The Electric Vehicle Industry’s Most Controversial Company: A Golden Opportunity or a Recipe for Disaster?
The electric vehicle (EV) industry has been experiencing a severe slowdown, and within the EV supply chain, silicon carbide (SiC) manufacturer Wolfspeed has emerged as one of the most controversial companies. With its stock down over 90% from its highs, investors are left wondering if this is a golden opportunity or a recipe for disaster.
A Complicated Story Unfolds
Wolfspeed’s story is more complicated than your typical stock. The company, formerly known as Cree, underwent a significant transformation five years ago, shifting its focus to power semiconductors to target the electric vehicle and infrastructure segments. This strategic move involved selling its lighting products businesses and renaming the company Wolfspeed. However, the journey has not been smooth, with the company facing significant challenges in the EV market.
The SiC Advantage
SiC, an infused silicon, offers higher conductivity, making it a valuable material in electric vehicles and infrastructure, as well as AI data centers. Wolfspeed invested heavily in becoming a SiC leader, but its efforts have been hindered by the soft EV market. The industrial and auto chip markets have experienced a severe downturn amid higher interest rates, leading to questions about the adoption rate of electric vehicles.
Lackluster Performance and Debt Concerns
Wolfspeed’s revenue has been lackluster, with the company guiding to flat-to-down revenue in the current quarter. This is despite investing nearly $4 billion in property, plant, and equipment. The company’s debt situation is also concerning, with over $6 billion in debt or debt-like obligations against just $1.7 billion in cash. The recent raise of another $750 million in debt from high-profile hedge and private equity funds, as well as securing $750 million in grants from the government under the CHIPS Act, may provide some relief, but it also means the company will have to dilute shareholders by 25%.
Uncertainty and Concerns
The departure of CEO Gregg Lowe has added to the uncertainty surrounding the company. While insiders have made significant bets on Wolfspeed shares, the lack of a CEO and the company’s execution issues are major concerns. The wind-down of the 150mm facility and the ramp-up of the 200mm plant in Mohawk Valley, New York, may explain some of the revenue shortfall, but it’s hard to tell.
Reasons for Optimism
Despite the challenges, there are reasons to be optimistic. Wolfspeed has billions in “design-ins” and “design wins” with auto customers, indicating theoretical future revenues. The company’s 200mm SiC plant is where most of its value lies, and success there may be masked by the wind-down of the legacy 150mm plant. If the EV sector reaccelerates, customers fulfill their design win commitments, and Wolfspeed’s 200mm production really does win out over competitors, the stock could be very cheap.
A Risky Bet
However, there are many uncertainties that need to be addressed before investing in Wolfspeed. The company’s debt load adds a significant amount of risk, and the market cap doesn’t factor in the debt. For now, it’s wise to approach with caution and monitor the situation closely. If some of the uncertainties in the EV market are worked out, a well-regarded CEO is selected, and the positive scenario envisioned by management begins to emerge, the stock could become a turnaround story. But for now, it’s a risky bet.
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