What happened
Shares of silicon carbide semiconductor manufacturers Wolfspeed (WOLF 3.86%), STMicroelectronics (STM -2.96%), and Allegro MicroSystems (ALGM 2.75%) fell this week, down 22.5%, 9.7%, and 14.6%, respectively, through Thursday trading, according to data from S&P Global Market Intelligence.
Silicon carbide (SiC) is a type of semiconductor material made from the fusion of pure silicon and pure carbon molecules and then doped with other elements, according to the specification of the end application. Silicon carbide is more expensive and difficult to produce than traditional silicon, but it has excellent electrical conductivity, durability, and resistance to heat. As such, the silicon carbide market is projected to grow by leaps and bounds over the next decade, as it's a key material in electric vehicles, charging stations, electrical power utilities, and data centers.
On that optimism, some leading silicon carbide stocks had been bid up to relatively high valuations in recent weeks. However, SiC leader Wolfspeed reported its earnings this week, giving guidance for the next fiscal year that was below expectations. Management blamed operational difficulties in scaling up its new advanced SiC plant and also said it would have to raise more money before the end of the year.
Image source: Getty Images.
While a supply and execution problem is better than a demand problem, the earnings release appeared to take down all semiconductor stocks involved in the production of SiC.
STMicroelectronics reported its results as well. Unlike Wolfspeed, STM is more diversified and profitable, and even gave decent guidance for the rest of the year. However, its management also acknowledged the challenges of scaling up next-gen SiC chips. So its stock price fell in sympathy.
So what
Wolfspeed was formerly known as Cree, which had a long history of working with older-generation SiC in its LED business. However, Cree sold off its LED business in mid-2021, and is reinvesting those proceeds into an advanced, first-of-its kind 200-mm wafer SiC plant in upstate New York geared toward advanced power chips.
Wolfspeed reported earnings on Wednesday night, and actually beat analyst expectations for revenue and losses per share in the March quarter. However, Wolfspeed is still unprofitable and investing lots of money in these new production facilities, so the past quarter's results don't really matter that much to the stock.
Unfortunately, the company appears to be sliding further behind its targets laid out about six months ago, as it took down expectations for revenue in fiscal 2024, which ends next June. Management now expects $1 billion to $1.1 billion in fiscal 2024, versus analyst expectations of $1.3 billion. And those analyst expectations had already been lowered from the $1.6 billion in 2024 revenue Wolfspeed projected at its analyst day last October.
Management maintained that orders and design wins for the future were very strong but gave two reasons for the shortfall. First, it cited supply chain issues and delays in getting switchgear in place at its Durham plant, which makes materials for production in its new state-of-the-art Mohawk plant, which is just producing its first samples. Second, management also said it was going to ramp up production at the Mohawk plant more slowly, as it acknowledged advanced SiC was "a difficult material to work with."
Another overriding concern is that management says it needs to raise about another $1 billion before the end of the year to complete the build-out of the Mohawk plant next year. So that dilutive overhang is likely another reason the stock sold off so hard, as the cost of capital has gone up as the Federal Reserve has raised interest rates.
In response to continued delays, several analysts took down their price targets on Wolfspeed stock, citing the pushout and opportunities for competitors to catch up.
Some of those competitors are STMicroelectonics and Allegro MicroSystems. However, instead of rising on the potential competitive opening, both these stocks also fell in sympathy. That's perhaps because investors are extrapolating these other SiC players may have similar troubles ramping up newer generations of SiC chips.
Interestingly, STMicroelectronics also reported results on Wednesday, and its stock fell 7.4% the following day, fueling the weekly loss. Yet unlike Wolfspeed, STM is more diversified and profitable, earning $1.10 per share in the first quarter on revenue growth of 19.7%, exceeding analyst expectations. The company also guided for full-year revenue to be between $17 billion and $17.8 billion, a range mostly higher than the $17.1 billion analyst consensus.
So, it's a bit curious as to why STM fell so much in sympathy with Wolfspeed, when its own revenue, including SiC products, came in ahead of expectations. Perhaps it was because like Wolfspeed, STM management acknowledged its future generation of SiC products would take about 18 months to develop after the current generation coming out later this year.
STMicroelectronics CEO Jean-Marc Chery said:
The 200-millimeter, that is not a piece of cake for silicon carbide. I don't want to be technical, but it is not a piece of cake. You have many mechanical effects, which are not so easy to control when you increase the wafer size of silicon carbide.
Now what
Silicon carbide holds a lot of promise for above-market growth in the years ahead, but the companies chasing that opportunity will need to execute on their technology roadmaps in order to realize those benefits.
From the earnings releases this week, it appears leading SiC manufacturers are running into complications with next-generation SiC technologies on larger 200-mm wafers, which are necessary to bring down costs.
So until these technical problems are resolved, the timing of these companies' future SiC revenue in 2024 and beyond may be more in question. With higher interest rates compressing time frames for investors, it's perhaps no surprise to see these stocks pulling back in the wake of production delays.
