Down 80% YTD, is the Worst Over for This Beaten-Down Semiconductor Stock?

Semiconductor stocks are experiencing a broader pullback, with industry leader Nvidia (NVDA)dropping 15% since its Q2 earnings announcement in late August. Market watchers cite various reasons for this pullback, including significant valuation concerns, mixed data on the U.S. economy, and ongoing geopolitical tensions, particularly with China. While the VanEck Semiconductor ETF (SMH) is stabilizing today, the Department of Labor is set to announce the latest monthly payrolls data ahead of the bell this Friday, Sept. 6, which will likely give stocks their next directional catalyst ahead of the upcoming Fed meeting. 

Against this broader backdrop, Wolfspeed (WOLF) - a niche player in the semiconductor industry - is facing even greater turmoil, with its shares plummeting 80% year-to-date. The company is grappling with significant operational and financial hurdles from shifts in its semiconductor fabrication process. This dramatic drop has caught the eye of activist investors, drawn by the stock’s low valuation, while multiple analysts have slashed their price targets. Is a rebound finally on the horizon for this significant underperformer - or just more losses?

About Wolfspeed Stock

Based in Durham, North Carolina, and founded in 1987, Wolfspeed (WOLF) is a chip stock company that often flies under the radar. The semiconductor firm specializes in silicon carbide and gallium nitride technologies, offering advanced solutions to enhance energy efficiency. Its products are crucial for various applications, including electric vehicles (EVs), fast charging, 5G technology, renewable energy and storage systems, and aerospace.

Down 93% from its late 2021 highs, WOLF is now valued at just $1.2 billion by market cap - pacing well behind the S&P 500 Index ($SPX), which has gained 15.1% in the same time frame.

The primary reason for this sharp decline is the company’s heavy cash burn due to operational expenses. Wolfspeed is in the process of transitioning its device fabrication to the new 200mm Mohawk Valley Fab, which is currently operating at only 20% capacity. This shift has led to additional costs and operational inefficiencies.

Furthermore, the underutilization of the new facility means that Wolfspeed is not yet realizing the full benefits of its investment, further straining its financial resources. 

The company also faces challenges in scaling up production to meet demand, resulting in delays and increased operational costs. Additionally, the need to train staff and optimize new processes has exacerbated the financial burden. As a result, Wolfspeed’s cash flow has been significantly impacted, leading to a sharp decline in its financial performance.

Wolfspeed Misses Fiscal Q4 Estimates

On Aug. 22, Wolfspeed reported its Q4 earnings results for fiscal year 2024, which fell short of expectations. Sales came in at $200 million, almost flat year-over-year, while the adjusted per-share loss was a wider-than-forecast $0.89. Mohawk Valley Fab contributed approximately $41 million in total revenue, while EV revenue rose more than 100% and notched its third consecutive quarter of growth. The company earned a non-GAAP gross profit of 1%, which is significantly below the sector median of 30%.

Despite these disappointing numbers, the company’s CEO, Gregg Lowe, outlined its priorities and focus on capital structure optimization and the state-of-the-art 200-millimeter fab. He said, “We achieved 20% utilization at Mohawk Valley in June and continued to see strong revenue growth from that fab, targeting 25% utilization in Q1 2025. Our 200mm device fab is currently producing solid results at significantly lower costs than our Durham 150mm fab. This improved profitability gives us the confidence to accelerate the shift of our device fabrication to Mohawk Valley.”

The company is EBITDA-negative by about 46%, burning a lot of cash in its expenditures and operational costs. However, the company is taking steps to optimize its capital structure for both the short and long term, including the fab shift to Mohawk Valley (which should result in significantly lower costs compared to the 150mm Durham Fab) and expanding its production footprint to support expected growth.

WOLF guided for an adjusted loss per share of $0.90-$1.09 for the current quarter on revenue of $185-$215 million, which fell short of analysts' expectations on both measures. However, EV revenue for fiscal Q1 is expected to rise roughly 300% year over year, while the cash-strapped company also trimmed its current-quarter capex forecast by $200 million to $1.2 billion.

The Bull Case for WOLF Stock

Wolfspeed stock could be considered undervalued after its steep decline, presenting an entry point for investors who think the company has longer-term growth potential. The shares are currently trading at a 1.30 price-to-sales ratio, a discount of more than 50% to the tech sector median.

WOLF's underperformance has also made it a target for activist investors. Jana Partners has built a “significant” stake in the semiconductor company, and wrote a letter to the Wolfspeed board earlier this year, urging them to consider a sale or other strategic alternatives as part of its broader “efforts to reverse its woeful performance for shareholders.”

What Do Analysts Say About Wolfspeed Stock?

Amid the stock's heavy losses, Bank of America recently cut its WOLF price target from $25 to $15, while maintaining an "Underperform" rating. 

Similarly, Canaccord Genuity cut its Wolfspeed price target from $45 to $25, as analyst George Gianarikas maintained a “Buy” rating, but urged management to communicate the company’s turnaround plan more clearly and concretely.

“The company has made commendable progress in improving its 200mm operations, enhancing performance and utilization ahead of schedule,” he wrote. "However, persistent negative earnings revisions, stemming from various factors like I&E weakness, RF challenges, and equipment issues, have eroded market confidence."

Overall, Wall Street analysts remain relatively optimistic about Wolfspeed stock, which has a consensus rating of "Moderate Buy." Out of 17 analysts covering the stock, 5 recommend a "Strong Buy," 11 suggest "Hold," and 1 advises a "Strong Sell."  The average 12-month price target of $21.87 implies expected upside of 150.8% from current levels.

Final Words

Despite ongoing operational challenges and a significant correction in its stock price, Wolfspeed is trading at a discounted valuation, presenting substantial upside potential based on analysts' price targets. However, given the uncertainty surrounding the expected timeline of its turnaround, this investment carries considerable risk, making it more suitable for those with a higher tolerance for volatility and a long-term perspective.