British tech darlings are an endangered species. More often than not they get bought out once they achieve any size of note — à la ARM Holdings.
In recent years IQE, the Cardiff semiconductor firm, has started to look like Britain’s next big tech thing.
Founded in 1988 and floated in 2000, it meandered along at a middling pace. Until last year, that is, when speculation about its silicon wafers finding their way into the next-generation iPhone sent the shares soaring.
Companies are generally discouraged from confirming they supply Apple, but IQE did little to quell the rumour. Between January and November the shares almost quintupled and IQE’s valuation climbed to almost £1.4bn. All this for a company that made adjusted profits of £22.1m on £132.7m revenues in 2016. “Our thesis is that lurking in the Cardiff suburbs is UK tech’s next large-cap tech company,” wrote an analyst at brokerage Stifel.
That meteoric rise caught the eye of short-sellers, whose interest has leapt in the past six months on fears that sales of Apple’s iPhone X will disappoint — and deflate IQE’s bubble. By the end of last week, 21% of the shares were out on loan, a proxy for short interest, according to Markit data.
IQE has raised eyebrows before, through a strange deal in 2014 when its chief executive, Drew Nelson, used a share pledging facility to borrow £1.9m in cash. He bought back the shares for a huge gain last September.
On Friday a little-known short-selling outfit run by former research analyst Matt Earl went for the jugular. ShadowFall Capital and Research published a note claiming IQE appears reliant on two joint ventures — one in Cardiff, another in Singapore — for a substantial chunk of its profits: 42% in 2015 and 30% in 2016. Yet ShadowFall said IQE’s relationship with these joint ventures is a “somewhat circular state of affairs” — their only customer appears to be IQE itself.
ShadowFall pointed out that losses have been piling up at the joint ventures. This might create a convenient situation “where IQE books the profits and the joint ventures retain the losses”, it wrote. Without the cash from these offshoots, IQE would have reported negative cashflow in 2016. The attack added to a recent sell-off in IQE shares, which fell 3.3% to 104.4p, valuing it at £788m.
Earl has pedigree. He called out social housing company Connaught before its collapse, and persistently criticised Mitie before its 2016 and 2017 profit warnings. His warning on IQE is worth heeding. It is one tech darling I’d give a wide berth. Avoid.
