AIM listed IQE PLC is the leading global supplier of advanced wafer products and wafer services to the semiconductor industry. IQE has been at the forefront of the compound semiconductor industry for more than twenty-five years and now has a global footprint spanning Europe, USA and Asia. The wafer products IQE manufactures are used by major global chip companies to produce the chips which enable a wide range of high-tech applications. The unique properties of these materials enable a diverse range of markets including wireless communications, advanced solar power (CPV), high resolution infrared systems, high efficiency LED lighting, efficient power switching and a range of consumer and industrial applications using advanced photonic lasers and detectors.

IQE’s shares performed strongly through 2016 and 2017, rising 11 fold from a low of 16.5p in July 2017 to reach a whooping 181.5p in December 2017. The trigger for this impressive rise was sales of IQE’s wafers that are used in Vertical Cavity Surface Emitting Lasers (VCSELs) had started to take off. Whilst not officially confirmed it’s widely believed that this sales increase was because IQE’s VCSEL wafers were incorporated into 3D sensors used in Apple’s iPhone X. Since peaking at 181.5p in December 2017 the shares have performed poorly and currently trade at 95p. One of the reasons for the poor performance is that sales of VCSEL wafers since December haven’t ramped up as fast as initial market expectations, this is most likely due to disappointing demand for the iPhone X. Now whilst the subdued iPhone X sales and IQE’s resulting share performance is certainly disappointing for shareholders the future looks bright for IQE. Apple is set to announce three new iPhone models on the 12th of September, whilst not yet confirmed these models are expected to be called the iPhone 9, the iPhone XI and the iPhone X Plus. Importantly for IQE shareholders all three models are expected to include Face ID so will require 3D sensing using VCSEL wafers such as IQE’s. And with the price point for the iPhone 9 set to be significantly lower than the iPhone X demand is expected to be off the charts.

IQE currently supplies about 80 percent of the VCSEL wafer market and to quote IQE Chief Executive Officer Andrew Nelson they supply “pretty much all of the main players in the end markets.”, with this in mind it seems fair to assume that IQE will supply most if not all of the VCSEL wafers in this years iPhone models. But it’s not just about the iPhone thanks to recent work on VCSEL product qualifications IQE is now in mass production with eight VCSEL chip manufacturers and in final qualification stages with another four. The wafers supplied to these manufacturers are for various uses including facial recognition for mobile phones, short-distance data communications, camera autofocus, proximity sensing and industrial heating. These varying applications show just how widespread the demand for VCSEL wafers is set to become.

Some of the manufacturers IQE supplies are believed to be Android OEMs with initial production for these manufacturers starting to ramp up. To supply this upcoming demand IQE has been busy constructing and fitting out a new foundry in Newport, the new facility is expected to operate 24/7 and is on schedule to commence production by the end of 2018. The additional capacity provided by this new foundry is critical for IQE to meet the required demand and maintain its dominant position in the VCSEL market as it grows.

VCSEL wafers are categorised into IQE’s Photonics component in their earnings reports. Photonics currently only accounts for 26% of IQE’s overall revenue but it’s expected to grow substantially over the next few years, with annual growth expected to clock in somewhere between 40 – 60%. The remainder of IQE’s revenue comes from their Wireless and Infrared components which are forecast to grow at an annual rate somewhere between 0 – 5% and 5 – 15% respectively. Analysts are currently forecasting earnings per share of 4.55p for 2019 putting the shares on a forward p/e ratio of 21. This seems quite a reasonable valuation considering the potential for the Photonics business and the growth which is forecast. If Apple does announce that Face ID is included in all three new iPhone models on the 12th of September then excitement around IQE could start to build and this will likely be reflected in the share price, the shares are certainly worth considering ahead of the announcement. One thing to bear in mind though is the shares aren’t without risk, there is no guarantee that the new iPhones will include Face ID or that it’s IQE’s wafers that will be used. The long term potential of VCSEL wafers is clear and with IQE being the market leader in this category the future certainly looks bright with or without Apple.

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