Should One Consider Investing in Wolfspeed Shares Presently?
A lot can transpire in a year, notably with semiconductor specialist Wolfspeed (WOLF up by 8.14%). Last year in December, its stock peaked at a 52-week high of $47.43. However, this month saw a low of $6.10.
Throughout this period, the company went through several modifications, part of a strategic shift. It discarded its radio-frequency (RF) devices business and witnessed its CEO depart. These were mere instances of the issues impacting its troubled stock.
By December 13th of 2024, Wolfspeed shares had plummeted over 80% in value. This raise the question, is it a stock to avoid, or could this be an opportune moment to invest?
Wolfspeed's Strategic Adjustment
Wolfspeed is undergoing a transformation. In 2023, it divested its RF devices division to concentrate on silicon carbide semiconductor products. Silicon carbide materials have a range of applications, particularly in power applications, such as electric vehicles (EVs) and solar energy systems, where its high heat tolerance provides a significant advantage.
This strategic shift was partly driven by the growing secular trend towards battery-powered electric vehicles. These vehicles heavily utilize silicon carbide components, with Statista Market Insights projecting electric vehicle sales to grow from around 9 million units in 2023 to over 14 million by 2029.
To exploit this growth potential, Wolfspeed is transitioning its production facilities from manual production of 150-millimeter (mm) silicon carbide semiconductor wafers to a more automated assembly of 200mm wafers. This change yields more significant benefits, as 200mm silicon carbide wafers result in higher output. However, this transition has increased the company's costs.
In its fiscal Q1 of 2025, which fell in September, Wolfspeed recorded $194.7 million in revenue. However, the cost to produce this revenue was substantial at $230.9 million, and beyond that, it had operating expenses of $230.1 million, resulting in a net loss of $282.2 million for the quarter.
Wolfspeed's Challenges
Wolfspeed operates in a cyclical industry currently experiencing a downturn. Consumers are purchasing fewer EVs, resulting in less demand for its products from automotive manufacturers. This contributed to a decrease in fiscal Q1 revenue to $194.7 million compared to $197.4 million in the previous year.
Additionally, setting up production facilities for its 200mm silicon carbide materials is not inexpensive; Wolfspeed's financial obligations have increased as a result. It concluded its Q1 with total liabilities of $7.2 billion, with $3.1 billion of this being long-term debt. Compare this to its total assets at the time, which were $7.9 billion.
With an increase in costs, a decrease in revenue, excessive debt, and zero profitability, it's no surprise that its board of directors dismissed its CEO in November. Furthermore, Wolfspeed risks losing its $750 million in CHIPS Act funding upon failure to meet certain requirements, such as constructing the world's largest 200mm silicon carbide wafer manufacturing facility.
Wolfspeed is attempting to rectify its situation with cost-cutting measures, such as a 20% workforce reduction and suspension of construction on a German factory. These moves are projected to produce annual savings of $200 million, beginning in 2026.
Should You Acquire Wolfspeed Stock?
Presently, Wolfspeed's situation appears bleak. However, the question remains whether it can recover over the long term. The management team estimates that the industry downturn will improve in 2025.
Wolfspeed's greatest asset is its focus on silicon carbide. This material offers superior alternatives in various situations due to its higher energy efficiency, greater resiliency, and better heat conductivity.
These benefits support a McKinsey forecast, which anticipates the silicon carbide market will expand from approximately $2 billion in 2023 to over $11 billion by 2030, primarily due to EV adoption growth. Wolfspeed leads the silicon carbide wafer industry, with over 50% of the market share.
According to the company's management, "Wolfspeed is the first silicon carbide company in the industry to transition its entire device business to 200-millimeter." Thus, it is well-positioned to capitalize on market growth.
Wolfspeed's stock price drop has made the shares appealingly priced, with its P/S multiple at nearly its lowest level. This suggests the current pricing could be a bargain.
Nonetheless, the decision to invest in Wolfspeed stock comes down to whether you believe it can overcome its current predicament. If you hold that belief, now would be an excellent time to invest in shares. However, even if that optimistic view is correct, the company's recovery could be several quarters or even years away.
Meanwhile, the risks include the possibility of losing CHIPS funding and the uncertainties associated with replacing a CEO. Even if you're confident that Wolfspeed can turn its business around, its stock is only suitable for investors with a high risk tolerance.
Given Wolfspeed's current financial situation, some investors might consider this as an opportunity for strategic investment. With the company focusing on high-demand sectors like electric vehicles and solar energy, its shift towards silicon carbide semiconductors could potentially yield significant returns in the long term, as predicted by the McKinsey forecast. The company's leadership in the silicon carbide wafer industry also positions it well to capitalize on market growth. However, it's crucial to note that this investment comes with high risks due to the company's financial challenges, market downturn, and CEO transition, making it suitable only for investors with a robust risk tolerance.
