IQE/ShadowFall: mystery shoppers

Shareholders in technology companies have endured a succession of accounting scandals. So when a short seller makes allegations about the book keeping of IQE, a Cardiff chipmaker, you would expect any seasoned investor to pay attention.

IQE is already one of the most shorted stocks in the UK. Its share price has fallen about 40 per cent since November. Yet it responded dismissively to the claims of a little-known outfit with a name worthy of a James Bond movie title: ShadowFall. This is run by a bear raider known as “The Dark Destroyer”, previously the nom de guerre of boxer Nigel Benn.

Appropriately, ShadowFall pulls no punches in a 35-page dossier on IQE. Here, it revives memories of Globo, the Greek technology group founded by a windsurfing champion that went into administration in 2015 amid allegations of falsified data.

ShadowFall said IQE appeared to rely on two joint ventures — one in Cardiff, another in Singapore — for a chunk of earnings. It argued IQE’s relationship with these joint ventures was “somewhat circular” as their only customer appeared to be IQE itself. Significantly, it argued, IQE had run up significant profits while the joint venture retained growing losses.

IQE has a history of covering cash shortfalls by raising fresh capital. But the criticisms still look overdone. The details of the joint ventures — set up to further links between IQE, academia and others — are disclosed in audited documents. The joint ventures now have external customers, albeit unnamed. IQE’s license income from joint ventures is expected to be less than £2m in 2017. The company said the ShadowFall report amounted to a “fundamental misrepresentation” of its profit and cash generation

Nor does IQE resemble Autonomy or Quindell, UK technology companies that had accounting controversies of their own. Unlike software, where revenue recognition has been a thorny problem, the accounting treatment of chip sales is straightforward.

A bigger question is whether IQE deserves the hype that pushed its share price up fourfold between January and November. Much of the excitement was generated by speculation IQE was selling chips needed by Apple for its new iPhone. The company says non-disclosure agreements mean it cannot confirm the story.

Investors are weighing the accuracy of a report from a mysterious short seller that nobody has heard of. What matters more is the accuracy of reports identifying a mysterious customer as one of the world’s most famous companies.