Where Will Wolfspeed Stock Be In 1 Year?

Semiconductor manufacturer Wolfspeed (NYSE:WOLF) specializes in silicon carbide chips that are increasingly used in the manufacture of electric vehicles. The stock, however, has failed to benefit from the buzz around EVs more generally.

But perhaps the tide is changing, so is Wolfspeed stock a buy now, or will it continue to lag the pack?

Inconsistent Revenue Growth & Deepening Losses

One of the strongest arguments against Wolfspeed is its highly inconsistent revenue growth at a time when many other chipmakers have seen steady advances in sales.

Since the end of 2020, quarterly year-over-year revenue growth rates have ranged from under 1% to over 50%. These wild fluctuations make it difficult for investors to confidently or accurately predict growth rates.

This top line volatility might be more acceptable if Wolfspeed was broadly profitable and delivered consistent margins but unfortunately the company’s last full year of profitability was 2014. On a quarterly basis, it last reported a profit in Q2 of 2022, and losses are continuing to deepen.

In 2023, Wolfspeed lost a total of $330 million and reported a net margin of -87%. In 2022, the loss was a comparatively modest $152 million.

This long trend of losses has also caused Wolfspeed to hunt for capital. As a result, long-term shareholders have been gradually diluted over the last several years.

The number of WOLF shares outstanding hit its lowest point at 97 million in early 2017. Up until then, management had been actively buying back shares but ever since the number of shares has risen to 126 million.

In addition to heavily diluted shares, the years of losses have also left Wolfspeed in a weak financial position. The company’s debt-to-equity ratio is currently 4.5x.

While this debt has been taken on to enhance production capabilities, there is clearly little confidence among investors that the company will be able to translate this into sustained profitability.

Where Will Wolfspeed Stock Be In 1 Year?

According to 16 analysts, Wolfspeed stock can rise to as high as $41.43 per share over the next year.

Despite its fundamental challenges, there are reasons to be optimistic about the long-term potential of the firm. The company’s focus on silicon carbide, a key component for charging systems, tethers it to a growing industry. The EV power electronics market is expected to grow to as much as $15 billion over the next 3 years, and silicon carbide is forecast to claim an ever-growing portion of it.

Mercedes-Benz has already decided to use Wolfspeed components in its next generation of electric vehicle powertrains, providing a boost for the struggling company.

In addition, the manufacture of specialized components for the EV market has notable advantages. Silicon carbide initially caught the industry’s attention in 2017 when Tesla began using it in its vehicles. Though more costly than traditional silicon chips, silicon carbide components offer weight reductions and efficiency gains that more than make up for their costs.

In the view of bulls, this is where Wolfspeed comes to the forefront. The company is currently investing billions of dollars to build what is expected to become the world’s largest silicon carbide manufacturing facility in North Carolina. At this facility, the company plans to create larger wafers of silicon carbide and, by extension, offer parts at lower costs by leveraging efficiencies of scale.

Bulls vs Bears, Who’s Right?

The bull case for Wolfspeed, appealing though it is, is undermined by both uncertainty and a long timeline. Despite attempting to position itself as a leader in silicon carbide, Wolfspeed isn’t without significant competitive threats.

The advanced power electronics used by Tesla, for example, are supplied by STMicroelectronics. The competitive nature of the semiconductor market could lead Wolfspeed to clash with other, much more successful manufacturers for dominance in the silicon carbide niche.

Furthermore, it’s not clear how much of the semiconductor market silicon carbide will eventually claim. For most uses, the far more cost-effective solution of traditional silicon chips remains preferable. While applications like EV power electronics provide exceptions, it’s likely that this material will remain relatively specialized and used only sparingly due to its higher costs.

Finally, the lack of a reasonable timeline for profitability weakens the bull case for WOLF. With the S&P 500 projected to rise around 11% this year and other chipmakers already delivering solid profits, investors incur an opportunity cost by buying companies like Wolfspeed that could take years to produce positive earnings.

While such investments can be worthwhile, they must have enough demonstrated upside to justify their risks. In the case of Wolfspeed, this doesn’t currently seem to be the case.

What About Valuation?

Turning to valuation, we find that the stock’s potential is almost wholly dependent on the success of Wolfspeed’s silicon carbide manufacturing plans. At 3.5x sales, it’s difficult to say that WOLF is particularly expensive for a growth stock. The new North Carolina facility is projected to increase silicon carbide production by up to ten fold, potentially providing significant tailwinds to revenue growth.

While the first phase of construction on that facility is expected to be finished this year, full capacity likely won’t be reached until the end of the decade, a fact which could push revenue growth out too far into the future for investors’ liking. There is also the ongoing problem of financial losses, which doesn’t appear likely to clear up anytime soon.

This leads to the question of whether Wolfspeed could be a value trap. Although analysts offer a median target price near $41.50, implying an upside of more than 60%, WOLF share price has delivered strong negative returns over the last year and a half.

From a high of well over $120 per share, it has fallen to just over $25 per share. Paired with the speculative nature of Wolfspeed’s future, its current steep losses and its high debt load, there is a good chance that WOLF appears to be a better deal than it really is in practice.

Ultimately, Wolfspeed appears to be a stock that is best to stay away from. While there’s a possibility that the company can turn itself around, the growth prospects for Wolfspeed rely on a combination of successful execution and strong growth of the market for silicon carbide power electronics. At the moment, there seems to be too much uncertainty in both of these areas for WOLF shares to be considered an attractive buy.

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