Wolfspeed (WOLF +0.00%), a producer of silicon carbide (SiC) chips, was once a red-hot semiconductor stock. Its shares surged to a record high of $141.87 on Nov. 16, 2021, clocking in a near-470% gain over the previous five years.
At the time, investors were dazzled by the resilience of its SiC chips, which could operate at higher voltages, temperatures, and frequencies than traditional silicon chips. Those chips were well suited for short-length LEDs, lasers, 5G base stations, military radars, solar panels, wind turbine systems, and electric vehicle (EV) powertrains.
Image source: Getty Images.
But today, Wolfspeed's stock trades at about $5. Its stock crashed as its growth stalled out and its margins crumbled. So would it be wise to take the contrarian view and buy Wolfspeed's stock while the bulls look the other way?
Why did Wolfspeed's stock crash?
In fiscal 2022 (which ended in June 2022), Wolfspeed's revenue soared 42% as its adjusted gross margin rose two percentage points to 36%. A lot of that growth was driven by the rapid expansion of the EV market.
But in fiscal 2023, its revenue only rose 24% as its adjusted gross margin slipped to 33%. In fiscal 2024, its revenue grew just 6% as its adjusted gross margin fell to 13%. That slowdown intensified in the first half of fiscal 2025.
|
Period |
Q2 2024 |
Q3 2024 |
Q4 2024 |
Q1 2025 |
Q2 2025 |
|---|---|---|---|---|---|
|
Revenue growth |
20% |
4% |
(1%) |
(1%) |
(13%) |
|
Adjusted gross margin |
16% |
15% |
5% |
3% |
2% |
Data source: Wolfspeed.
Wolfspeed's sales growth stalled out as the EV market cooled off and more companies prioritized purchases of artificial intelligence (AI)-oriented data center chips. Tesla, one of Wolfspeed's top customers, further rattled the bulls by predicting its upcoming powertrains would use 75% fewer silicon carbide chips. The competitive headwinds intensified as other big chipmakers, including Infineon and On Semiconductor, expanded into the silicon carbide market.
Wolfspeed expects its revenue to decline 0% to 15% year over year in the third quarter of fiscal 2025. For the full year, analysts expect its revenue to decline 6%. That grim outlook indicates the chilly SiC market won't warm up anytime soon.
NYSE: WOLF
Key Data Points
Slowing growth, rising costs
As its top-line growth slowed down, Wolfspeed ramped up its expansion of its New York and North Carolina plants over the past two years. It expects the higher utilization of those plants to reduce its overall die costs by over 50%, but it could take years for those tailwinds to kick in. For now, those investments are squeezing its gross margins.
To offset that pressure, it laid off a fifth of its workforce, restructured its business, and obtained $750 million in direct funding from the U.S. Department of Commerce's CHIPS and Science Act. Yet it remains deeply unprofitable, and it ended its latest quarter with $6.66 billion in total liabilities -- which gives it a high debt-to-equity ratio of 17.9.
As Wolfspeed grappled with that slowdown, its board fired CEO Gregg Lowe last November. It hasn't appointed a permanent CEO yet, and it's unclear if its next leader will continue to expand its plants or focus on cutting costs instead.
However, it could reach its cyclical trough in 2025
Wolfspeed's near-term outlook seems grim, but analysts are still optimistic about the SiC market's growth potential. According to S&S Insider, the SiC market could still grow at a compound annual growth rate (CAGR) of 9.7% from 2024 to 2032.
From fiscal 2025 to fiscal 2027, analysts expect Wolfspeed's revenue to grow at a CAGR of 44% from $757 million to $1.57 billion as the SiC market warms up again. Wolfspeed is well poised to profit from that recovery, since its New York and North Carolina plants make it the largest manufacturer of SiC chips in North America. The U.S. also recently banned American companies from purchasing SiC chips from Chinese chipmakers, and that protectionist move could boost Wolfspeed's sales.
But with an enterprise value of $6.2 billion, Wolfspeed doesn't seem like a bargain at 6 times next year's sales. It might seem reasonably valued if it passes its cyclical trough this year and starts growing again in fiscal 2026, but it could be risky to bet on that cyclical recovery before some more green shoots appear.
Should you buy Wolfspeed today?
Wolfspeed's stock could stay in the penalty box for a long time. The SiC market could warm up again, but the company still faces too many near-term challenges. So for now, I'd avoid it and stick with more reliable semiconductor stocks instead.
