What happened
Shares of Wolfspeed (WOLF 5.55%) rocketed upward by 11% on Wednesday. The chipmaker is making an enormous and costly bet on plants to make silicon carbide (SiC), an alloy that has tremendous conductive and heat-resistant capabilities. Because of these characteristics, silicon carbide is expected to be heavily used in electric vehicles and infrastructure, and is therefore primed for blockbuster growth this decade.
Wolfspeed is not currently profitable, which has particularly weighed on investor sentiment about the company in this era of higher interest rates. That anxiety has led to a year-to-date share price decline of 17.8% even as the broader semiconductor sector has surged.
But Wolfspeed just delivered some positive news: It inked a long-term sales agreement that may de-risk the company's ongoing investments.
So what
On Wednesday, Wolfspeed announced a 10-year agreement to supply Japanese power semiconductor and microcontroller manufacturer Renesas (RNECY 0.12%) with silicon carbide wafers.
Wolfspeed is in the midst of building out two massive plants: one in Chatham, North Carolina, to manufacture the actual silicon carbide wafers, and another in Marcy, New York, that will produce end-market power chips on those wafers.
With this agreement, however, it appears Wolfspeed is expanding into selling its SiC wafers to third-party customers. That should be a benefit, as producing more wafers should lead to increased economies of scale and profitability.
One especially important feature of the agreement is that Renesas will make a $2 billion pre-payment to Wolfspeed that will help it complete the facilities and ramp production.
Two weeks ago, Wolfspeed sold a $1.25 billion note to private equity firm Apollo Global (APO 0.30%), which also helped secure funding for these massive construction projects. However, that note bears an interest rate of 9.875%, which is rather expensive, especially for a loss-making company. If Wolfspeed can fund its manufacturing build-out with interest-free pre-payments from customers, that would be a much better option.
Furthermore, the 10-year commitment also amounts to a vote of confidence in Wolfspeed's technology and manufacturing capabilities. After all, Renesas was the eighth-largest power chip manufacturer in the world as of last year. So it's no wonder Wolfspeed's stock surged Wednesday.
Image source: Getty Images.
Now what
Wolfspeed is an interesting company to watch, but it is not currently generating profits: It booked a $102 million operating loss last quarter alone.
However, the chip stock is still down 61% from its all-time highs. Given the funding it has secured from Apollo and Renesas, and its extended new supply deal, Wolfspeed may be worth a look for the risk-on, aggressive growth investor.
