But investors’ knee jerk reaction looks way overdone. In a note to clients this morning, technology analyst Vijay Anand at broker Espirto Santo notes that: “Qualcomm’s solution is based on silicon, which has inherent physical limitations (consumes higher power at higher frequencies) in comparison to compound semiconductors. While it appears that Qualcomm’s use of envelope technology plugs some of the gap, the technology is also available to IQE’s customers who intend to (or already have) launched envelope tracking based RF solutions. “ In fact, IQE stated last month in an earnings call to analysts that its power management solutions already extend battery life in 4G handsets by around 25 per cent and continue to outperform silicon in other areas including noise and resistance.
Mr Anand also notes that: “The Qualcomm product is an off-the-shelf solution limiting the ability for handset manufacturers to differentiate whereas the products from IQE’s customers are customised to the requirements of handset makers. In our view, Qualcomm largely targets the low-end of the smartphone market.” It’s worth remembering, too, that high-end smartphones have between four and six times as much compound semiconductor content versus a low-end phone. During an earnings call three weeks ago, Skyworks management said that: “The low-end silicon based RF market is tiny. It’s not a very attractive market for us......it’s maybe 5 per cent or 6 per cent of our revenue and it will not be accretive to margin.” RFMD, another one of IQE’s customers, expects silicon based RF products to account for less than 5 per cent of revenues in the first quarter this year. So, in effect, the market Qualcomm is targeting accounts for only 5-6 per cent of IQE’s revenues and even then the US giant is unable to offer the same solutions to customers as IQE, given the differences in the technology used.
Espirito Santo are maintaining their 2013 pre-tax estimate at £11.4m based on revenues of £146m to produce EPS of 2.5p. For 2014, the broker forecasts profits of £19.5m and EPS of 3.6p assuming a rise in on turnover to £159m. On this basis, IQE shares are rated on less than 12 times current year earnings estimates.
Trading volumes
In late trading yesterday, around 7.175m shares were sold at 29p, a significant discount to the market price of 33.5p, and there was another 985,000 trade first thing on Friday at the same price which has dragged down IQE’S share price. In total, these four trades represent 1.26 per cent of the company’s issued share capital of 645m shares.
Investors may also be reacting to online news reports that IQE’s recently completed $75m acquisition of US business Kopin Wireless is to be examined by the Office of Fair Trading (OFT). IQE has yet to make a statement to the London Stock Exchange, but it has been reported by online news agencies that comments have been invited by the OFT, with a deadline of 4 March 2013. If an inquiry is opened then the remit would be to examine whether the deal is as a "relevant merger situation" and determine whether it substantially lessens competition.
But even if these reports – which have yet to be substantiated by IQE - have foundation and an inquiry is launched by the OFT, it doesn’t mean that the deal will be deemed a merger situation. Moreover, at the current price, IQE shares are back to where they were 12 months ago even though the company has made substantial operational progress in the meantime and is below the levels I recommended buying in at. These were at 31.5p (Tech that and rally, 19 October 2012); 28.5p (Happy capital returns, 17 December 2012); 33p (A tech share worth buying now, 10 January 2013) and 35p (Time to dial into profit, 13 February 2013).
