As investors keep reading about shortages of silicon chips, strong demand for electronic gadgets and the wonders of fifth-generation (5G) mobile technology, they could be forgiven for being a bit disappointed with a first-half results statement from IQE which reveals an operating loss on a stated basis and offers no upgrades to management’s sales or profit forecasts for the year,” says AJ Bell Investment Director Russ Mould.
“That may explain why the shares are down so sharply today, even if the company tends to march to its own beat – it does not make chips, but the wafers from which they are made, and it does not provide traditional, pure silicon wafer but more complex compounds, such as Gallium Nitride (GaN), Gallium Arsenide (GaAs) and Indium Phosphide (InP).
“These so-called epitaxial wafers are then used as the basis for chips that are used in specialist functions and products, such as mobile handsets, mobile telecom network infrastructure, 3D imaging and sensing and photonics systems for fibre-optic telecoms networks.
“These target markets enjoy demand cycles all of their own, which are as much led by technology and the shift to next-generation products as the wider economic cycle. This is a little different from the broader silicon chip industry, which follows a more typical boom-and-bust pattern, related to swings in demand caused by the economic cycle and swings in supply as manufacturers cut or increase investment according to where they think demand is going next.
“Current consensus forecasts are looking for an increase in global semiconductor sales of some 25% to a new all-time high.
“This makes IQE’s forecast of broadly flat sales and flat (adjusted) earnings before interest, taxes, depreciation and amortisation (EBITDA), on a currency adjusted basis, all seem a bit more pedestrian.
“That implies EBITDA may not be much higher than it was in 2017, which may be why IQE’s shares trade at a four-and-a-half year low.