Wolfspeed (WOLF +0.00%), the chipmaker formerly known as Cree, saw its stock price hit a record high of $141.87 on Nov. 16, 2021. At the time, investors were dazzled by its rapid post-pandemic recovery and the growth potential of its specialty chips.
But today Wolfspeed stock trades at about $50. It lost its luster as its growth cooled off, it remained unprofitable, and rising interest rates deflated its valuations. Does that steep pullback represent a good buying opportunity for long-term investors?
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What does Wolfspeed do?
Most semiconductors are produced with conventional materials like silicon and gallium arsenide. Wolfspeed differentiates itself from those chipmakers by producing wide-bandgap (WBG) semiconductors made from silicon carbide and gallium nitride, which can operate at higher voltages, temperatures, and frequencies than most traditional semiconductors.
That resilience and energy efficiency make WBG chips well-suited for short-length LEDs, lasers, 5G base stations, and military radars. Wolfspeed's WBG portfolio includes RF chips and power management chips for a wide range of industries, and it also sells silicon carbide materials to EV makers for the production of batteries and powertrains.
Wolfspeed believes the ongoing transition from silicon to silicon carbide chipmaking technologies will drive its long-term growth, and it opened the world's largest 200mm silicon carbide plant in upstate New York last April to capitalize on that transition. It also streamlined its business with several divestments to focus on the growth of its core Wolfspeed chips.
NYSE: WOLF
Key Data Points
How fast is Wolfspeed growing?
Wolfspeed's revenue fell 16% in fiscal 2020 (which ended in June 2020) as the pandemic disrupted the global chip sector and China's EV market. But in fiscal 2021 its revenue grew 12% as the automotive and RF chip markets recovered.
In fiscal 2022, Wolfspeed's revenue surged 42% as it sold more chips to the recovering auto, industrial, and energy markets. For fiscal 2023, it expects its revenue to rise another 20%-23%, even as the persistent macro headwinds rattle the broader markets. It notably started to recognize revenue from its new Mohawk Valley fab in upstate New York in the third quarter of fiscal 2023 (ended March 26), and it plans to ramp up that plant's operations throughout fiscal 2024 (which starts in June 2023).
For fiscal 2024, Wolfspeed expects its revenue to rise 10%-21%, which reflects the broader slowdown of the semiconductor sector, with its Mohawk Valley plant aiming to achieve a 20% capacity utilization rate by the end of the year. During the company's latest conference call, CFO Neill Reynolds said the expansion of that 200mm plant "will dramatically change the dynamics of the business as its scale, automation and wafer size advantages will lower our overall die cost by greater than 50%."
Analysts expect Wolfspeed's revenue to rise 23% to $917 million in fiscal 2023 and 21% to $1.1 billion in fiscal 2024. Based on those expectations and its enterprise value of $7.6 billion, Wolfspeed still trades at 7 times next year's sales.
That EV/revenue ratio might seem a bit high, but it's reasonable relative to those of its industry peers. By comparison, the larger and more diversified chipmakers Broadcom (AVGO +4.27%) and Texas Instruments (TXN +0.90%) currently trade at 10 and 9 times this year's sales, respectively. But there's a key difference: Broadcom and Texas Instruments are both firmly profitable, but Wolfspeed is still bleeding a lot of red ink.
Does Wolfspeed have a path toward profitability?
Wolfspeed narrowed its net loss from $524 million in fiscal 2021 to $201 million in fiscal 2022, but analysts expect it to post a wider loss of $306 million in fiscal 2023 as its revenue growth cools off and it ramps up its production at its Mohawk Valley fab. For fiscal 2024, they expect it to slightly narrow its net loss to $249 million.
On a more forgiving adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Wolfspeed has been profitable since fiscal 2022. Analysts expect its adjusted EBITDA to rise 24% to $52 million in fiscal 2023 and nearly triple to $147 million in fiscal 2024.
That outlook is encouraging, but Wolfspeed's stock isn't cheap at 52 times next year's adjusted EBITDA. Broadcom and TI only trade at 16 and 17 times this year's adjusted EBITDA, respectively. That higher EV/EBITDA ratio could make Wolfspeed a lot less appealing than its industry peers as interest rates stay elevated. That's probably why Wolfspeed's stock tumbled 26% this year as Broadcom and TI both generated positive returns.
Is it the right time to buy Wolfspeed?
Wolfspeed established a first-mover advantage in the silicon carbide space, and it should continue to grow as more industries transition away from traditional silicon chips. But a lot of that growth is still baked into its current valuations -- even after its 65% drawdown from its all-time highs -- and it could be years before it actually breaks even.
Wolfspeed could be a good investment for patient investors, but I expect it to remain out of favor until its growth accelerates again and it narrows its net losses. Investors can accumulate some shares of Wolfspeed today, but only after they've set aside enough cash to invest in more promising evergreen chip plays like Broadcom and TI.
