After rising 33% in 3 months, is now the time to buy back into this stock?
A couple of years ago there was a big fuss and plenty of excitement surrounding British-based processor designerImagination Technologies(LSE: IMG), but theparty came to an abrupt haltamid a flurry of profit warnings. Many investors will have walked away and forgotten all about the company. But lately however, it has been showing signs of renewedlife. Is now the time to go back to the future?
Show some Imagination
Investors fell for Imagination Technologies because they hoped it would become the next ARM Holdings, an innovative, fast-growing UKtech giant thatdesigns and licenses chip designs for use in iPhonesand other modern devices. Especially since it was forecastingjuicy long-term operating margins of 30%-40%. Imaginationeven came equipped with an ARM-style valuation too, trading at a reassuringly expensive 35times earnings. But the futuredidnt quitehappen, with a string of broker downgrades in 2014and three years of falling earnings per share (EPS) and profits.
At the start of 2015, analysts were optimisticallyforecasting 2015 earnings growth of 39%, but as the year progressedthings started to go wrong. The multimedia and communication technology companys half-year report, published last December, warned ofa slowdown in semiconductor and smartphone markets and ramp-down of customers legacy chips, which would hit short-term royalty revenues. Group revenues fell sharply from 82.2m to 71.1m, with the companys operating loss doubling from 10.3m to 20.8m, overshadowing managementclaims that the fundamental medium-term demand drivers remain strong.
Smart work
Despite all the misery, the company valuation remainedtoppyat around 25 to 30 times earnings, and it looked like investors were paying for a future that wasnt there. Apple was said to be considering buying Imagination Technologies, thenchanged its mind. Falling royalty payments and delayed licensing deals culminatedin job cuts, restructuring and plans to offloadits lossmaking Pure digital radio business. Yet suddenly this year, sentiment changed. Why?
The shares have reviveddespite a string of disappointing reports and further losses.Julys final results were disappointing, with a 23% drop in revenue from continuing operations to 120.8m, although cash generation rose to 16.7m and net debt fell slightly to 33m.The summertimesale ofARM Holdingsto Japanese telecoms groupSoftbankfor 24.3bn gave Imaginationa major lift, stirring speculation that it could be next, as its PowerVR graphics business, a key strategic technology used by Apple, could tempt buyers.
Tech trouble
Nothing has comeof the takeover speculation so far but at least Pure has been sold off cheaply for 2.6m, allowing new chief executive Andrew Heathto focus on the firmsintellectual property business, andclaim the company has now put itsdifficulties behind it. Currently, it trades at 43.3 times earnings,which looks pricey givenits recent history of problems.
There may be hope for the longterm, with earnings per share forecast to rise 35% in the year to 30 April2018, and operating margins forecast to recoverfrom minus 51.2% to 11.6%. But it would take a lot of imagination to treat this as the British technology company to replace ARM.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.