Replacing ordinary silicon with silicon carbide has never been a bad idea. The carbon-toughened version of the simple material can be used for higher voltage applications like solar inverters and electric vehicles, since it tolerates higher levels of heat. It's also just more power-efficient. That's why no one's criticized Wolfspeed (WOLF 1686.78%) for doubling down on the science by virtue of getting out of the LED light bulb business -- when the company was still called Cree -- back in 2020.
As time has marched on though, Wolfspeed's silicon carbide business hasn't proven any more fruitful. The organization's still got no real revenue to speak of ($758 million for its recently ended fiscal year), and certainly no profits. In June of this year, it officially began long-anticipated Chapter 11 bankruptcy protection proceedings, in fact.
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The stock's multiyear sell-off, of course, reflects all of this.
The funny thing is, this could be one of those rare cases where it makes sense to step into a position in a bankrupt company even before the process is complete. The mere news of the reorganization may have already done all the damage to shareholder value that it's going to do, and every interested party is seemingly trying to find a way for Wolfspeed to continue making and marketing its potentially game-changing material.
The question remains, however ... what awaits on the other side of the reorganization effort?
Is Wolfspeed just ahead of its time?
A quick primer for the unfamiliar: Simple silicon still works well enough in all your electronic devices. The decades-old material is overdue for an upgrade, though. Higher-voltage machinery like electric vehicles, EV charging stations, data center power supplies, and renewable energy equipment are forcing it, in fact; every watt, volt, and amp counts these days. Silicon carbide's wider "bandgap" provides a crystalline molecular matrix that provides better heat durability and requires less power to push higher-voltage electrical current all the way through it.
The only problem? The technology is expensive. Like, wildly expensive ... roughly three times as much as ordinary silicon. That's why the industries that would obviously benefit from its use aren't biting just yet despite Wolfspeed's best efforts.
It's possible, however, that this company was just a little too ahead of its time, investing too much money to come up with a solution that the world wouldn't be ready to embrace for a few more years.
The irony? With the echoes of Wolfspeed's Chapter 11 bankruptcy protection petition still ringing, the planet may actually be on the verge of being ready for silicon carbide. From here, industry research outfit Global Market Insights believes the world's silicon carbide market is set to grow at an average annualized pace of more than 34% through 2034.
What if, however, Wolfspeed's bankruptcy is less about fighting for its life and more about entering this era of silicon carbide's growth with as little debt baggage as possible?
That may well be the case, which, if it is ... brilliant!
Buying Wolfspeed requires some strategic thinking
Don't misread the message. No company wants to declare bankruptcy for any reason. Its shareholders don't want it either, nor do its creditors.
Except, Wolfspeed's bankruptcy seems unusually amicable. Its lenders are reportedly supportive of the plan that will wipe out about 70% of the company's $6.5 billion in debt, with a big chunk of its debt holders receiving shares of the struggling company in exchange for the bonds they had been holding.
Then there's something relatively new CEO Robert Feurle said along with the company's official announcement of its Chapter 11 filing: "We are continuing to move forward with our accelerated restructuring process to strengthen our capital structure and fuel our next phase of growth."
And notably, while current shareholders will only receive an estimated 3% to 5% of the newly restructured company's new equity, the stock's 98% pullback from its 2022 peak arguably already reflects this loss. In other words, the scraps that newcomers are buying here and now could already be fully devalued, reflecting the impact of the reorganization now underway. Indeed, new buyers would be stepping into discounted shares of a company that's technically never been more promising than it is right now.
A life-changing prospect for Wolfspeed investors?
But back to the titular question ... could buying Wolfspeed today set you up for life?
The answer to the question requires an acceptance of two important realities.
First, this is anything but conventional stock-picking. You'd be buying into a company that's not only declared bankruptcy, but buying it even before those proceedings are finalized. Although the judge overseeing this case (Christopher Lopez, of Texas' southern district) accepted the intended restructuring that at least most of Wolfspeed's creditors reportedly support, unexpected twists and turns do happen.
Second, even if the company comes out of its bankruptcy in better shape than it entered it, the silicon carbide market hasn't exactly gelled yet.
There's the rub. As promising as Global Market Insights' 10-year outlook is, already losing hundreds of millions of dollars per year just on relatively steep operating costs, Wolfspeed needs the next two years to be tremendous ones. And a proverbial temperature check of the silicon carbide market doesn't suggest this is imminent. Further weighing on Wolfspeed's potential penetration of the nascent market is the emergence of silicon carbide rivals ranging from STMicroelectronics to Entegris to Coherent just to name a few.
Connect the dots. Any success Wolfspeed achieves is going to be hard-fought, to say the least.
So, take your shot if you must; it may well work out. Just don't lose perspective on the low-odds/high-risk trade you're making here. It could set you up for life, but it likely won't. There are more promising opportunities out there, even if their upside isn't as great as the narrow sliver of a chance that any post-bankruptcy Wolfspeed shares could soar.
