Are hedgies right to short IQE?

It’s been a stunning year for IQE (IQE) as the maker of advanced semiconductor wafers continues to draw comparisons with iPhone chip designer ARM Holdings.

IQE’s shares have soared by almost 300% in 2017, making it one of the best performers on AIM this year and a worthy winner of Best Technology stock at the recent AIM Awards. Much of the investor excitement relates to IQE’s photonics division, which is enjoying dramatic growth thanks to it being the market leader for laser diodes called Vertical Cavity Surface Emitting Lasers (VCSEL).

Facial recognition in mobile phone handsets is one potential use of VCSEL wafers, although IQE has been tight-lipped about its reported role in Apple's (AAPL) new iPhoneX. Such smart sensors also have uses for Internet of Things applications or to reduce energy demand at high volume data centres.

The value of IQE’s technology in photonics was plain for investors to see today as the company said growth was expected to have doubled in 2017, helped by its ability to scale this complex technology for the mass market. It said this was further underpinned by several, multi-year supply contracts.

With the wireless and infra-red divisions supporting the growth in photonics, IQE said full-year group revenues will be ahead of market expectations and not less than £150 million. Profits will also be ahead of hopes after a record year.

The Cardiff-based group will also be a beneficiary of Donald Trump’s US tax reform, which should provide a “positive long-term financial benefit”.

IQE shares still gave up some of their recent gains to stand 4% cheaper at 148p in the wake of today’s update. Some hedge funds have reportedly shorted the stock in recent weeks in the hope that shares will fall if iPhone sales disappoint.

IQE, which doesn’t pay a dividend, shot to fame during the 1999-2000 tech boom, reaching £7, before falling back to earth. The ongoing question for investors is whether IQE is a growth or cyclical stock and whether it is able to replicate Arm Holdings, which was recently bought by Japan’s Softbank (SFTBY) for £24 billion.

Chief executive Drew Nelson is confident that the group can deliver growth in the near and medium terms. He highlighted VCSEL as a long-term growth driver for the group, with applications as diverse as sensing, optical communications, industrial heating, machine vision and heat assisted magnetic recording.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.