Shares of Wolfspeed (WOLF 15.00%) plunged 37.6% this week through Thursday trading, according to data from S&P Global Market Intelligence.
The rout in the stock largely came on Thursday, following Wednesday evening's earnings release for the company's fiscal first quarter. Wolfspeed had made some positive funding announcements in recent days, but the fruits of its massive debt-fueled buildout haven't shown up yet.
Massive spending, yet revenue decline
In the quarter ending in September, Wolfspeed's revenue declined slightly to $194.7 million, missing expectations, while its non-GAAP (adjusted) earnings per share plunged to negative $0.91, beating the forecast of negative $1. The big loss was due to a number of restructuring charges the company announced, including severance payments and an early facility closure made in an effort to cut costs and right-size its cost base for a weaker-than-expected near-term revenue outlook.
Of note, auto and industrial markets are in a down-cycle at the moment, which is an inopportune time for Wolfspeed and the big investments it's making in silicon carbide chip manufacturing. For the current quarter, management forecasts between $160 million and $200 million in revenue, a sequential decline at the midpoint and well below analysts' estimates of $214.6 million.
Wolfspeed may get CHIPS money, but it has to have a sustainable business model
After an 80% plunge this year, Wolfspeed surged recently after announcing it had signed a non-binding memorandum for $750 million with the U.S. Department of Commerce under the CHIPS and Science Act and another $750 million in funding from a consortium of big-name private equity funds and hedge funds.
However, the dismal earnings report has undone that dead cat bounce for now. If Wolfspeed's massive investments don't start to yield results, the company's liquidity could be called into question. In fact, on the conference call, management noted it would have to raise up to $300 million in equity, diluting shareholders, in order to receive the CHIPS funding.
While the company has $1.69 billion in cash and the other $1.5 billion in total outside funding options, Wolfspeed also already has over $6.1 billion in debt and convertible notes, and it burned through $570 million in cash last quarter alone.
While the stock seems cheap based on its potential, the company's finances make it too risky for me, at least until there are real signs of silicon carbide growth.
Editor's note: This article has been corrected. Wolfspeed beat analysts' earnings estimate. And the company's fiscal second quarter ends in December.
