(Bloomberg) -- In one of the best years on record for semiconductor stocks, Wolfspeed Inc. managed to lose more than a third of its value. Most on Wall Street aren’t betting on a quick turnaround in 2024.
The maker of chips that control power in electric vehicles and other devices was the only stock in the Philadelphia Stock Exchange Semiconductor index to decline in 2023. Investors soured after delays in its efforts to introduce a more advanced way of making chips that are a vital component of electric vehicles, a ramp up that should make it more profitable. Wolfspeed hasn’t been able to get its new plant in upstate New York running anywhere near capacity.
In a show of how little confidence analysts have in a rally, the average price target on Wall Street was sitting just a few dollars above the stock price at the start of the year, according to data compiled by Bloomberg. Since then, Wolfspeed has fallen another 20% — again making it the worst performer on the benchmark chip index. Fewer than half of the 24 analysts covering the company have buy ratings.
“Their track record has been very inconsistent,” said Chris Rolland, an analyst at Susquehanna Investment Group, citing a string of disappointing earnings reports that ended in October when the company reported better-than-expected sales. “They need to continue to meet, or better yet exceed, revenue expectations from the Mohawk Valley ramp,” he said, referring to the New York plant.
Wolfspeed’s problems stem from production snarls at another one of its plants that is one of the largest makers of silicon carbide wafers. The wafers are what its chips are built on, and inadequate supply is stifling production at the Mohawk Valley chip plant.
Failing to maximize output at an expensive production facility is a cardinal sin for a chipmaker, which faces high fixed costs for production that quickly can become obsolete. The expense of building plants can only be justified if companies can run their plants 24 hours a day at as close to flat out as possible.
If Mohawk Valley can be brought up to full capacity soon, Wolfspeed will be able to lower costs by as much as 40% compared to its existing production and the company should have “major cost advantage” over competitors like ON Semiconductor Corp. for a few years, according to Wells Fargo analyst Gary Mobley.
The clock is ticking, however. Its peers are now reporting that automotive demand is slowing as vehicle makers cut orders to reduce stockpiles of unused parts. Last week, Mobileye Global Inc. warned such a build up was weighing heavily on orders and its first-quarter revenue will drop 50% from a year earlier.
Not everyone is pessimistic about Wolfspeed, of course. William Blair’s Jed Dorsheimer named the stock his “best idea” of 2024. The call is rooted in the belief that Mohawk Valley will soon have the wafers needed to operate at much higher capacity and that wafer supplies from China won’t soon sap Wolfspeed’s competitive advantage.
For Cannacord Genuity’s George Gianarikas, one of 11 analysts who have a buy rating on the company’s stock, owning Wolfspeed boils down to a bet on its ability to make enough Silicon carbide to supply the Mohawk plant.
“Are they going to be able to make that material? I think so, but no one knows, including probably them,” he said in an interview.
The company said there’s more demand than can currently be supplied and that getting its new facilities up and running will fuel a large revenue opportunity.
“Our capacity expansion plan supports a $20 billion market opportunity by 2030,” the company said in an emailed statement. “We are keenly focused on ramping this US capacity, because there is a significant supply/demand mismatch for the foreseeable future.”
When Wolfspeed reports fiscal second-quarter earnings later this month, it’s projected to show a net loss from continuing operations of $139 million, according to the average estimate of analysts. The company hasn’t had an annual profit since 2014 and isn’t projected to return to profitability on an annual basis until 2027.
The Mohawk Valley plant is targeting 20% utilization by the end of fiscal year 2024, which ends in June. To meet the need for more so-called SiC wafers it’s also investing in another facility in North Carolina to grow the crystals that will become the wafers to form the base that the chips are then built on.
For now, as the costs of its bet on production of the newer type of chips mount, all investors want to see is evidence that it’s paying off, according to Cowen & Co. analyst Joshua Buchalter.
“It’s all about how many wafers that they can manufacture at high enough yields to feed their facility,” he said.
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Earnings Due on Thursday
No major earnings expected
--With assistance from Thyagaraju Adinarayan.
(Updates with company statement from 12th paragraph.)
