ambitious branch-opening strategy, with a large part of annual branch rental costs covered by an operation to provide safety deposit boxes. Apparently, this is a market rivals have pulled out of, and I wonder if it could be ripe to come under increased regulatory scrutiny. Either way, I’ve long been unconvinced that Metro is the future of 21st century banking.

In an article in January last year, I wrote that even if I had confidence in the business model, I wouldn’t be prepared to pay the valuation. At the time, this was 150 times forecast 2017 earnings of 23.5p and over 50 times forecast 2018 earnings of a bit above 70p. The share price was north of 3,500p and I suggested, “now could be a good time to cash in.”

The fact the company went on to post earnings of just 18.8p for 2017 and 39.4p for 2018, shows how far it has fallen short of earlier growth expectations. And there have been other issues, notably its mis-categorisation of a large number of its higher-risk mortgages, which required an emergency fundraising earlier this month (£375m at 500p a share) to bolster its capital position.

Some long-term supporters have continued to back the bank, and there’s also been talk of private equity interest. However, I remain thoroughly unconvinced by the business and its valuation. A current share price of 790p represents over 30 times the Reuters consensus earnings forecast of 25.74p for 2019.

Finally, at least seven sophisticated hedge funds are currently positioned to profit from Metro’s share price falling, with their disclosable ‘short’ holdings in the stock totalling 10.4%. This makes the bank the third most shorted stock on the London market.

Step-change sceptic

IQE’s president and chief executive, Dr Drew Nelson, founded a company called EPI in 1988, which became IQE in 1999, and listed on the stock market in 2000. It billed itself as “the world’s largest ‘pureplay’ outsource supplier of customised epitaxial wafers to the compound semiconductor industry.”

A real step-change in earnings and free cash flow (FCF) has yet to materialise. Despite spending a total of £166m on capex and £59m on acquisitions over the last 10 years, cumulative FCF for the period stands at minus £33m. Periods of elevated investment and heavily negative FCF have been followed by little meaningful FCF advance in subsequent years. Given two decades as “the leading global supplier” of epi-wafers, I’m sceptical about whether we’ll ever see a step-change in FCF and earnings.

In view of this, I see little value in the shares at a current price of 74p, which represents over 33 times consensus forecast earnings of 2.2p for 2019. Finally, I’m conscious IQE is another grievously shorted stock, with four institutions having disclosable positions totalling 8%.

The post Metro Bank and IQE: two high-risk stocks I would sell today appeared first on The Motley Fool UK.

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G A Chester 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.

Rocked by a profit warning in November and then another worrying set of full-year financials in March — a report in which the semiconductor manufacturer warned of continued inventory unwinding in the VCSEL supply chain and ongoing softness in the mobile phone market — investors continue to march towards the exits.

Even my Foolish colleague Paul Summers, himself a holder of IQE stock, sold out of the AIM-quoted business on fears of these tough trading conditions and the company’s wafer-thin (pun fully intended) balance sheet.

And judging from the fresh set of shocking trading numbers released yesterday from Apple, I reckon more investors will be following Mr Summers out of the door.

Troubles mounting

In its latest financial release, the US tech giant, a major buyer of IQE’s products, announced that sales of the iPhone posted their biggest ever drop for any quarter in its history during the three months to March.

Revenues from its flagship device in the period plummeted 17% year-on-year to $31.05bn, the familiar problem of decimated Chinese demand hampering shipment levels. If you remember, poor sales of Apple’s core product was cited as the cause of IQE’s profit warning last autumn.

Back in March, IQE tried to put a positive spin on things by commenting that “there are strong signs that significant growth can be achieved in the second half of 2019 and into 2020 in both the group’s Photonics and Wireless business units.” Yesterday’s update from Apple casts a colossal shadow over that statement and for City forecasts of a 63% earnings rebound in 2019 too.

At current prices, I don’t believe that IQE’s high rating, a forward P/E multiple of 35 times, reflects the worrisome sales picture which could well stretch from the remainder of 2019 into the new decade. I’m fully expecting profits forecasts to be downgraded in the near future and for fresh flows of investor selling to materialise.

6% dividend yields

Why take the chance on IQE when there are plenty of better growth shares to pick from?

Take National Grid (LSE: NG) for instance. Scintillating profits growth isn’t the name of the game here — indeed, an earnings rise of just 4% is predicted for the current fiscal year — but for those seeking improvements over a long-time horizon, this FTSE 100 stock is hard to beat given the defensive nature of its operations.

The electricity network operator’s near-term growth story certainly looks more robust than that of IQE, National Grid commenting in April that better-than-expected inflation-related costs are helping to offset a rise in operating costs. And in the meantime, investors can take heart from the brilliant visibility created by its profits agreements with regulators in the US and the UK.

This stable outlook means that dividends at National Grid are expecting to keep dancing higher, meaning that investors can sink their teeth into a gigantic 6% forward yield. Throw a dirt-cheap corresponding P/E ratio of 14.2 times into the equation and I reckon the power play is a great stock to load up on today.

The post More bad news for IQE! I’d rather buy this 6% FTSE 100 dividend yield appeared first on The Motley Fool UK.

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Royston Wild 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.

Sometimes a great growth share comes along that appears to be too good to be true though, and throws such convention out of the window. IQE (LSE: IQE) was once a share whose profits outlook, built on the evergreen popularity of Apple, and its fashionable ranges of hi-tech gadgets, made it a terrifically-compelling buy despite the cyclical nature of its end markets.

With Apple’s products losing their sheen more recently however, component supplier IQE has endured no little trading turbulence. And this was reflected in November’s profit warning, issued on the back of falling demand for its 3D sensing laser diodes used for facial recognition purposes in smartphones.

More bad news

Despite these fears, IQE’s share price had gained ground in recent months, rises which left it susceptible to a fall as Apple continued to struggle selling its technology. Indeed, I warned that the firm’s share price could sink on full-year financials, released last week, and so it has come to pass.

On  Wednesday, the company announced operating profit slumped 40% in 2018 to just £16m, worse than the City had been expecting even after November’s shock warning. What’s more, cash generated from activities sunk to £17m from £29.7m a year earlier.

Those dried-up diode orders weren’t the only things to plague IQE’s profits performance last year, though. The semiconductor play was also hit by adverse currency movements, production inefficiencies related to lower output of its VCSEL 3D sensing technologies, and costs related to its new production site in Newport. Big investment in “low and zero margin” technologies for new customers and a higher percentage of lower-margin wireless revenues also took their toll in 2018.

… but is it a buy?

Quite a catalogue of issues, then. And the tech titan isn’t expected to have got 2019 off to a blinder, either. Reflecting on what chief executive Drew Nelson described as “the current well-heralded softness in the smartphone market,” IQE said it expects both revenues and profits to suffer in the first half as inventory levels in the VCSEL supply chain are unwound and general softness persists in the semiconductor market.

Now the firm has described 2019 as a “year of opportunity” because of capacity extensions in the US and Taiwan scheduled for completion as well as maiden production at its Newport facility. I’m not buying it though, as smartphone sales continue to struggle and particularly so in that critical growth market of China. The “temporary” problems IQE is predicting for the first half threaten to stretch much longer into the future, I fear.

Even despite this week’s share price fall, the business still changes hands on a high forward P/E ratio of 24.2 times, and this gives plenty of scope for additional share price falls as the year progresses. Whether I was down to my last £1,000 or had tens of thousands to invest, I’d still steer well clear of IQE today.

The post The IQE share price: should I buy it with my last £1k? appeared first on The Motley Fool UK.

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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 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.

Today, I’m going to explain why I’ve recently jettisoned two of the worst performing stocks from my portfolio — advanced wafer products supplier IQE (LSE: IQE) and sports nutrition company Science in Sport (LSE: SIS).

Heavy faller

There’s simply no hiding from the fact that shares in Cardiff-based IQE are still way down on the highs reached back in November 2017. Sixty percent down, to be precise.

Last week’s full-year results, while never likely to be good, didn’t make for pleasant reading.

Revenue may have increased very slightly (1.1%) over 2018 to £156.3m but pre-tax profit dropped 43% to £14m following what CEO Dr Drew Nelson described as “a very difficult and challenging year“. 

Ordinarily, I wouldn’t sell a holding based on a fairly short period of underperformance. With IQE, though, I can’t see things improving any time soon.

Perhaps my biggest worry is the dwindling amount of cash on the balance sheet. Net funds fell from £45.6m to £20.8m over 2018 — a 54.4% decrease — while capital investment increased almost 22% from £34.8m to £42.4m. 

Some may argue that IQE’s growth credentials fully justify this heavy spending. That may be true but I don’t see a halt to the latter any time soon.

There’s another nagging concern. Right now, IQE is still one of the most popular shares on the London Stock Exchange among short sellers (those betting on the share price to fall). Only strugglers like Debenhams and Metro Bank are attracting more attention. The fact that these positions haven’t been closed post results suggests that there could be worse news ahead. 

Of course, short sellers don’t always get things right. Given that they technically have a lot more to lose compared to your typical investor, however, their ongoing bearishness certainly warrants attention.

IQE could end up doing very well (there’s always a chance that I’m exiting at the worst possible time) Nevertheless, I can’t help but think there are less risky destinations for my remaining capital, especially as the shares still trade on 21 times earnings.

And if you’re going to wait for a recovery, there’s an argument that you should at least be compensated for your patience.

Running to stand still

Science in Sport is another portfolio laggard that I’ve dispensed with. This business has been a disappointing (but mercifully small) investment, even if recent trading has been encouraging.

Group revenue jumped 37% to £21.3m in 2018. Gross profit also rose from £9.3m to £12m, supported by a small contribution from the newly-acquired PhD Nutrition brand.

The problem is that the company is still loss-making on an underlying basis. Moreover, these losses are increasing (£2.5m in 2018 compared £1.7m in 2017) as a result of ongoing investment in “brand awareness, e-commerce, and international expansion“. 

The company may be growing at a faster rate than competitors but it’s burning through a lot of money in doing so. The cash pile more than halved over 2018 (from £16.6m to £8m).

Again, if you’re patient enough, this could be a rewarding investment. However, with another equity raise looking likely (although not guaranteed), I’m happy to walk away for the time being and focus on other growth-focused opportunities. 

The post IQE isn’t the only ‘jam tomorrow’ growth stock I’ve just sold appeared first on The Motley Fool UK.

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Paul Summers 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.

Uphill struggle

It is easy to see why investors were disappointed with the results. The market views IQE as a growth stock, (its forward P/E of 20.5 stands testament to that) but the firm’s numbers for 2018 do not support this thesis.

Revenues for the period only increased by 1.1%, and a 14.2% decline in gross margins meant earnings before interest tax depreciation and amortisation (EBITDA) declined 28.9% year-on-year and profit before tax slumped 43%.

Looking at these numbers, I think the company has its work cut out to return to growth, although at the time of writing, City analysts are forecasting earnings per share of 4.8p for 2020, compared to just 1.4p for 2018. They are also expecting revenues to grow by around a third over the next two years.

Only time will tell if the company can hit these targets, but considering last year’s performance, I’m not willing to bet on it. Also, a forward P/E of 20.5 does not leave much room for manoeuvre if the group misses City growth targets once again.

Looking at this evaluation, I think further disappointments could lead to a significant drop in the share price.

Monster growth

I’m more optimistic on the outlook for cybersecurity expert Avast (LSE: AVST). For a start, shares in this business, which has been a public entity for less than 12 months, are currently dealing at a relatively attractive forward P/E of 13.2, that’s compared to a multiple of around 19 times earnings for the rest of the software services industry. Also, investors buying today can pocket a 3.2% dividend yield.

But it is the company’s future potential that I am really excited about here. Cybersecurity is a booming market, and it is only going to continue to grow as the world becomes more digitised.

Booming market

As I recently noted, experts suggest that the cybersecurity market is expected to double in size between 2018 and 2024. This implies double-digit growth for the industry every year until the mid-2020s. I see no reason why Avast’s earnings cannot grow at least in line with the rest of the market, and even if the company does not manage to match the market growth rate, I reckon there is still a strong chance that this business can grow earnings in the high single-digits for the foreseeable future.

Using a rough, back of the envelope calculation, I calculate that if the company’s earnings per share grow at an annual rate of 10% between now and 2024, Avast will earn 34.6p per share in 2024, putting it on a forward (2024) P/E of 8.6 at the time of writing.

If the stock attracts a valuation similar to the rest of the software services sector, the shares could be worth as much as 657p in five years, more than double the current price and that is excluding dividends. I think these figures clearly show Avast is a better growth stock than the IQE share price.

The post One monster growth stock I’d buy before the IQE share price appeared first on The Motley Fool UK.

More reading

• Want to build a high-yield share portfolio for dividend income? 3 things to watch
• Down 10% already this year, is there any hope for the Diageo share price?
• Up 28% in under a month, is Nvidia stock taking off again?
• Is this news a minor development for Greggs shares – or potentially a major one?
• 1 top ETF yielding 4.6% to consider for a £20,000 Stocks and Shares ISA

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.