Wolfspeed (WOLF) endured a tough stretch, but with the company emerging from bankruptcy, hope is anew. Its newly issued shares skyrocketed higher on their first day of trading, but investors who owned shares prior to the company emerging from bankruptcy came back with a lot fewer of the new shares.
If you held on through the bankruptcy, you got roughly one new share for every 120 old ones. That's tough, but what matters now is where the stock goes from here?
Emergence from bankruptcy
Wolfspeed rushed into a prepackaged Chapter 11 bankruptcy to significantly lower its debt load. It accomplished that by reducing its debt by about 70% and its annual cash-interest expense by around 60%.
CEO Robert Feurle said that the heavy capital spending phase is now behind Wolfspeed, and it is time to put its manufacturing footprint to work. The company ran into debt issues while building out its John Palmour Materials facility in North Carolina and the Mohawk Valley semiconductor fabrication plant in New York as it went all in on silicon carbide.
Wolfspeed's plan was to become vertically integrated in order to control its own supply chain. That looked like a smart decision on paper, but the company's execution was poor. Its facilities took too long to ramp up, which led to negative gross margins and operating cash flow. Together with high capex spending, its free cash flow for its fiscal year ending in June was a whopping negative $2 billion.
With its debt now reduced, Wolfspeed must get its manufacturing facilities to run efficiently with high yields. Semiconductor manufacturing isn't easy, which is why most chipmakers today turn to companies like Taiwan Semiconductor Manufacturing to do it for them. Manufacturing silicon carbide wafers is even more complex, and for its business to be successful, Wolfspeed basically needs to control the whole supply chain.
The company is making a big bet by shifting to larger 200mm silicon carbide wafers. Larger wafers equal more chips per wafer, which should lower unit costs, but it is technically challenging to get good yields on them. There is a higher defect rate early on. If it can get yields up, the economics can improve sharply. It has spent a massive amount of money on these new facilities, and it needs them to produce acceptable yields.
Wolfspeed's results so far show how far there is to go. Last quarter, it still had a negative gross margin of 13%, and even its adjusted gross margin was -1%. This is largely the result of underutilization costs at its Mohawk Valley fab. Meanwhile, its adjusted earnings per share (EPS) amounted to a loss of $0.77.
The company has talked about generating $200 million in unlevered operating cash flow by fiscal 2026, but interest payments will still run over $125 million even after the debt reduction. That would leave it with less than $75 million in operating cash flow versus $4.6 billion in debt. There is not much margin for error if execution slips again.
Image source: Getty Images.
Is the new Wolfspeed a buy?
Wolfspeed still has an attractive long-term opportunity in front of it, with silicon carbide still in high demand for things like electric vehicles (EVs). Silicon carbide is better than silicon at high temperatures, which is important when it comes to EV range and performance. As such, Wolfspeed is positioned if EV robotaxi fleets are going to soon be filling the streets of major U.S. cities.
That said, investors should be realistic. While its balance sheet is in better shape and new management is in place, Wolfspeed still needs to prove it can get its manufacturing right. If you believe in the growth of silicon carbide in EVs and think Wolfspeed's plants can finally deliver, the stock could be interesting at these levels. Nonetheless, it remains a high-risk turnaround story that is best suited for investors willing to make a speculative bet.
