Shares of next-gen semiconductor manufacturer Wolfspeed (WOLF +0.00%) are headed back toward multiyear lows after an ugly quarterly earnings update, one that apparently took many investors by surprise.
But it isn't a surprise that Wolfspeed has been one of the more aggressive companies trying to expand into silicon carbide (SiC) chips and has been building several new chip fabs -- an endeavor that costs a great deal of money. With some of those (what should have been) expected costs now coming to bear, some investors are selling.
Is it time to move on from this stock?
NYSE: WOLF
Key Data Points
Greenfield factories doesn't mean greener pastures
Wolfspeed put the final wrap on its fiscal 2023 (the 12 months ended in June 2023), and management was quick to highlight its 24% revenue growth over 2022 for total sales of $922 million. The company has been trumpeting its ambitions in SiC -- chips for use in power management in electric vehicles, as well as other industrial systems where energy efficiency is becoming a top priority. However, not even Wolfspeed has been immune to the present downturn in the semiconductor industry, as some of its products get sold to smartphone manufacturers and other consumer electronics applications, which have both been hit hard in the past year.
The resulting revenue in the fourth quarter of fiscal 2023 was thus actually only up 3% year over year. Wolfspeed expects fiscal 2024 revenue (the 12 months that will end next June) to be in the range of $1 billion to $1.1 billion, up only as much as 19% from this most recent fiscal year.
But here's the real kicker: Wolfspeed is hemorrhaging cash. The company has been building brand new "greenfield" chip factories (a brand new facility, versus retrofitting an existing operation with new manufacturing equipment), and constructing and then ramping up production at a fresh new operation like this is very expensive. Wolfspeed's fiscal 2023 net loss based on generally accepted accounting principles (GAAP) was $330 million, and free cash flow was negative $1.1 billion -- $956 million of that attributable to the purchase of property and semiconductor fab equipment (or capex).
SiC has a bright future, but Wolfspeed's path forward is fraught with risk
This cash-burn situation isn't going to end anytime soon. By the end of fiscal 2024 (next summer), management thinks its newest fab in Mohawk Valley, New York, will still only be operating at 20% utilization (underutilization costs start to disappear at about 70% capacity). Plus, capex will be another $2 billion in the coming year (for another SiC materials facility now under construction).
Wolfspeed did land a couple of funding agreements with Apollo Global Management and Japan's chipmaker Renesas, but given the rate of spending expected, Wolfspeed might need to start looking for more investment again come fiscal 2025. It had just under $3 billion in cash and short-term investments at the end of June, and debt of $4.2 billion.
Suffice it to say Wolfspeed is a very risky stock, and the market is only just beginning to realize its pioneering work in SiC isn't going to be an easy win. Even after another big sell-off, shares still trade for over 5 times expected fiscal 2024 revenue -- a valuation that profitable chipmakers like GlobalFoundries and even Renesas don't even trade for.
The SiC hype for the fast-growing electric vehicle market is real, but I still don't think Wolfspeed is the right way to invest in this movement, not yet anyway. If you invested in Wolfspeed, a long road of mounting losses still lies ahead. It might be time to move on to other SiC plays like STMicroelectronics, ONsemi, or even Renesas.
