What happened
Shares of Wolfspeed (WOLF 5.55%) dropped 27.4% in August, according to data from S&P Global Market Intelligence .
The semiconductor company, in the midst of a large-scale transition to mass-producing silicon carbide (SiC) power devices, fell in the month following a somewhat disappointing earnings report.
In addition, the company isn't profitable, and has had to raise billions of dollars to fund its ambitious buildout of silicon carbide factories. Silicon carbide is more heat- and power-efficient than traditional silicon, and it is thought to have huge growth potential in electric vehicles and with the energy transition.
However, with its existing silicon-chip revenue stagnating, and its SiC ramp-up going a bit slower than anticipated, shareholders sold off the stock following the company's fiscal fourth-quarter update in August. An accounting change also lowered Wolfspeed's gross margins, which also might have played a part, even though it shouldn't affect long-term profits.
Oh, and rising long-term interest rates and inflationary worries didn't help the loss-making company, either.
So what
In the second quarter, revenue grew 3.2% year over year to $235.8 million, beating expectations, but adjusted losses per share of $0.42 missed expectations by a wide margin.
There were a couple of reasons for the profit miss. First, management used an accounting change, which had the effect of lowering adjusted margins. Whereas the company used to count start-up costs in its Mohawk Valley fab as underutilization charges that were excluded from its adjusted results, those charges will now be a part of costs of goods sold and therefore will lower margins since Mohawk Valley has officially started production.
Everyone has been accustomed to reading Wolfspeed's adjusted numbers, since it has so many start-up and underutilization costs associated with its Mohawk and Siler City fabs under construction. So, the big drop in adjusted margins might have rattled some. Still, nothing has really fundamentally changed with the business.
More likely, investors are growing impatient with Wolfspeed's silicon carbide ramp-up. While Mohawk Valley has officially begun production of silicon carbide chips, the fab only produced $1 million of revenue last quarter. Management expects a steep ramp-up, but the fab will only be at around 20% utilization by this time next year, according to management, and revenue associated with that ramp-up won't be recognized until the end of 2024.
As for the upcoming quarter, management guided for basically flat quarter-over-quarter revenue, largely from its legacy silicon power business, which didn't inspire confidence. Over the past year, Wolfspeed has experienced delays in ramping-up its vertically integrated silicon carbide operations on 200mm wafers.
SiC has a lot of growth potential, but it is not an easy material to work with. But since Wolfspeed is essentially betting the company on these massive high-upside plant buildouts, any disappointing delays are bound to raise doubts.
Now what
Wolfspeed remains perhaps the highest-upside but highest-risk bet on silicon carbide today. It is currently beginning production out of its massive Mohawk facility, and the company is also beginning construction of a huge plant to grow silicon carbide crystals in Siler City, North Carolina, which is forecast to start producing wafers by June of next year.
On the plus side, the company has garnered lots of customer engagement, with $1.6 billion worth of "design-ins" in the quarter and $8.3 billion design-ins for its recently completed fiscal year, increasing from $6.4 billion in 2022. Moreover, Wolfspeed received a massive $2 billion pre-payment from Renesas Electronics in July, which was certainly a show of confidence.
However, until Wolfspeed actually gets these fabs up and running and efficiently producing SiC revenue, the market might continue to be skeptical, especially amid higher interest rates.
