As electric vehicles (EVs) and renewable energy pick up momentum, the world has become aware of a new semiconductor material: silicon carbide (SiC). SiC is more resistant to heat and can handle high voltages, making it ideal for the power management chips needed for these applications.
Wolfspeed (WOLF 5.55%), the company formerly known as Cree, was quick to pick up on the coming wave of demand for SiC and has built a couple of factories fully dedicated to producing SiC wafers (the discs that eventually get chopped up into chips) and devices.
But launching such ambitious manufacturing plans is expensive and takes years to reach profitable scale. Investor enthusiasm gradually moderated for Wolfspeed until recently, as the company announced a couple of funding deals -- including with leading Japanese chipmaker Renesas (RNECY 0.12%). But is Wolfspeed really the best buy of these two companies?
Wolfspeed (was) in dire need of cash
Since its hard pivot toward SiC, Wolfspeed has been a high-growth company. However, building and then ramping up production at new SiC wafer and chip fabs is expensive and takes time. Fast-growing even amid a bear market as it has been, many investors realized Wolfspeed was going to need cash. It took a big step toward raising needed funding in Nov. 2022 by selling over $1.5 billion in convertible debt.
Data by YCharts.
However, at the rate Wolfspeed was burning through liquidity, more was needed. After all, during its last earnings call, management said its most immediate-term priority was getting its SiC wafer fab in Mohawk Valley, New York (opened in 2022) up to 20% capacity utilization by the end of fiscal 2024. That's right, just 20% utilization (a money-losing output) by the summer of 2024, another year from now. Suffice to say, Wolfspeed will be tearing through plenty more cash for at least a couple more years.
Wolfspeed can fortunately declare "funding secured." First, in late June, the company announced it secured $1.25 billion from the sale of debt, with the option to tap those bond investors for an additional $750 million as needed. The lead investor was none other than asset manager Apollo Global. With an interest rate of 9.875% that will mature in 2030, I believe this is a great deal for Apollo.
The second deal is more favorable to Wolfspeed, though. In early July, it announced a 10-year supply agreement with Renesas for raw SiC wafers, as well as epitaxy-treated SiC wafers (epitaxy machines are a specialty of industry force Applied Materials). The deal will begin producing tangible output in calendar year 2025.
Significantly, Wolfspeed landed a $2 billion deposit from Renesas in order to secure that decade-long supply of SiC. This echoes other deals for long-term supply agreements with customers willing to shell out cash, announced by other SiC leaders like Onsemi.
Don't sleep on Renesas
Renesas is one of the world's top automotive chip suppliers, ranking especially high in microcontrollers (small chip systems that govern a specific task, usually on a vehicle or industrial equipment). But as EVs, renewable energy, and industrial automation have taken the front seat as of late in the investment world, Renesas has been clear it wants to expand its power chip portfolio. It's getting funding from Japan, which, like many other countries, wants to boost domestic production of chips over the next decade.
Renesas stock has also been off to the races thanks to investor optimism regarding the company's ambitious expansion plans and government support to do so. The business enjoyed rapid growth up until recently (it's getting hit by the chip downturn, as are most semiconductor outfits right now), but it remains highly profitable and has a solid balance sheet.
Data by YCharts.
Indeed, where Wolfspeed still has a long road ahead to reaching profitability, Renesas is already there. And though sales and profits are likely to take a bit of a hit in the coming quarters, Wall Street analysts expect Renesas to return to growth next year. The stock (which trades over the counter in the U.S. as it's a Japan-listed investment) currently goes for 15 times trailing-12-month earnings per share, or just under 13 times free cash flow.
I'm really not sure about Wolfspeed stock. Even after taking quite the beating last year, it trades for nearly nine times sales, compared to just three times sales for Renesas. With 20% manufacturing capacity a base scenario by next summer, this still seems like a risky investment, given the premium price tag -- even if the company has taken care of its cash needs for now.
Renesas looks like the far more interesting stock to me at this juncture, as well as previously mentioned top SiC chipmaker Onsemi and fab equipment companies like Applied Materials that will win no matter who takes the SiC power semiconductor crown. With a new bull market for chips possible in 2024, put these chip stocks on your watch list.
