Could a Cardiff, Wales-based wafer company be the next big thing for U.K. technology investors? Investors trying to sniff out hidden Apple Inc. suppliers are betting on it, sending the shares of IQE Plc up more than 300 percent this year.

The company is the second-best performer in the FTSE AIM 100 Index year-to-date and has also beaten every stock in the Philadelphia Semiconductor Index, including high-fliers Nvidia Corp. and Micron Technology Inc. And even with the cautionary tale of companies who flew too close to Apple’s sun still fresh in investors’ minds, some analysts say IQE’s run is just getting started.

The main reason for the excitement is familiar: speculation that IQE may be selling wafers needed by the technology giant for its new iPhone, expected to be introduced next week with sensors that use facial recognition to unlock the screen.

“Our thesis is that lurking in the Cardiff suburbs is U.K. tech’s next large-cap tech company,” Stifel analyst Lee Simpson wrote in a recent report as he started coverage of the billion-pound chip company with a buy rating. Despite the year-to-date rally, he still expects more gains as “the full extent of the future growth opportunities has yet to wholly emerge to the market.”

3D Sensing Technology

IQE makes wafers that are needed for Vertical Cavity Surface Emitting Lasers (VCSELs), used for 3D sensors and widely thought to be included in the new iPhone.

While IQE’s link to Apple likely funnels through several other companies along the supply chain, Stifel’s Simpson estimates that IQE’s 3D sensor revenue from Apple may increase to 38 million pounds ($50 million) by 2019 from an estimated about 2 million pounds last year. IQE reported 2016 sales of 133 million pounds.

IQE Chief Executive Officer Andrew Nelson declined to comment directly on whether the company is a supplier to Apple, but said in an interview that IQE has about 80 percent of the VCSEL wafer market and supplies “pretty much all of the main players in the end markets.”

VCSELs are part of IQE’s so-called photonics -- or lasers and sensors -- business, which only accounted for 17 percent of the company’s sales in 2016, but is expected to become increasingly important as other phone companies follow Apple. In the company’s recent first-half results, photonics revenue grew 48 percent, while the larger wireless division rose just 9 percent. Nelson said that VCSEL technology could also be used in other applications, from driverless cars and industrial heating to hair removal.

IQE’s wireless division, which includes materials used for power amplifiers in smartphones and wireless base stations, probably also has ties to Apple. “Our materials are in pretty much 100 percent of all smartphones through the various supply chains,” Nelson said.

Short Positions

Still, while the four analysts who cover the stock are unanimous in their buy recommendations, some investors are more skeptical about IQE’s rise. Short interest is now at about 4 percent of the float, near the highest in more than two years, and has been steadily climbing for the past few months, according to data from Markit. Hedge funds Marshall Wace LLP and Ennismore Fund Management Ltd hold 2.1 percent and 1.5 percent short positions on the stock, respectively. Both funds declined to comment.

And investors who have followed the company for a long time might have doubts due to a couple of “big opportunities that haven’t materialized” in the past, according to N+1 Singer analyst Oliver Knott. The London-traded shares hit 762 pence in 2000 before crashing to a low of about 2.2 pence in 2003. Until this year’s surge, the shares hadn’t risen above 59 pence since then. Another sign of IQE’s volatility: the shares initially fell 12 percent after results on Sept. 5, before ending the session 6.5 percent higher.

IQE shares fell as much as 1.6 percent today, trimming the year’s gains to 310 percent.

Knott said that this time is different for IQE. He believes IQE is a supplier to Lumentum Holdings Inc., which has gained 49 percent this year on speculation that it is supplying lasers for the new iPhone.

Other Apple-related European stocks have had mixed fortunes. Imagination Technologies Group lost nearly two-thirds of its value in a single day after Apple said it would stop using its graphics technology, and is now said to have drawn interest for parts of the business from parties including China-backed private equity firm Canyon Bridge Capital Partners.

Dialog Semiconductor Plc has also been hit by concerns that Apple is seeking to increase in-house capabilities to make the chips that Dialog supplies. Still, AMS AG, which is also involved in 3D sensing components for the new iPhone, is up 168 percent this year.

Knott said it was unlikely that IQE would face the same fate as Imagination, as “it’s a complex manufacturing process, not pure intellectual property design like Imagination was.” IQE’s Nelson said that no single customer accounts for more than 20 percent of company revenue, and that there are “huge barriers to change” in supply chains.