CS Shares Enjoy A Tremendous Twelve Months
Topping this year's shareprice leaderboard are the suppliers of epiwafers, substrates and MOCVD tools
BY RICHARD STEVENSON
If you own a portfolio of shares in compound semiconductor companies, you'll be pleased by performance over the last 12 months. While it's not been as stellar as it was seven years ago, when shares in every firm listed on the Compound Semiconductor Shareprice Leaderboard delivered double-digit growth, the majority of companies have outperformed the technology-rich NASDAQ "“ and even that has shot up by nearly 27 percent in the last year.
Example of success include the two industry heavyweights Qorvo and Skyworks, which have delivered gains in share price of 51 percent and 49 percent, respectively, during the twelve months up to the end of this April. Last year, those performances would have been good enough to secure the second and third spots on the table, but this year it's placed them eighth and ninth.
Topping the table this year is epiwafer supplier IQE, which has seen its share price rocket by more than 200 percent; next on the list is substrate maker AXT, with an appreciation of just over 160 percent; and third is MOCVD manufacturer Veeco, which has seen its share price climb by nearly 80 percent.
According to IHS, the average TV panel size exceeded 40 inches for the first time ever in 2016. This is good news for LED makers, and also MOCVD equipment makers, such as Veeco.
Possible drivers behind the growth in IQE's valuation can be found in the company's results for the year ending 31 December 2016. These figures, which were reported on 21 March, reveal a 16.4 percent hike in year-over-year annual revenue from Â£114.0 million to $132.7 million. The increase in sales is attributed to success in multiple markets, plus an 11 percent post-Brexit strengthening of the US dollar against sterling. Adjusted operating profit also climbed, increasing by nearly 17 percent to Â£22.1 million.
Commenting on the 2016 annual results, IQE CEO Drew Nelson picked out the photonics division as the "star of the show", thanks to its year-on-year growth in sales of more than 43 percent. "This is being driven by VCSEL and InP technologies, which enable a broad range of applications, from fibre optic communication to advanced sensors and industrial processes." Margins from this sector are high, with an operating profit of Â£6.9 million on sales of just $22.8 million.
Sales of IQE's photonic products are expected to increase, with the depth and breadth of photonics development programmes and customer qualifications providing a solid platform for strong growth. The company is now shipping 6-inch VCSEL epiwafers, which are claimed to slash the unit cost of chips, and thereby accelerate the adoption of this technology. Devices can be used in 3D sensing, data communications, data centres, gesture recognition, health and cosmetics.
The lion's share of IQE's sales comes from the wireless sector. Here it claims to have 55 percent of the global market. The company "performed well" in this sector, according to Nelson, with sales up 15 percent. However, margins are far tighter than they are in photonics, with annual sales of Â£91.2 million producing an adjusted operating profit of Â£7.9 million.
Infra-red and CMOS++ are the two other divisions of IQE's business. The former, which produces InSb and GaSb wafers, generated an annual revenue of Â£10.6 million and an adjusted operating profit of Â£2.2 million; and CMOS++, which involves the growth of III-Vs on silicon substrates, brought in yearly sales of Â£1.4 million, and made an adjusted operating loss of Â£1.6 million.
IQE's share price has rocketed since autumn 2016.
The hike in IQE's share price may have been spurred on by its increase in capital investment. This shot up between 2015 and 2016 from Â£10 million to Â£19.1 million. Investment in equipment increased by Â£7.1 million to address growth opportunities, principally in photonics, GaN and its rare-earth oxide technology.
Another possible factor behind the surge in IQE's valuation is the tremendous level of activity associated with establishing a compound semiconductor cluster in Cardiff, where IQE has its headquarters. One of the company's visions is to be at the epicentre of the world's first compound semiconductor cluster, and recent progress towards that goal includes: a Â£75 million investment by Cardiff University to form the Institute of Compound Semiconductors; a Â£24 million joint investment by IQE and Cardiff University in the formation of the Compound Semiconductor Centre; a commitment by the UK government to Â£50 million of funding for a Compound Semiconductor Catapult in Cardiff, which will receive a further Â£100 million in funding from Innovate UK and Industry; and a Â£10 million investment by the EPSRC's to create a Compound Semiconductor Manufacturing Hub.
Glancing at the financial results from AXT leads one to wonder whether it's just the improvement in the earnings figures that has propelled the company's share price from $2.57 in late 2016 to $6.75 a year on. Sales are up, but not much, with revenue for the first fiscal quarter 2017, ending 31 March, worth $20.6 million, compared to $18.7 million for the equivalent quarter of last year. However, it can be argued that the company's bottom line is getting much better: profit hit $0.7 million in first quarter 2017, compared to $42,000 in the equivalent quarter of 2016.
One can argue that the share price is being spurred on by the ambitious plan for the company and the strength of its management. The firm has recently raised $32.3 million through a public offering of 5.3 million shares. Speaking during the first fiscal quarter earnings call, Chief Financial Officer Gary Fischer remarked: "We expect to use the proceeds for general purposes, which will of course include a relocation of the gallium arsenide product line as well as capital for the expansion of our operations to meet the requirements of exciting business opportunities across our portfolio and other things."
When unexpected difficulties arise at AXT, the company acts quickly and effectively. On 15 March, an electrical short-circuit fire broke out at the Beijing manufacturing facility, impacting the electrical power supply supporting 2-inch, 3-inch and 4-inch GaAs and germanium crystal growth. Making matters worse, the fire department accidentally damaged the critical wastewater pipe that services wafer processing.
Initially, AXT revised down its forecast for the first quarter 2017 to reflect the halt in production of certain products. However, it didn't take long for the company to address this delay.