What happened

Shares of Wolfspeed (WOLF 5.38%) popped as much as 25.2% this week, according to data from S&P Global Market Intelligence. The semiconductor manufacturer and maker of silicon carbide chips posted strong revenue and earnings for its fourth quarter, beating analyst expectations. As of 1:52 p.m. ET on Friday, the stock is up 21.5% this week.

So what

On Aug. 17, Wolfspeed released its fourth-quarter earnings for fiscal year 2022. Revenue grew 57% year over year in the period to $228.5 million, impressively beating analyst expectations of $208 million going into the results. The company had an adjusted earnings loss of $0.02 per share during the period, also beating analyst expectations for a loss of $0.10 for the period.

The big news here is the revenue beat. Management said in the earnings release that Wolfspeed is seeing strong demand from its end markets for silicon carbide parts, which include both electric vehicle and aerospace companies, among other industries. Wolfspeed also opened a new 200-millimeter silicon carbide manufacturing plant in New York to further accelerate its growth plans.

Things seem to be looking up for Wolfspeed right now, so it is no surprise investors traded the stock higher this week. Management updated its long-term 2026 revenue guidance to a range of $2.73 billion to $2.94 billion, up from the $2.1 billion guidance it gave out at the beginning of the year. Clearly, companies are clamoring for more silicon carbide chips, and Wolfspeed is working hard to fulfill this demand.

Now what

This was another strong earnings report from Wolfspeed. The company looks set to grow rapidly for years to become a big player in the electric vehicle market. However, investors should be cautious about the stock's valuation. The company's market cap is $13.74 billion, with shares trading at a trailing price-to-gross profit of 55. This is much, much higher than the market average and shows how optimistic investors are about this business. The stock looks quite expensive when looking at it through this lens.

Even if Wolfspeed hits the high end of its new 2026 revenue guidance, the stock will be trading at a price-to-sales ratio of 4.7 based on today's prices. Again, this is expensive compared with the market average, and this is based on guidance for four to five years in the future. If you are going to invest in Wolfspeed stock, you need to be highly confident the company can continue this torrid growth rate, likely for many years beyond 2026.