Wolfspeed (WOLF +0.00%), the chipmaker formerly known as Cree, lost more than 90% of its value over the past three years. It was a hot stock during the peak of the meme stock rally in late 2021, but its shares crumbled as its growth stalled out.
Does that pullback represent a buying opportunity for contrarian investors? Let's review its business model, near-term challenges, and valuations to decide.
Image source: Getty Images.
What happened to Wolfspeed over the past few years?
Wolfspeed manufactures wide-bandgap (WBG) semiconductors, which are made from silicon carbide (SiC). These chips can operate at higher voltages, temperatures, and frequencies than traditional silicon chips.
That resilience makes SiC chips well suited for short-length LEDs, lasers, 5G base stations, and military radars. They've also been increasingly used in electric vehicles (EVs), solar panels, wind turbine systems, and other green energy solutions.
NYSE: WOLF
Key Data Points
Wolfspeed is the leader of the SiC chip market, which Global Markets Insights estimates could grow at a compound annual growth rate (CAGR) of 10% from 2024 to 2032. To support that secular expansion, Wolfspeed opened the world's largest 200mm silicon carbide plant in New York in 2022 and broke ground on a new North Carolina plant in 2024.
From fiscal 2019 to fiscal 2024 (which ended in June 2024), Wolfspeed's revenue grew at a CAGR of 8%. It was disrupted by the onset of the pandemic in fiscal 2020, but it recovered in fiscal 2021 and fiscal 2022 as the EV market rapidly expanded. But over the following two years, its growth decelerated and its gross margin crumbled.
|
Period |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|---|---|
|
Revenue growth |
(16%) |
12% |
42% |
24% |
6% |
|
Adjusted gross margin |
36% |
34% |
36% |
33% |
13% |
Data source: Wolfspeed.
That slowdown can be attributed to four major challenges. First, the global EV market cooled off as inventories rose, prices dropped, and the macro headwinds curbed consumer spending. Second, rising interest rates chilled the green energy and industrial markets. Third, China banned its exports of gallium and germanium (two essential metals for producing SiC chips) amid the escalating tech war in 2023. Last but not least, many companies likely pivoted their spending toward artificial intelligence (AI)-oriented chips instead of SiC chips as new generative AI applications hit the market.
It isn't surprising for a chipmaker to experience a cyclical slowdown, but expanding during a downturn can crush its margins and result in steep losses. That's what Wolfspeed did by expanding its New York and North Carolina plants over the past two years. Wolfspeed expects the increased utilization of its New York plant and the opening of its new North Carolina SiC plant to reduce its overall die costs by at least 50%. However, it will take several more years for those economies of scale to kick in.
As a result, its adjusted gross margin plunged in fiscal 2024. It generated $807 million in revenue that year, but its net loss widened year over year from $330 million to $864 million. Wolfspeed plans to lay off a fifth of its workforce and restructure its business to offset that pressure, but it should remain unprofitable for the foreseeable future.
What will happen to Wolfspeed over the next few years?
For fiscal 2025, analysts expect Wolfspeed's revenue to decline 2% to $790 million as its net loss widens to $975 million. That's a lot of red ink for a company that ended its latest quarter with $726 million in cash and equivalents with a high debt-to-equity ratio of 10.2. Wolfspeed's board also fired CEO Gregg Lowe, who had led the company since 2017, in mid-November. It hasn't appointed a permanent CEO yet.
Wolfspeed's business could warm up again as the EV market stabilizes and the macro environment improves, but its steep losses, high leverage, and management issues all cast dark clouds over its future. For fiscal 2026, analysts expect its revenue to rise 49% to $1.17 billion as it narrows its net loss to $438 million -- but investors should be skeptical of those optimistic expectations until they see how its turnaround efforts play out.
With an enterprise value of $6.1 billion, Wolfspeed trades at 8 times this year's sales. That valuation might be reasonable for a growth stock, but it's a bit too high for a struggling chipmaker that faces an uncertain future. Other larger chipmakers, like Infineon and On Semiconductor, have also been expanding into the SiC market. That competitive pressure could prevent Wolfspeed from expanding its gross margin and narrowing its losses.
Is it the right time to buy Wolfspeed's stock?
Wolfspeed could recover from its deep cyclical downturn, but it could drop even further before it finally bottoms out. I'd keep an eye on Wolfspeed for now, but I wouldn't pull the trigger until it stabilizes its sales, narrows its losses, and hires a new CEO.
