Shares in IQE (LSE: IQE) have had a rough time of late. Last year, the stock lost around two-thirds of its value as earnings and revenue growth failed to live up to expectations and investors jumped ship.
However, since the beginning of 2019, the shares have staged a modest recovery, rising around 2% year-to-date. They were, at one point, up more than 23% for the year.
These gains seem to suggest that investors are returning to the stock, but Im not convinced. I think IQEs future is more uncertain than ever.
Uncertain outlook
Over the past few months, some of the worlds largest computer chip manufacturers, including Nivida, Micron, CML Microsystem and AMS, have all informed investors they now expect growth for 2019 to come in below expectations. Nividia, in particular, issued a vast revenue warning at the end of January, lowering itsfiscal fourth-quarter outlook to $2.2bn, from $2.7bn.
These developments tell me that the whole semiconductor market is suffering from oversupply and falling demand. Its logical to assume IQE is having the same problems and, with this being the case, I dont think investors can trust the Citys numbers when it comes to its future growth.
Those analysts had been expecting the firm to report earnings per share of 3.9p for fiscal 2019, up 71% from 2018s estimate of 2.3p. Considering whats happening in the rest of the semiconductor industry, I reckon IQE will struggle to meet these numbers. And if the enterprise does miss expectations for growth, the share price could crash as its currently dealing at a forward P/E of 29.2, a multiple that gives the company no earnings leeway whatsoever.
Undervalued
At the other end of the valuation spectrum, theresAmigo Holdings (LSE: AMGO). Amigo provides short term loans to borrowers who are unable to borrow from traditionallenders due to poor credit histories. This so-called payday lending industryhas attracted a lot of flack recently because of the high interest rates and excessive charges it forces on customers. For this reason, many investors decide to stay away from the sector altogether.
Ethical considerations aside, companies like Amigo do provide an essential service. Hundreds of thousands of people in the UK are cut off from traditional banks because of poor credit backgrounds, and Amigo can offer them a lifeline.
From an investor perspective, the business is attractive because it requires almost no capital to set up and generates a relatively attractive profit margin of 35%. The groups return on capital employed a measure of profit for every 1 invested in the business was 10.2% for 2017, putting the business in the top third of the most efficient companies in the UK.
City analysts expect Amigos earnings to more than double over the next two years, rising to 24.8p for fiscal 2020, from 11p as reported for 2017. The group is expected to distribute5p per share as a dividend for 2019, giving a yield of 2.1%. Current forecasts have the yield doubling in 2020 to 4%.
Whats more, the stock is also trading at an undemanding forward P/E of just 11.3, which only adds to its appeal. These metrics put Amigo, in my opinion, head and shoulders above IQE as an investment.
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