A lot can happen in a year. Just look at semiconductor specialist Wolfspeed(NYSE: WOLF). Last December, its stock reached a 52-week high of $47.43. Last month, the shares hit a low of $6.10.
During this past year, as part of a strategic shift, the company divested itself of its radio-frequency (RF) devices business. Also, its CEO exited the company. Those were just some of the changes that affected the beleaguered stock.
As of Dec. 13, Wolfspeed shares were down by more than 80% in 2024. Does this mean it's a stock to avoid, or might now be the time to buy?
Wolfspeed's shift in strategy
Wolfspeed is a business in transition. In 2023, it divested itself of its RF devices arm to concentrate on silicon carbide semiconductor products. Silicon carbide materials are widely used in power applications, including electric vehicles (EVs) and solar energy systems, where the material's high heat tolerance is particularly advantageous.
Management's strategic decision to focus on silicon carbide was prompted in part by the secular trend toward battery-powered electric vehicles. These make heavy use of silicon carbide components, and Statista Market Insights predicts that electric vehicle sales will grow from about 9 million units in 2023 to more than 14 million by 2029.
To capture this growth opportunity, Wolfspeed is transitioning its manufacturing facilities from manual production of 150-millimeter (mm) silicon carbide semiconductor wafers to a more automated assembly of 200mm wafers. The 200mm silicon carbide wafers provide greater yield, so the move makes sense. However, shifting its manufacturing processes has elevated the company's costs.
In its fiscal 2025 first quarter, which ended Sept. 29, Wolfspeed generated $194.7 million in revenue, but its net cost to produce that revenue was $230.9 million. Beyond that, it had operating expenses of $230.1 million. In all, it booked a net loss of $282.2 million for the quarter. That's just the start of the company's many challenges.
Wolfspeed's woes
Wolfspeed operates in a cyclical industry that is currently in a downturn. Consumers are purchasing fewer EVs, so there's less demand from automotive manufacturers for its products. This contributed to the company's fiscal Q1 revenue dropping to $194.7 million from $197.4 million in the prior year.
Moreover, implementing fabrication facilities for its 200mm silicon carbide materials is not cheap; the process has required Wolfspeed to amass significant debt. It exited its fiscal Q1 with total liabilities of $7.2 billion, $3.1 billion of which was long-term debt. Contrast this with its total assets at that time of $7.9 billion.
With Wolfspeed's costs up, revenue down, debt high, and profits nonexistent, its board showed the CEO the door in November. Meanwhile, the company has $750 million in CHIPS Act funding at risk. The U.S. government funding was granted to it contingent upon it achieving certain requirements, including the construction of the world's largest high-volume 200mm silicon carbide wafer manufacturing facility.
Wolfspeed is trying to right the ship, with cost-cutting moves, such as reducing its workforce by 20% and halting construction of a new factory in Germany. These moves are expected to produce annual cost savings of $200 million starting in 2026.
To buy or not to buy Wolfspeed stock
Right now, the situation for Wolfspeed looks grim. The question is whether it can rebound over the long haul. Management has stated it expects the current industry downturn to improve in 2025.
Wolfspeed also has several advantages. Its greatest strength is its focus on silicon carbide. This material is a superior alternative to silicon for many use cases due to its higher energy efficiency and greater resiliency and heat conductivity, among other things.
Those benefits underpin a forecast from McKinsey that the silicon carbide market will expand from about $2 billion in 2023 to more than $11 billion by 2030, primarily due to growth in EV adoption. Wolfspeed is the leader in the silicon carbide wafer industry, with more than 50% of the market.
According to the company's management, "Wolfspeed is the first silicon carbide company in the industry to transition its entire device business to 200-millimeter." So it is well-positioned to benefit from market growth.
The recent decline in Wolfspeed's stock price has left the shares attractively valued on a price-to-sales basis. Its P/S multiple is nearly the lowest it has ever been. This suggests the current price is a good value.
Even so, deciding to buy Wolfspeed stock comes down to whether you believe the company can bounce back from its current struggles. If you think it can, now would be a good time to scoop up shares. That said, even if that optimistic view is correct, it could be several quarters or even years before Wolfspeed's business recovers.
Meanwhile, the risks include the possibility of it losing its CHIPS funding and the uncertainties that come with replacing a CEO. Even if you believe Wolfspeed can successfully turn its business around, its stock is only appropriate for investors with a high risk tolerance.
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Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wolfspeed. The Motley Fool has a disclosure policy.
