Concerns about reduced demand from Apple for IQE's microchip wafers has hit the shares
but broker Canaccord is confident in the company and sees the share price weakness as "an attractive entry point" for investors.
Last week IQE confirmed guidance of a 40:60 revenue split for the full year, with "strong" wireless activity in the first half and qualification programmes for "over 10 additional key VCSEL chip manufacturers" had begun, with strong progress mentioned across multiple areas.
"Given that IQE would presumably by June have good visibility of VCSEL wafer demand in H2, we took this update to be extremely positive," said analysts in a note to clients. "However, news of reduced demand from Apple has since wiped out all gains."
"Our view is that if the Apple news was negative for IQE, it would not have re-iterated guidance in the face of a circa 9% H1 currency headwind. Furthermore, the potential for the customer ecosystem to expand not only bodes well for FY19 growth rates, but also for reduced dependence on a single OEM."
"The combined probability of Android adoption of 3D sensing wafers and the multiple further opportunities mentioned above, suggest that IQE is not the one-trick pony that many seem to assume."
This positive view is supported, analysts said as they reiterated their 'buy' rating and 190p price target, by news this week from Taiwanese wafer specialist WIN, which believes VCSEL demand from Apple could triple and its own revenue from 3D sensing will double this year.
"These drivers are consistent with our own assumptions for IQE's second half. We note that chip manufacturers will be ramping in July for Apple's major new device launches in the Autumn such that IQE will already be well aware of H2 demand levels for its wafers. We conclude that forecast risk is firmly on the upside with execution now the only significant downside risk remaining."
Moreover, commissioning of IQE's new Newport Foundry is progressing to plan with the first five reactors on track for qualification later this year and the second five due for delivery in the third quarter, which should see them become productive early in 2019.
"With 10 new reactors up and running for most of 2019, this will bring IQE the step change in capacity needed to service additional smartphone OEMs. While it is too early to build this anticipated demand into our FY19 forecasts, it does suggest that our current numbers represent the bottom end of the range of likely outcomes."