Canyon Bridge is offering 182p per share. However, after initially rising towards the offer price in early deals, shares in Imagination have settled at a price of 168p at time of writing, 14p below Canyon’s offer price.  Does this present an opportunity for investors? 

Looking for a partner 

Imagination has been looking for a strategic partner or buyer since the company found out that its primary customer, Apple was planning to drop it. When this news became public, the chipmaker lost around two-thirds of its value in a single day as investors rushed for the exits. 

Since the Apple loss, management has been trying to find a buyer for the company and its intellectual property. It looks as if they’ve found one in Canyon Bridge, which is offering around half a billion pounds to take the business private. 

As well as the China-based buyout, Imagination has also agreed to sell its worldwide MIPS CPU business and patents, to Tallwood MIPS Inc, a company indirectly owned by Tallwood VC of Palo Alto for a total consideration of $65m in cash. Some $40m of the proceeds are payable in cash at completion and $25m in cash six months after completion.

According to today’s news release on the transaction, management has decided to hive off the MIPS business to “ensure MIPS remains an independent licensing business” and the unit’s continued growth will “provide increased customer choice and new job opportunities.“

So, it looks as if Imagination is going to split up and go private. However, there is a chance that the group could become the subject of a takeover battle. The firm said in its acquisition note today that “one party has not confirmed whether its interest in the Imagination Group has terminated and accordingly it remains a potential offeror for Imagination for the purposes of the Takeover Code.” With this being the case, another higher offer could still emerge. 

Time to buy? 

Should investors buy into Imagination in the hopes of making a quick profit? Well, as the shares are trading below the offer price, it looks as if the market does not believe that the deal is going to go ahead.

There are multiple reasons why the deal could fall apart including competition and regulatory concerns. And if the merger is called off, investors who tried to make a quick buck will be left high and dry. City analysts are projecting a 52% decline in earnings per share for the company for fiscal 2018, the year the Apple contract finally runs out, and going forward it’s difficult to predict if the business is a worthwhile investment. 

Overall, shares in Imagination do look cheap compared to the offer for the company, and they could be an interesting trade — if you know what you’re doing. For long-term investors, it might be better to take the money and run as the firm’s outlook is uncertain. 

The post Is Imagination Technologies Group plc worth buying after Canyon Bridge’s offer? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The good news sparked a 7% rally when markets opened this morning, but in reality any turnaround may be too little, too late. The big problem facing Imagination is Apple’s decision to stop using the firm’s graphics chips in new devices over the next two years.

The US tech giant accounts for about half of the firm’s revenue. Losing Apple is likely to be a blow from which the UK business can’t easily recover. That’s why the board recently put the entire company up for sale.

Today’s results didn’t contain any new information about the sale process. But for shareholders and potential investors, I think the only way to view the stock is as a potential special situation. Is the company’s current £437m valuation a fair reflection of its value? Or is there an opportunity for significant upside, if and when it’s broken into pieces and sold?

What’s under the bonnet?

When hunting for value, the balance sheet is usually a good starting point. Today’s accounts show a net asset value of £119.4m, based on assets of £235.9m and liabilities of £116.6m. Given the firm’s market cap of £437m, Imagination doesn’t look cheap based on the book value of its assets.

The other way of valuing a company is on its sales, earnings and cash flow. With a turnaround apparently underway, Imagination might look cheap enough to consider buying on a 2018 forecast P/E of 17.

However, Apple supplied £65m (45%) of the firm’s revenue last year. Given that this revenue was previously described as having “minimal” direct costs, I believe it probably accounts for a large part of the group’s profits.

The potential loss of this revenue from 2018/19 onwards means that Imagination is impossible to value accurately, in my view. I can’t see any reason to believe that the shares offer hidden value at current levels.

Investors could strike gold

Tanzania-focused gold producer Acacia Mining (LSE: ACA) has been losing around $1m of revenue per day since March. This painful loss is the result of an export ban placed on the firm by the Tanzanian authorities.

Acacia has been accused of under-declaring previous exports and thus avoiding royalty payments. The firm denies the allegations and is hoping to enter into discussions about these issues with the government, but as yet discussions haven’t started.

The stock has now fallen by 25% this year and trades at a forecast P/E of 8.5, at a 20% discount to its book value of around 350p per share. Net cash stood at $165m at the end of May, although this is falling fast due to the deferral of export sales.

If Acacia can resolve its dispute with the Tanzanian government, then I’d expect the shares to rebound sharply. But this could come at a cost to the firm that’s hard to predict.

Because of this, I’d argue that while Acacia does offer potential value, it’s too speculative to be a sensible buy.

The post Imagination Technologies Group plc could offer hidden value appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Having your products in what is likely to become the most coveted gadget going can’t be bad for business. If rumours prove true, the impact on IQE’s fortunes would surely contrast with those of Imagination Technologies, recently put up for sale after being told by Apple that it would stop using the former’s technology. Earnings estimates would be speedily revised, increasing the likelihood of IQE’s share price rocketing.

Of course, buying shares in a company just based on rumour can be a risky strategy. Since there are no guarantees when it comes to investing, there’s always a chance that no deal will be forthcoming. As such, it surely makes sense to scrutinise the investment case of IQE as it stands today, without the inclusion of a transformative deal with Apple. Let’s do that.

Strong results

Back in March, the company released a record-breaking set of full-year figures to the market. Over 2016, revenue climbed 16% to £133m, with all key markets — photonics, wireless and InfraRed — showing evidence of organic growth. A beneficiary of favourable exchange rates following last year’s shock referendum vote, adjusted operating profit at IQE climbed by 17% to £22.1m.

In addition to these encouraging numbers, the company remarked on how more investment was being seen in the sector due to compound semiconductors being regarded as critical technology for exploiting growth areas (such as big data, autonomous vehicles and the Internet of Things).

Under the bonnet, IQE’s balance sheet still looks decent enough with fairly manageable levels of debt. Operating margins, returns on investment and cashflow have all improved over the past couple of years. But as to be expected with small companies with high-growth strategies, IQE doesn’t pay a dividend. 

A price worth paying?

Since those numbers came in just over three months ago, shares in IQE have stormed ahead 71%. They now change hands on a fairly frothy valuation of 27 times earnings based on an expected 24% rise in EPS this year, reducing to 25 in 2018. Naturally, this is all subject to change if a deal with Apple is announced.  Expect the forecast price-to-earnings (P/E) ratio to drop significantly if this occurs. 

So, would I buy the shares right now? Without a deal in the bag, the valuation is a little too rich for me at the current time, particularly as investors are beginning to question whether this bull market can continue in the face of political and economic uncertainty. Should markets wobble as a result of concerns that are unlikely to impact on the company’s prospects however, I would certainly be tempted.

And if this dip just happens to occur before a deal is announced, the queue for IQE’s shares might be even greater than those outside its new client’s stores when the phone goes on sale.

The post A deal between Apple Inc. and this promising small-cap stock could help you retire early appeared first on The Twelfth Magpie.

More reading

• 7 easy Warren Buffett tips to retire richer
• Here’s how saving £3 a day could lead to an £11,925 yearly passive income

Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Apple

The decision to put the company up for sale comes just over two months after Apple announced that it was developing its own graphics chips and would no longer use Imagination’s intellectual property in its products in around two years’ time. And as Apple accounts for nearly half of Imagination’s annual revenues, the British firm risks losing future royalty payments under the current license and royalty agreement.

However, Imagination said it believes Apple will struggle to avoid infringing its intellectual property rights, as the US giant has used its technology and intellectual property for many years and because its tech has formed the basis of the Graphics Processor Units (GPUs) in Apple’s phones, tablets, iPods, TVs and watches.

Significant premium

Any potential suitor for Imagination should be able to get the company at a favourable price, at least compared with a year ago, as its shares have lost nearly half of their value since April. This could mean that a white knight bidder may be willing to pay a significant premium to today’s share price, but that’s far from being certain in any way.

Meanwhile, Imagination has been trying to return to profitability by cutting costs and expanding its presence in the rapidly emerging automotive and augmented/virtual reality markets. These new markets could become strong potential growth areas and may, in the long term, generate enough revenues to offset the loss of its licensing deal with Apple.

As for now, some profit-taking is to be expected after today’s strong gains. With this in mind, I’d avoid buying its shares until at least after the company’s full-year earnings release on 4 July.

Billion-dollar acquisition

Elsewhere, Diageo (LSE: DGE) has agreed to pay up to $1bn to buy Casamigos, a fast-growing premium tequila brand co-founded by George Clooney and two other business partners in 2013.

The acquisition is set to help the world’s largest spirits maker expand into a fast-growing market, in which it currently only has a limited presence. Tequila has been the strongest performing category in the US in recent years, with sales up 7.4% last year, compared to just a 2.6% increase for the overall distilled spirits sector.

Casamigos has delivered impressive growth in recent years, with a compound annual growth rate of 54% in the last two years. The company shipped 120,000 cases of tequila in 2016 — and looking ahead, Diageo reckons it is on track to reach over 170,000 cases by the end of 2017. 

Bottom Line

It’s good to see Diageo step up efforts to expand into faster growing markets after years of sluggish organic volume growth. But since its shares have already gained 27% over the past 52 weeks, mostly due to sterling’s weakness, I reckon valuation look a little expensive. That’s because shares in the spirits maker trade at a forward P/E of 21.1, compared to its five-year historical average of 19.6.

The post Should you buy Imagination Technologies Group plc as it goes up for sale? appeared first on The Twelfth Magpie.

More reading

• Newsflash: the Diageo share price just climbed!
• Which British dividend shares could supercharge a passive income portfolio in 2026?
• Has the turnaround finally started for Diageo shares?
• How much longer can the Diageo share price stay this low?
• Is it finally game on for the Diageo share price?

Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Apple’s denial perhaps should have given us come clue as to what was to come, as the Californian giant precipitated the Imagination share price crash by announcing it is to stop using the company’s graphics processing units (GPUs) and will instead develop its own alternatives. Last year, royalties from Apple totalled around £60m and accounted for half of Imagination’s revenues.

That will still continue for a short while as Imagination chips are used across Apple’s range of iPhones, iPads, TVs and watches, but over the next 15 months to two years it will dwindle to nothing — and without Apple’s cash, Imagination looks likely to turn quickly back into a lossmaking operation unless it can find alternative sources of revenue.

What are the options?

In its announcement, Imagination Technologies said it “believes that it would be extremely challenging to design a brand new GPU architecture from basics without infringing [Imagination’s] intellectual property rights“. And some observers think Imagination has good grounds for a legal battle.

The problem with that is legal action would be slow and expensive, and it’s Apple that has all the time and the money on its side — Imagination was shouldering £40.8m in net debt at its interim stage last October, and is in no position to finance a lengthy and expensive legal case.

No, a small tech company in a legal battle that would probably make the difference between life and death, well, that’s not an attractive investment scenario for me.

There are some, including the Financial Times, who seem think there could be life in the firm’s relationship with Apple based on its multitude of patents surrounding graphics processing, and that some sort of court-avoiding deal could be struck for the continuing use of some intellectual property.

Who else is there?

Failing that, the only alternative seems to be for Imagination to pin its hopes on expanding the rest of its user base. But the problem is, as explained in the company’s first-half results released in December, it is just emerging from a restructuring phase, and the desired shape of the company has surely been dictated by its reliance on Apple as its key partner.

There are certainly possibilities for major new sales channels, as Imagination said of its Mediatek Helio X30 technology that it “expects some of these devices to intersect with Google’s Daydream VR specification and enable further mass market untethered VR headsets“.

But that all sounds very speculative to me, and I can’t help feeling there could be a knock-on effect from the latest catastrophe — if Apple doesn’t want Imagination’s clever tech stuff, maybe others won’t be so keen to commit to it either?

Too risky

The company is suffering from situations that are not of its own making, after a lot of hard work to get to this stage, and today I feel very sad over what’s happened.

But when it comes down to cold, hard investing, I’m afraid Imagination Technology shares are firmly in bargepole territory for me right now.

The post Is Imagination Technologies Group plc a bargain buy after 60% fall? appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A dark day

The reaction? Imagination’s shares opened the day at exactly 100p, some 168.25p lower than Friday’s close of 268.25p. During the course of what will be a dark day in the company’s history the shares continued to plummet to 76p, a level not seen since 1 March 2009, some eight years earlier. That’s a whopping 72% lower than the previous closing price.

Apple is without doubt Imagination’s most important customer, contributing around half its revenues. The Hertfordshire-based group’s technology and intellectual property forms the basis of Graphics Processor Units in iPhones, iPads, and iPods, as well as Apple’s TV and watch offerings. Apple claims that it has been working on its own separate independent graphics design in order to control its products, and will be reducing its future reliance on Imagination’s technology.

Long-term survival

However, the UK chip designer is not convinced, with Apple yet to provide any evidence that it will no longer require Imagination’s technology, without violating its patents, intellectual property and confidential information. Imagination is now discussing potential alternative commercial arrangements for the current license and royalty agreement with Apple. The way I see it there are a number of possible outcomes:

First and foremost, it’s possible that Apple has indeed developed its own alternative technology without infringing Imagination’s intellectual property rights. If this was the case, then the UK business would lose around half its revenue by April 2019. Many believe that this could lead the company back into a lossmaking position, which could eventually bring its long-term survival into question.

Takeover?

Secondly, Imagination could take Apple to court, claiming infringement of intellectual property. The general consensus is that Imagination would have a pretty strong case, in which a one-off settlement would still leave the UK firm without its biggest customer in the long term.

Thirdly, Apple could take advantage of the decimated share price and launch a full-blown takeover. The US giant already owns 8% of the company and there have been many takeover rumours in the past. Some sceptics believe this has been Apple’s plan all along.

Finally, there is the possibility that current discussions will lead to a compromise, where Apple could use the threat as a bargaining chip (pun intended) to reduce royalty rates. This would still leave Imagination with lower revenues than previously forecast.

Things could get messy

None of the scenarios above would return Imagination Technologies to the way things were prior to 07:00 on 3 April. Some contrarian investors may be tempted by the heavily discounted share price, but I think that without Apple’s long-term support, the company may well find itself in a lossmaking position once again whichever scenario plays out. Add high levels of debt to the mix, and Imagination Technologies could even cease to exist.

The post Why I’m avoiding Imagination Technologies Group plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Over the years, the company’s chip designs have been used in the $735bn cap tech giant’s most popular products such as iPhones, iPads and iPods. Thanks to Apple developing its own graphics technology, within 24 months this will no longer be the case. With that goes 50% of Imagination’s annual total revenue and — given the Kings Langley-based company’s preference for being tight-lipped when it comes to numbers — potentially more in terms of its profits.

Whether management is justified in its belief that one of the world’s most valuable companies will struggle without Imagination’s involvement is debatable at the current time. With its huge research budget and unquestionably talented workforce, I wouldn’t be so sure. What’s more certain is that any protracted legal challenge is unlikely to be positive for the latter’s shareholders, some of whom may already be nursing significant paper losses of around 65% if not more (five years ago, Imagination’s shares traded just below the £7 mark).

While it’s never a great idea to sell in haste (and crystallising a loss is always difficult), I struggle to see how Imagination Technologies can be a rewarding investment over the short-to-medium term. To paraphrase the great British economist, John Maynard Keynes, the facts surrounding Imagination have changed and many once loyal holders have already changed their minds. Sometimes, the herd is right. 

“Significantly ahead”

While long-sighted contrarians may be willing to give Imagination Technologies and its management the benefit of the doubt, I’m far more optimistic on the prospects of robotic process automation company, Blue Prism (LSE: PRSM), particularly after today’s very encouraging trading update for the current financial year.

In the five months to the end of March, Blue Prism secured 151 new software deals. Of this number, 87 were new customers obtained via its channel partners — as clear a signal as you’re ever going to get that this company is growing exponentially. Sixty of the remaining deals were up-sells across 40 customers already on Blue Prism’s books.

Perhaps most significantly for existing holders, the £300m cap’s board now expects full-year revenue to come in “significantly ahead of market expectations” as a result of the progress made so far and its product pipeline. This bullish call also explains why the company will be continuing to invest in its sales and marketing activities for the foreseeable future with the clear intention of turning Blue Prism into a global player.

Commenting on the update, CEO Alastair Bathgate signposted his intention to provide “greater insight” into the company’s progress when interim results are announced on 27th June. While ongoing and enhanced investment means that Blue Prism is unlikely to turn a profit for a while, the rate at which customers are being drawn to using its software suggests that this may come sooner than originally thought.   

Perhaps understandably, shares in Blue Prism soared over 15% in trading this morning. While increased competition in this potentially hugely-lucrative industry is to be expected over the next few years, I remain confident that this is one company risk-tolerant investors won’t be able to ignore for much longer.

The post Forget Imagination Technologies Group plc, this company has a far brighter future appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares in Blue Prism. The Motley Fool UK owns shares of Imagination Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Ups and downs

Those invested in tech firm Imagination Technologies have suffered a calamitous plunge of 62% or so since the end of March. The firm’s largest customer, Apple declared its intention to abandon Imagination’s intellectual property offering around 15 months or two years from now, so that will pull the rug from under around half the firm’s current revenues.

Meanwhile, oil exploration company Hurricane Energy has delighted its shareholders with a more-than-450% uplift in its shares since April 2016 on the back of a successful oil exploration programme in the North Sea. The firm now thinks it could be sitting on “the largest undeveloped discovery on the UK Continental Shelf.”

What now?

Whether you hold these firms’ shares already, or if you are considering a new purchase, at every point in a stock’s journey there is a decision to be made. At frequent periods, I reckon we should ask ourselves whether to ‘buy’, ‘sell’ or ‘hold’.

However, one school of thought has it that if you don’t rate a stock as a ‘buy’, it is by default a ‘sell’, and that’s an opinion I’m increasingly drawn to in my own investing. Unpleasant things can happen to those that hold for too long, perhaps the most common of which is the dreaded share price reversal, which can cause once perky portfolio profits to evaporate.

Warren Buffett, Peter Lynch and other well-known successful investors built their fortunes by nailing down profits when they had them, not by holding on and on and on, despite what we often hear in the media. So if I was sitting on big profits with Hurricane Energy now I would probably take at least some of them by selling some of my shares.

When it comes to a decision to buy these firms now, the choice offers opposing characteristics. Is the most interesting company the one that has run into operational problems and needs to turn around its fortunes, perhaps with a new strategy? Or is the tempting candidate the firm demonstrating operational success and a bright outlook?

To be, or not to be contrarian

It’s well known that many investors seem to gravitate to shares making new lows. When a company such as Imagination Technologies runs into operational trouble, the valuation can shrink and the shares can look like a bargain. However, Imagination has been relying on Apple for a long time and has been slow to build a more diverse revenue base. Now it looks like the firm may become embroiled in a legal dispute with its hitherto main customer. The situation looks messy and I think there may be risks ahead for shareholders.

The clear choice for me is to focus further research on the company that is performing well and on the share price that is breaking new highs to reflect that good operational performance, so Hurricane Energy tempts me the most. However, if I did decide to plunge in now and buy some of the firm’s shares I’d remain vigilant and be prepared to sell at the first sign of things not turning out as expected.

The post Why I’d buy fast-growing Hurricane Energy plc over turnaround candidate Imagination Technologies Group plc appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Reliance on one company

While the loss of any customer is a significant problem for any business, the loss of Apple as a customer will hit Imagination extremely hard. It contributed over £60m in revenue in the most recent financial year. This works out as roughly half of the company’s total revenue. While the loss of half of total sales is clearly bad news, the deal with Apple was associated with minimal direct costs to Imagination. In other words, the vast majority of revenue from Apple was profit.

This reliance on one company for half of sales and the majority of profit is not uncommon in business. However, it is somewhat unusual for a major listed company to be so reliant on one entity for the bulk of its sales and profitability. Clearly, it is always easy to criticise in hindsight, but it now seems obvious that Imagination needed to have a more diversified business model. It was running a major risk of losing a key customer, which has now taken place.

Investor takeaway

Of course, diversification is not only crucial for companies, it is also of great importance for investors. While a portfolio of just a handful of stocks could record stunning capital gains and lead to high potential rewards, risks are also high. Even the most stable of companies with the best track records can endure challenging periods which lead to profit warnings. Therefore, the lesson from Imagination’s share price decline is to spread the risk among a number of different stocks.

Furthermore, buying shares in a variety of industries and geographies can also be worthwhile. This can help to reduce the overall risk of a portfolio. In addition, buying a range of different types of companies, such as growth, income and value stocks can protect against changes in investor sentiment over a period of time.

Looking ahead

While Imagination Technologies may be able to launch a legal defence of its patents or else agree a revised payment structure with Apple, the fact is that the company appears to be overly exposed to one business. As such, it does not seem to be an attractive buy given the opportunities which are available elsewhere at the present time.

Certainly, the company’s shares could mount a comeback, or they could fall further if a profit turns into a loss over the medium term. For Foolish investors, it proves why diversification is a required, rather than a desired, part of successful investing for the long term.

The post Imagination Technologies plc’s woes highlight the importance of diversification appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Imagination and Apple’s relationship goes back years, and the former has become dependent on the latter for more than half of its total revenues. This year, it’s expected Apple will pay nearly £65m in royalties to Imagination. In 15 to 24 months time, this figure will fall to zero.

However, even though it now appears Imagination will struggle to survive after the break-up, this is not a simple case.

Indeed, some City analysts believe Imagination has a strong case to take Apple to court as, while the tech giant may have a multi-billion dollar research and development budget, building graphics processing units from scratch (similar to those provided by Imagination) will be challenging unless the company has acquired intellectual property rights or mastered reverse engineering.

With this being the case, according to the Financial Times, the Apple/Imagination relationship may still have some life in it yet. Imagination holds a significant number of patents around low-power graphics processors and may have the bargaining power to discuss new commercial terms with Apple for the use of this intellectual property without a costly legal battle. 

Legal battle 

Despite its size, if it comes to a full intellectual property lawsuit, Apple seems to be on the back foot. iPhones have been built using Imagination’s chips for a decade now, and as the company has so far failed to provide evidence showing how the technology it plans to use going forward differs from that provided by Imagination, its intentions certainly look suspicious.

Still, even though Imagination may have the upper hand if it comes to a legal battle, there’s no denying that the company’s outlook has now changed significantly for good. A legal battle is likely to cost a lot of money and time, two commodities it lacks. When the Apple revenues completely vanish, the firm will return to a lossmaking position, and the company’s debt is already growing. It rose from £35m to £45m in 2016. 

If Imagination’s management has no appetite for a costly, lengthy legal battle the company’s future looks bleak. But if management can negotiate an out-of-court settlement to continue the relationship on a smaller scale, the group may be able to buy itself some time to cut costs and move into other markets.

The bottom line 

Overall after yesterday’s news, Imagination’s outlook has changed drastically, there’s just no other way of putting it. If the group takes Apple to court over intellectual property rights, it may be awarded a substantial reimbursement, but such an outcome is almost impossible to predict and would not happen fast.

Unfortunately, without more information on how management intends to tackle Apple and rebase the Imagination business to profit without its large US partner, it is not possible to place a value on the shares.

The post The future may not be so bleak for Imagination Technologies Group plc after all appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool UK owns shares of Imagination Technologies and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.