One of the most controversial industries right now is electric vehicles, with the industry's long-term growth opportunities running into a severe near-term slowdown. And within the EV supply chain, silicon carbide (SiC) manufacturer Wolfspeed (WOLF -7.01%) has emerged as perhaps the most controversial company.
Wolfspeed has spent a fortune turning itself into a SiC-based semiconductor leader, a key type of chip crucial to the future of EVs. With the stock down over 90% from its highs, is this a golden opportunity for investors?
The Wolfspeed story
Wolfspeed has a more complicated story than your typical stock, which could lead to it being mispriced. So let's dive in.
Wolfspeed was formerly known as Cree, which had power semiconductor, radio frequency (RF) semiconductor, and lighting businesses all under one roof. Five years ago, however, the company decided to go all in on power semiconductors to target the electric vehicle and infrastructure segments, selling the lighting products businesses in 2019 and then in 2021, renaming the company Wolfspeed, then selling the RF business in late 2023.
Wolfspeed then took those proceeds and issued a bunch of debt to invest in becoming a silicon carbide leader. SiC is an infused silicon that is somewhat difficult to produce, but results in much higher conductivity. Therefore, it's a useful material anywhere power efficiency and heat dissipation are paramount, such as electric vehicles and infrastructure, and more recently AI data centers.
The bad
Obviously, with the stock down 93% from its highs and nearly 80% on the year, things have clearly gone sideways.
It's hard to tell how much fault lies with Wolfspeed, and how much has resulted from the soft EV market. Over the past couple years, the industrial and auto chip markets have gone into a severe downturn amid higher interest rates. And while electric vehicles, which are the main driver of SiC demand today, were thought to be a high-growth sector, every EV market outside China has gone into a slowdown. That has led to questions as to how quickly EVs will be adopted.
But even by those standards, Wolfspeed's ramp of silicon carbide products seems lacking compared with some competitors. Last quarter, revenue was slightly down year over year at $195 million, and management guided to flat-to-down revenue in the current quarter as well. This is despite Wolfspeed's having invested nearly $4 billion in property, plant, and equipment.
Wolfspeed has also borrowed a lot of money. Between convertible bonds, secured debt, and a large pre-payment from Japanese SiC wafer customer Renesas, Wolfspeed is burdened by over $6 billion in debt or debt-like obligations against just $1.7 billion in cash.
And more debt is coming; Wolfspeed just raised another $750 million in debt from some high-profile hedge and private equity funds, while also securing another $750 million in grants from the government under the CHIPS Act.
But one of the stipulations for the CHIPS grant is that Wolfspeed will have to raise another $300 million from equity, which means the company will dilute shareholders at this bargain-basement stock price. While getting a government grant is OK, that dilution may actually turn that grant into a negative for current equity holders. If Wolfspeed raises $300 million in equity at these price levels, that would dilute shareholders by 25%.
Instability at the top and uncertain execution
There have also been delays in ramping Wolfspeed's 200mm plant in Mohawk Valley, New York, but that seems to have been sorted out. In fact, management just disclosed it would actually be closing its 150mm factory in North Carolina, as its new state-of-the-art New York facility is now showing good yields. Of note, chips produced on larger wafers have a lower cost.
Despite that seeming improvement, Wolfspeed's CEO Gregg Lowe just agreed with the board to "depart" from his role as CEO and Chairman. While the wording of the press release is vague, it appears as though Lowe was essentially fired, though there's a small chance he resigned of his own volition.
The exact reason for the departure is hard to know. Perhaps it was related to past execution issues -- or maybe those issues haven't been completely resolved. Whatever the reason, the current void at the top of the company means more uncertainty, which is probably another negative for the stock.
Image source: Getty Images.
But there's good news, too
On the other hand, there are also reasons to perhaps be optimistic. After the recent announcement of Lowe's dismissal, several board members bought a fairly large amount of Wolfspeed stock on the open market. The significant buys mean insiders are making a big bet on Wolfspeed shares to go higher. This is despite the company's lack of a CEO at the moment, with interim Chairman Thomas Werner taking control while the board seeks a replacement.
Moreover, the current ramp-up of SiC might be going better than it appears, although it's hard to tell. The wind-down of the 150mm facility could explain some of the revenue shortfall in the current quarter. However, the modern 200mm SiC plant is where most of Wolfspeed's value is, and success there may be masked by the wind-down of the legacy 150mm plant.
Wolfspeed also has billions in "design-ins" and "design wins" with auto customers. Both terms indicate theoretical future revenues that have been agreed to by customers, though those revenues are not assured. Design-ins include a customer's letter of intent to purchase a certain number of chips at a certain amount of revenue, while a "design win" indicates Wolfspeed has received a purchase order for at least 20% of the first year's design-in. Neither is a firm commitments from the customer, but Wolfspeed management uses these metrics to estimate future demand.
As of the end of its fiscal year in June, Wolfspeed counted $9.1 billion "design-ins" and $5.8 billion of "design wins." On top of that, Wolfspeed won an additional $1.5 billion of design-ins and $1.3 billion of design wins in the September quarter.
As long as the company executes and demand for electric vehicles eventually bounces back, that revenue should in theory come through, even though today's revenue numbers look paltry.
Wolfspeed still seems risky, even at this price
If the EV sector reaccelerates, customers fulfill their design win commitments, and Wolfspeed's 200mm production really does win out over competitors, the stock could be very cheap.
The company has just a $1.22 billion market capitalization, and management says capacity from its current factories could support $3 billion in annual revenue when ramped up. That could easily mean $500 million or even more in earnings under a reasonable margin scenario. That means the stock trades at 2.5 to 3 times future theoretical earnings.
Still, that's a lot of things that have to go right, which is a lot to assume for a company without a CEO. Moreover, the current market cap doesn't factor in Wolfspeed's debt, which is now over $6 billion, and is set to rise by another $750 million. Additionally, if the company raises $300 million in equity at this price in order to receive the CHIPS Act grant, the market cap will be diluted another 25%. All in all, that puts Wolfspeed's enterprise value much higher, between $7 billion and $8.5 billion, depending on how much cash the company burns in the near-term.
So the stock isn't nearly as cheap as it may appear, and the debt load adds a fair amount of continued risk. For all these uncertainties, I'd put Wolfspeed aside for now.
That being said, interested semiconductor investors should watch this story closely. If some of these uncertainties in the EV market are worked out, a well-regarded CEO is selected, and if the positive scenario envisioned by management begins to emerge, the stock could become a turnaround story.
However at this moment, we're just not there yet.
