IQE banking on long-term tech trends

For semiconductor maker IQE (IQE) it’s a case of balancing long-term prospects against short-term issues. Management is confident the chips that support 5G technology and 3D sensing applications will be in high demand as megatrends like the internet of things and the metaverse take hold of society. However, to get there, IQE must fight through recent headwinds linked to supply chain disruptions, geo-political crises and de-globalisation.

Wireless revenue fell 12 per cent to £83.2mn because of a reduction in demand for GaN wafers used in 5G infrastructure – pushing revenue in this segment down 49 per cent. Asia, and China in particular, have slowed down deployment of 5G infrastructure and have sought to source the required technology for it more locally.

As well as a reduction in 5G infrastructure demand, revenue in Photonics was also hit by a slowdown in the aerospace industry. Infrared revenue fell 8 per cent and 3D sensing applications was down 19 per cent as a result of smaller chip sizes.

There are some silver linings though. Strong demand for wafers used in 5G handsets and WiFi 6 routers resulted in a 19 per cent increase in sales for Wireless GaAs. Management pointed out that this same technology can be used in any devices that need to be connected to the internet. This could include autonomous vehicles or headsets used for virtual reality in the metaverse. Both are sectors that futurists are adamant will boom in the coming years.

It is hard to ramp up semiconductor production quickly though. Investment needs to be made early to meet future demand. IQE is closing its site in Singapore which will generate c.4.8mn of cost savings and is consolidating production at the “more scalable” facility in North Carolina. Capital expenditure increased to £15.1mn up from £5mn last year to help increase supply of its 5G handset and Wifi 6 wafers.

Peel Hunt thinks that Photonics and Wireless revenue will remain flat next year but hopes there maybe some growth in 5G handsets. However, recent news reported by Nikkei that Apple has reduced production of its new iPhone SE is concerning. It’s a sign that inflation could already be having a negative impact on consumer electronics.

Peel Hunt thinks that focus should now “turn to strategy rather than conservative medium term forecasts”. The broker predicts that revenue will only increase 6 per cent to £163mn by 2023. If you are willing to play the long game there could be value but don’t expect immediate returns. Hold for now.

Last IC View: Sell, 61p, 8 Sep 2020