Can Wolfspeed (WOLF +0.00%) get back from the edge of a financial cliff, or is this company a lost cause and its stock a falling knife? Let's see what Wolfspeed might do over the next year.
My lucky Wolfspeed experience
I used to own a few Wolfspeed shares. The alternative semiconductor stock entered my portfolio under the old Cree name in April 2020. I had been following the maker of LED lighting and silicon carbide chips for years, and the stock looked like a steal in the darkest days of the COVID-19 pandemic.
Two and a half years later, I started to wonder why I was holding on to Wolfspeed's stock. The post-pandemic rebound looked complete, and I wasn't excited about the company's growth prospects anymore. So I closed that position at a 156% gain -- well ahead of the S&P 500's (^GSPC +0.54%) 42% rise over the same period.
I can't claim any genius insight saving me from huge Wolfspeed losses. It just didn't make sense in my portfolio anymore.
I rarely close my stock positions, trying my hardest to find robust long-term winners. Holding on in weaker periods is a crucial part of that wealth-building strategy. But selling can still be the right move sometimes, and I'm glad I lost faith in Wolfspeed three years ago.
NYSE: WOLF
Key Data Points
Why Wolfspeed filed for bankruptcy
Right now, the company is going through the Chapter 11 bankruptcy protection process. Buried under a mountain of expensive debt papers, Wolfspeed spent 43% of revenues in the latest quarterly report on interest fees. That didn't leave much room for innovation, investing in the future, or running a successful business. And profits were hard to find below the interest-paying line.
Now, the whole point of Chapter 11 is to restructure the company's soul-crushing debts. That is indeed happening.
Wolfspeed had $6.54 billion of long-term debt due for repayment as of June 29. Its cash reserves stopped at $955.4 million.
Under the Chapter 11 reorganization, the debt balance drops to $2 billion, and Wolfspeed's cash equivalents are up to $1.3 billion. Quarterly interest payments should drop by more than 60% under this deal, which got the court approval rubber stamp last week. By the end of September, Wolfspeed will have dropped two-thirds of its debt and added a bit of extra cash to its coffers.
Wolfspeed stock will mostly disappear
The debt forgiveness has a downside, though.
The Wolfspeed stock you see today won't be around much longer. The company will cancel these shares and issue new stock under a different symbol by the end of this calendar quarter -- ergo, in the next two weeks. The holders of Wolfspeed's convertible debt notes will become the majority owners of the new stock, while owners of the current Wolfspeed stock get a much smaller stake.
"Existing equity holders expected to secure 3%-5% of new issuance," Wolfspeed's Chapter 11 infographic says.
That's not a typo. The tiny ownership staying with existing shareholders was proposed in the original Chapter 11 filings, published on June 22: "Pursuant to the transactions, existing equity will be cancelled, and the existing equity holders will receive their pro rata share of 3% or 5% of new common equity, subject to dilution from other equity issuances and potential reduction from certain events."
In plain English, the current stock will lose nearly all of its value in the next few weeks. If the Wolfspeed successor's market cap stays in the $450 million range you see today, about $18 million of that equity will be split between all the existing shares.
Image source: Getty Images.
Can Wolfspeed bounce back after this? Well, sort of.
So Wolfspeed itself should be doing better by September 2026. Thanks to the dramatically lower interest expenses, management expects to turn a profit after the restructuring. Silicon carbide has some unique advantages over classic silicon, particularly suitable for applications with extremely high power draws and silicon-melting temperatures.
While the company may stick around for decades, it would do so under a different ownership structure. When the final Chapter 11 reorg takes effect, the Wolfspeed stock will lose about 96% of its value.
If you want to invest in the company's long-term business prospects, you should sit on your hands until October. This is the wrong time to reach for Wolfspeed's falling machete.
