Is It Too Late to Buy Wolfspeed Stock?

Wolfspeed's (WOLF 5.55%) stock sank 15% during after-hours trading on Aug. 16 after it posted its latest quarterly report. For the fourth quarter of fiscal 2023, which ended on June 25, the chipmaker's revenue rose 3% year over year to $236 million and exceeded analysts' expectations by $13 million. However, its adjusted net loss widened from $26 million to $53 million, or $0.42 per share, and missed the consensus forecast by $0.22.

That earnings miss was disappointing, but is the market too bearish on Wolfspeed -- which has already declined 34% year to date and remains 68% below its all-time high? Let's see if it's too late to bet on this niche chipmaker's long-term recovery. 

Image source: Getty Images.

Why did Wolfspeed lose its momentum?

Wolfspeed produces wide-bandgap (WBG) semiconductors, which are made from silicon carbide and gallium nitride. These specialty chips can operate at higher voltages, temperatures, and frequencies than traditional silicon and gallium arsenide chips -- which makes them well suited for short-length LEDs, lasers, 5G base stations, and military radar.

Wolfspeed currently leads the WBG market, which Precision Reports estimates could grow at a compound annual growth rate (CAGR) of 29% from 2022 to 2028 as more companies recognize the benefits of silicon carbide technologies. To support that expanding market, it opened the world's largest 200 mm silicon carbide plant in upstate New York last April. It also sells silicon carbide materials to electric vehicle makers for the production of batteries and powertrains.

Wolfspeed was known as Cree until late 2021, when it rebranded itself to prioritize its sales of Wolfspeed-branded WBG products. It also divested several of its noncore product lines to free up more resources for its Wolfspeed products. 

It suffered a slowdown in fiscal 2020 (which ended in June 2020) as the pandemic disrupted China's EV sector and the global semiconductor market. But over the following two years, its revenue growth accelerated again as the pandemic passed.

Data source: Wolfspeed.

Unfortunately, that growth spurt ended in fiscal 2023 as macro headwinds curbed the market's demand for new chips. At the same time, its costs continued rising as it ramped up its production of new 200 mm chips at its New York plant and broke ground on an even larger 200 mm plant in North Carolina. That mix of slowing growth and rising costs spooked the bulls.

For the first quarter of fiscal 2024, Wolfspeed expects its revenue to dip 1% to 9% year over year as its adjusted net loss widens from $5 million to $75 to $94 million. That grim near-term outlook suggests its cyclical downturn isn't over yet.

But brighter days could be ahead

Wolfspeed faces a near-term slowdown, but it expects the increased use of its New York plant and the opening of its North Carolina plant to eventually reduce its overall die costs by at least 50%. Therefore, all these supply chain investments could pay off over the long term as economies of scale kick in and boost its gross margins.

Wolfspeed recently faced some supply chain concerns after China banned its exports of gallium and germanium. However, the company said those bans, which went into effect on Aug. 1, wouldn't have any impact on its supply chain.

Wolfspeed's prospects should brighten as the macro environment improves and more companies shift from traditional silicon chips to silicon carbide ones. It signed on more customers across the automotive, industrial, and energy sectors during the fourth quarter, and it recently inked a 10-year wafer supply agreement with Renesas (RNECY 0.12%) for its production of next-gen silicon carbide devices. It expects Renesas to ramp up its production of silicon carbide products in 2025.

Wolfspeed didn't provide a full-year forecast. But during the conference call, CEO Gregg Lowe predicted a "modest increase in device revenues in the first half of fiscal 2024, with a steeper increase in revenue beginning in the second half."

For fiscal 2024, analysts expect Wolfspeed's revenue to rise 15%. With an enterprise value of about $7 billion, Wolfspeed trades at nearly 7 times that estimate -- so it still isn't a screaming bargain after its latest post-earnings decline.

It's also expected to stay unprofitable by both generally accepted accounting principles (GAAP) and non-GAAP measures, and it ended fiscal 2023 with a high debt-to-equity ratio of 2.7. That premium valuation, red ink, and high leverage could all keep Wolfspeed stuck in the penalty box as long as interest rates stay elevated.

Is it too late to invest in Wolfspeed?

I don't think it's too late to buy Wolfspeed as a long-term play on the nascent silicon carbide market. That said, the bulls probably won't rush back until its growth accelerates, its gross margins stabilize, and it narrows its net losses again. So for now, I'd rather stick with more stable chip stocks instead of hastily betting on Wolfspeed's near-term recovery.