Before I take a fresh look at tech superstar IQE (LSE: IQE), Im going to consider the potential attractions of a small-cap software group thats released a year-end update today.
Solid results
Technology firm Sanderson Group (LSE: SND) produces software systems used by trade customers including retailers and food and drink companies. Examples include click & collect systems and software to manage inventories of ingredients for food and drink producers.
Systems like this are increasingly considered essential for maximising a companys profits and controlling its costs.
In todays year-end trading update, Sanderson said that revenue for the year ended 30 September is expected to be about 21.5m. Thats marginally below analysts forecasts for sales of 22.25m for the year, a factor which may explain why the groups shares have fallen 4% today.
I dont think investors need to be too concerned about this slight miss. Todays trading statement guides for adjusted operating profit of 3.9m. This gives an adjusted operating margin for last year of 18%, which is a slight improvement on last years equivalent figure of 17.3%.
Growth prospects
The group has reported several new customer wins over the last year, ending with an order book of 5.8m, up from 3.02m a year ago. Management describes the order backlog as optimal and says that net cash at the end of September was over 6m, up from 4.34m at the same point last year.
Todays figures suggest to me that analysts forecasts for earnings of 5.4p per share this year are likely to be broadly correct. On that basis, the groups stock trades on a forecast P/E of 13, with a prospective dividend yield of 3.6%.
At under 70p, I believe the shares could be worth a closer look for small-cap investors.
The next ARM Holdings?
Its a completely different picture at advanced semiconductor wafer group IQE.
Shares in this high-tech firm have triple-bagged this year, as investors have raced to buy into an exciting growth story. Following the companys recent interim results, IQE shares now trade on a 2017 forecast P/E of 44, falling to a P/E of 37 for 2018.
Theres no dividend, so whats the appeal of this high-octane investment?
Im not a technical expert, but my understanding is that IQE makes semiconductor wafers using more advanced materials than silicon. These are used by manufacturers to make the most high-performance processing chips and sensors in devices such as top-end smartphones and robotics.
The company claims to be the global leader in this field and has a number of major new products due to be launched over the next couple of years. Management believe that the market for its technology is approaching an inflection point, with massive growth potential.
My verdict
In my view, this is a pure growth buy. Based on recent trading, the stock looks expensive. But if IQE does reach the hoped-for inflection point and its sales multiply, the stock could be good value. It could even become the next ARM Holdings, a true tech superstar.
I dont know enough about IQE to judge how likely this is, but I can say that the company appears to have a solid financial platform for growth, and strong investor backing.
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