Shares of silicon carbide (SiC) chipmaker Wolfspeed (WOLF +0.00%) enjoyed a small relief rally after its latest earnings report. The company is in the midst of ramping up a big new factory in support of next-gen power semiconductors for applications like electric vehicles (EVs).
However, while progress is a positive sign, Wolfspeed still has much to prove in the next couple of years -- and could burn through ample amounts of cash while it does so. Investors should remain cautious with this chip stock.
NYSE: WOLF
Key Data Points
A brand-new, super-ambitious expansion plan
Recent media reports have highlighted weakening growth for the EV market. Blame higher interest rates. Currently, EVs are more expensive than traditional cars, and with financing costs up substantially this year, some consumers are on hold with a new car purchase.
But that doesn't mean EV growth is done. Indeed, the market is still on the rise, and despite challenging economic conditions, Wolfspeed is still ramping up its supply of SiC materials and chips to support its automotive customers.
Revenue in Q1 fiscal 2024 (the three months ended in September) increased 4% year over year to $197 million. Guidance for the next three months indicates a step-up in sales, with management calling for revenue to be as much as $222 million in Q2 fiscal 2024 (though revenue was $216 million in Q2 last year, reflecting the last period of peak demand for the semiconductor market).
Long-term analyst predictions point toward the current SiC market (which is largely tied to EVs) going from about $6 billion in annual sales now to $20 billion by the end of this decade. Wolfspeed, which is in the process of selling its last vestige of non-SiC and EV-related business to Macom Technology (MTSI +5.95%), is in a prime position to benefit.
But therein lies the rub, because Wolfspeed has big ambitions, and those ambitions cost a great deal of money. The company is pursuing multiple construction projects so that it can address the expected future demand for SiC chips. They are as follows:
- Mohawk Valley, New York fab, which is now open, but only ramping toward 20% of total utilization by June 2024. This is for SiC wafers, which eventually get diced up into chips.
- JP (John Palmour) SiC materials facility is now under construction, which is by Wolfspeed's existing facility in Durham, North Carolina. Once complete (by the end of 2024), JP will be the largest such SiC facility in the world.
- An existing SiC device fab in Durham, North Carolina, was expanded, and is ramping up production as Mohawk Valley supplies more raw materials.
- An SiC factory in Germany will also be constructed in the future.
The cash outflow continues
The Mohawk Valley facility, which is only just now entering production, is operating at a loss. And once it reaches 20% utilization by next summer, it's still likely to operate at a loss. Wolfspeed will need to reach closer to 50% utilization to reach breakeven at this facility.
Add in construction costs elsewhere, Wolfspeed is operating deep in the red by all counts. Generally accepted accounting principles (GAAP) losses from continuing operations totaled $124 million in Q1 fiscal 2024. And on a free cash flow basis (which further subtracts money spent on property and equipment), Wolfspeed lost $589 million last quarter.
As I wrote over the summer, Wolfspeed was currently filling up its coffers with cash to meet its construction and new facility ramp-up needs in the coming years. It's now done so, ending September with $3.35 billion in cash and short-term investments (compared to $2.95 billion three months prior).
But it's raising cash primarily by taking on debt, all while interest rates soar to the highest level in decades. Total debt (including debt convertible to stock) tallied up to $5.15 billion at the end of September (compared to $4.18 billion three months prior).
Wolfspeed is to be watched, but not bought?
Given all the construction going on and the expectation for Wolfspeed to burn through cash for the foreseeable future (perhaps through the summer of 2026), Wolfspeed stock still doesn't look like a particularly good bet to me right now.
There's also the turbulence in the EV space. EV demand is still headed higher, but there's some elevated inventory of automotive chips at the moment. That could impact the cadence of Wolfspeed's growth this coming year, which could further impact cash outflows.
I still believe most investors would be best served watching this stock from the sidelines for right now, at least until the company makes more robust progress on breaking even. Until then, expect Wolfspeed shares to be highly turbulent, and focus on other semiconductor stocks.
