Should Investors Consider Purchasing Wolfspeed Stocks?
Revised Article:
In the contentious realm of contemporary industries, electric vehicles (EVs) and their related supply chain have stirred up a storm of controversy. Amid this tumult, silicon carbide (SiC) manufacturer Wolfspeed has emerged as a highly debated entity. Capitalized at -3.35%, the company has invested heavily to become a SiC-based semiconductor frontrunner, a critical component in the future of EVs. Yet, with shares plummeting over 90% from their peak, some see this as an enticing investment opportunity. Let's delve into the controversial company's past, present, and future.
The Wolfspeed Chronicles
Wolfspeed's storied history includes a more complex narrative than typical stocks, which may contribute to its potentially mispriced value.
Once known as Cree, the company established its power semiconductor, radio frequency (RF) semiconductor, and lighting segments under one umbrella. In a bold move five years ago, Wolfspeed decided to focus solely on power semiconductors, targeting the electric vehicle and infrastructure industries. Cree sold off its lighting products in 2019 and 2021, and in late 2023, the company was rebranded as Wolfspeed, continuing its RF business divestment.
Wolfspeed utilized the earnings from these transactions and borrowed heavily to invest in becoming a silicon carbide leader. SiC is a valuable material due to its high conductivity and heat dissipation properties, making it indispensable for power efficiency applications in EVs, infrastructure, and AI data centers.
The Drawbacks
With share prices plummeting 93% from their highs and a 79% decline in the year, it's clear the company's fortunes have taken a turn for the worse.
It's challenging to dissect the precise extent of Wolfspeed's blame or the EV market's role in this slump. Over the last couple of years, industrial and auto chip markets have experienced a severe downturn amid rising interest rates. Although some anticipated electric vehicles à la Elon Musk's Tesla to be a high-growth sector, every EV market outside China has experienced a slowdown, leading to questions about how quickly EVs will be embraced.
Wolfspeed's silicon carbide rollout doesn't seem as expeditious as some competitors. In Q4, sales also dipped slightly year over year, despite the company pouring nearly $4 billion into property, plant, and equipment. Complicating the matter further, Wolfspeed has a substantial debt load – over $6 billion in convertible bonds, secured debt, and loans from Japanese SiC wafer customer Renesas – with only $1.7 billion in cash in the bank.
More debt is in the pipeline; Wolfspeed recently secured an additional $750 million in debt from influential hedge and private equity funds. Additionally, the company will have to raise an additional $300 million in equity to receive a U.S. government grant under the CHIPS Act, potentially diluting current shareholders by 25%.
SiC Speed Bumps
Several setbacks have affected Wolfspeed's progress. There have been delays in ramping up the 200mm plant in Mohawk Valley, New York, but management claims these issues have been resolved. While the 150mm factory in North Carolina is being phased out, its remaining units are still producing a less economical type of chip.
Executive turnover has also been a challenge. Recently, CEO Gregg Lowe agreed to depart from his role. While the precise circumstances behind his departure remain unclear, there have been questions about past execution issues or continuing unresolved concerns. At present, interim Chairman Thomas Werner takes the reins while the board searches for a replacement.
On the Bright Side
Despite these setbacks, there are reasons for optimism. The recent departure of CEO Gregg Lowe has prompted several Wolfspeed board members to purchase large quantities of stock on the open market. This indicates insiders believe in the stock's potential to soar. Additionally, although Q4 revenue was down, the wind-down of the 150mm facility could be masking some positives from Wolfspeed's newer 200mm plant.
Moreover, the company has amassed billions in "design-ins" and "design wins" with automotive clients. These agreements represent potential future earnings, albeit ones not guaranteed. Meanwhile, despite the lackluster revenue numbers, the company's EV sector revenue should grow when the market picks back up.
Wolfspeed: A Risky Gamble, Even at a Discount
If the EV sector accelerates, customers fulfill their design commitments, and the 200mm factory performs better than competitors, the stock could bounce back substantially. At present, Wolfspeed has a market cap of only $1.22 billion, and management believes the capacity of its factories could support $3 billion in annual revenue when fully ramped up. Assuming a reasonable margin, this could translate to hundreds of millions to even billions in earnings, making the stock seem cheap at 2.5 to 3 times future earnings.
However, this optimistic scenario assumes many factors – a rebounding EV market, customers fulfilling commitments, and the 200mm factory outperforming competitors – all coming together. And the stock's current price doesn't factor in the existing $6 billion debt, which will only grow by another $750 million, and the additional $300 million equity needed to receive the CHIPS Act grant, diluting shareholders by an additional 25%. Taking all these uncertainties into account, Wolfspeed remains a risky investment opportunity.
For those with a keen interest in semiconductors and capable of taking on long-term risks, Wolfspeed presents an intriguing play on the electric vehicle market. As developments unfold, investors should remain vigilant and informed about this rapidly evolving sector.
Wolfspeed's strategic decision to invest heavily in becoming a silicon carbide leader in the electric vehicle industry has been driven by the material's high conductivity and heat dissipation properties, making it essential for power efficiency applications. This significant investment, however, has increased the company's debt load, with over $6 billion in convertible bonds, secured debt, and loans.
With shares of Wolfspeed plummeting over 90% from their peak, some investors perceive this as an attractive opportunity to invest in the company's potential future growth, given its critical role in the electric vehicle industry.