Today’s share price collapse at Imagination Technologies saw the stock fall as far as 66% during trading - and many private investors will be feeling the pain. It was triggered by news that Imagination’s biggest client Apple is set to pull out of a long standing licensing deal with the company.

Before today, Imagination showed the worrying signs of being a Momentum Trap. In its favour, its shares were supported by positive price momentum and brokers had been upgrading their earnings forecasts in recent months. But it was still financially weak and the stock looked expensively priced. Today’s slump shows just how Momentum Traps can suffer when sudden disaster strikes. So what were the warnings signs and how can investors be aware of them?

What’s the deal?

Imagination supplies the technology behind the Graphics Processor Units used in Apple's most popular devices. Last year, Apple paid £60.7 million in fees and royalties for the privilege. That accounted for about half of Imagination’s total revenue. This year the figure will be closer to £65 million.

But the deal will now end over the next 15 to 24 months, although legal wrangles and negotiations could ensue. In a statement, Imagination questioned Apple’s ability to bring the technology in-house without infringing on its intellectual property rights. It suggested that talks were now focused on “potential alternative commercial arrangements for the current license and royalty agreement.”

But Apple isn’t just Imagination’s biggest customer, it’s also one of its biggest shareholders, with a reported stake last year of 8.48%. Indeed, just a year ago Apple confirmed that it had been in talks to buy Imagination, but those discussions apparently went nowhere. If Apple now starts selling down its stake in the company, it could put extra downward pressure on the price.

Strong momentum...

A sequence of profit warnings and poor interim figures wrapped up a dire year for Imagination in 2015. But a restructuring of the business helped the share price recover through 2016, and the stock ended the year up 88%.

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Click here to see the Imagination Technologies chart

These changing fortunes were reflected in increasingly optimistic broker forecasts. Since last September, the broker consensus EPS forecast for 2017 has risen from 5.4p to 6.3p (last month).

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Together, these two momentum indicators contributed to a rise in Imagination’s Momentum Rank from…

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