Wolfspeed’s Stock Crash: Bargain or Bust?

Wolfspeed’s Stock Crash: Bargain or Bust?

If you haven’t heard about silicon carbide and  Wolfspeed stock then consider yourselves lucky   if you have then you’re probably suffering from  analysis paralysis So today we’re going to discuss   briefly the broader SiC thesis so SiCstands for  silicon carbide this isn’t your typical bull  

Thesis wankathon we’re going to focus on shooting  holes in the thesis we’re going to look at Main   players in the story mainly around 8 in wafer  production and if you’re familiar with the six   story you’ll know why that’s relevant we’re going  to look at pure playness we’re going to discuss  

Wolfspeed a bit more on the back of a recent  research piece we did on the topic mainly are they   going to survive and most importantly what are  key metrics for investors or would be investors   to watch and we’re going to try to simplify what’s  we found to be an extremely complex topic because  

There’s so much commentary out there about it now  a short history of SiC or silicon carbide it’s a   wafer of silicon and carbon compressed and sir  Elon of Musk used his first principles thinking   and employed this new material in Tesla’s traction  inverter and what it basically does is for several  

Hundred dollars more to use this miracle material  that translates to $2,500 in savings through   better vehicle design so for example batteries can  be smaller and last longer however Tesla’s use of   SiC is in question we’re going to talk about that  later so as this technology improves larger Wafers  

Can be produced which lower the cost of production  which spurs adoption so everything moves to 8 in   because of this great chart from a DIGITIMES  Research Special Report I came across we’re   very grateful to these folks based out of Taiwan  for the work they did on this that we’re going  

To leverage throughout this presentation here you  can see the efficiency I talked about between the   6in wafer and the 8 in you know you can just cut  more pieces out of it if you will so you have less  

Losses you can see that there and then the single  chip cost comparison between the larger wafer and   the smaller Wafers that larger wafer is actually  less so it’s it’s beneficial across the board and   the leader in SiC right now in terms of Wafers  supplied so we’re going to differentiate between  

Materials and products that use SiC so Wolfspeed  is the technology leader in this industry so   that’s very important because we only invest in  leaders and basically Automotive is the fastest   growing in majority use case that’s why we’re  interested because we want exposure to electric  

Vehicles without investing in OEMs or we’d be  open to investing in an OEM such as BYD but we’d   like to explore the EV chip thesis so equally  attractive are also their non-auto use cases   like industrial energy which is actually seeing  a retraction right now but Wolfspeed exited their  

RF business you can see that on the chart here so  that’s just something worth noting now if you’re   interested in our previous research you can start  here and look these articles up on our website   we’re building on that research the B thesis has  been discussed ad nauseum so what are reasons to  

Avoid Wolfspeed well we can use this SWOT analysis  something a tool they give you in B School I’ve   highlighted the right hand side weaknesses for  Wolfspeed would be poor execution we’ll talk   about that their heavy leverage threats would  be competition especially China and then on the  

Left- hand side you have strengths well they’re  the leader and opportunities well the growth of   silicon carbide so this piece from DIGITIMES  Asia from late last year is very telling so it   says that previously silicon carbide materials  from China accounted for only 5% of the global  

Market however by 2024 they’re expected to grab a  substantial market share so there’s approximately   four to five leading companies engaged in  silicon carbide crystal growth in China and so   you can just measure their capacity to figure out  China’s capacity right or contribution to Global  

Production so that was around 60,000 units a month  that’s going to double this year so they’re going   to be producing about 1.5 million units annually  and to put that into perspective the estimated   Global Supply of SiC wafers in 2023 so last year  was 1.7 million units so it’s predicted that  

China’s 2024 Supply could potentially that’s this  year could potentially account for about half of   the global market shares so that would imply what  a 3 million unit demand so the other question we   had here is how long before the Chinese start  producing 8in Wafers and this piece didn’t say  

But just look at what China did to the solar panel  industry and you ought to be very scared if you’re   somebody in the US that’s competing against the  Chinese when it comes to anything silicon based   so let’s talk a little bit about economics  supply versus demand so silicon carbide is  

Needed for electric vehicles and they’re growing  like mad means there isn’t enough silicon carbide   consequently everyone’s ramping production we see  that now since there’s not enough supply right   now costs are going to be high and oems are  looking for substitutes and Tesla’s done that  

We’ll discuss that in a second what happens then  is that demand decreases and when that massive   supply comes online and there’s no turning around  that investment ship once you start building a   factory then you’ve got all this excess supply  and price Wars ensue and then the Chinese will  

Clean house like they did with solar panels that’s  a concern and when you look at Tesla here it says   Tesla plans to slash silicon carbide use sending  some chip makers shares down you can see the   usual suspects here look at this little exerpt  on the right so it differentiates between SiC  

Materials and SiC devices so it’s very important  to note for SiC materials they site WOLF, COHR,   and Rohm. we’ll talk about those and then you can  see here they say that the possibility of Cheaper   chips could drive up EV adoption globally again  going back to the 8 in production that’s coming  

Online so why did Tesla do this well probably  because of the cost and supply considerations   they figured out a way to use 75% less SiC  without compromising the performance or the   efficiency of the car and according to DIGITIMES  it’s said that Tesla has gotten a hold of  

Virtually all of STM’s SiC capacity now STM is  a notable player three cited in this DIGITIMES  Research Special Report on the SiC wafer industry  status for 8in wafers three players mentioned STM   Wolfspeed we already know enough about them and  Rohm which is a Japanese firm so when it comes to  

STM this was raised on our last EV chip video as  somebody correctly pointed out the acceleration   of STM’s SiC revenues but we look at exposure  so even though they might have had a billion   dollars in SiC revenues last year that’s just  6% of total revenues you’re not getting a lot  

Of that exposure if they hit the 5 billion Mark  7 years from now so it’s expected by I think   2030 they’re going to have $5 billion that means  you’re waiting 7 years to get 29% exposure to the  

SiC thesis and in the meantime if the other part  of their business grows then you’re actually going   to have less exposure that’s a good problem  to have right but if the other side of their   business shrinks that’s going to offset the SiC  growth and then what do you really have well you  

Have more exposure but overall you haven’t fared  too well this is why we’re looking for more of a   pure play than a firm like STM that gives you  broader exposure reminiscent of this would be   Qualcomm’s supposed exposure to Auto and you  look at the numbers well it’s only 7% of total  

Revenues well that’s not a lot of exposure even  though they may be a big player in that space so   when we look at Rohm they’re the third 8 inch  player and you can see here that they’ve made   an $800 million investment for the years of 2021  through 2025 they have volume production starting  

They say this year with 600 million in revs and  an added 15% market share by 2025 so then they   say by that they currently have 15 and that they’d  have 30 by next year well hard to say but we like  

To extend a thank you to DIGITIMES for the great  work they did that we used and leveraged in our   presentation so just before we get to talking  about Wolfspeed some more I wanted to draw your  

Attention to our online store which you can access  just right below this video and here’s some of the   artifacts in there so our dividend growth report  that’s still on sale that shouldn’t be I’m going   to have to chastise one of our interns please  don’t buy that because it’s supposed to be at  

Full price wait till we change it to full price  then buy it we have our new money portfolio there   you can see that’s a collection of 20 stocks 10  dividend growth and 10 disruptive growth stocks   we find most compelling and then of course there’s  the usual merch throughout this year we’re going  

To be adding artifacts these are just some of the  things that Nanalyze Premium subscribers enjoy   with the subscription so thoughts on Wolfspeed  great build it and they will come story here and   I I did the original research piece that we put  out in 2022 and I found it more compelling than  

I thought I would but it’s an extremely complex  thesis with lots of moving parts that’s evident   by the amount of complex analysis you can find  in the wild it’s incredible how many firms out  

There have really dug into this so what you then  need to do is try to make things simpler and you   can do that by identifying simple metrics to avoid  analysis paralysis we did that here three metrics   revenues ultimate ground truth that this company’s  produce something that customers are buying that  

Extends across the board in disruptive growth  investing gross margins you you have to have   positive gross margins otherwise you don’t have a  business these need to be trending upwards we’re   going to talk about why they’re in the wrong space  right now and survivability that comes down to for  

Wolfspeed because they’re spending so much capex  that comes down to free cash flows which include   that capex expenditure so poor execution is  one thing that that Wolfspeed is guilty of   so if you look at their 2022 analyst day they  guided to $1.6 billion in fiscal 2024 in May of  

Last year suddenly they guided to 1 billion to 1.1  billion that’s assuming a 20% capacity utilization   at Mohawk Valley that’s the big Factory they’re  trying to get online by Q4 2024 that’s fiscal and   the fact that somebody should be taken out back  and shot for using fiscal years it makes things  

So confusing so weeks ago in their earnings call  they said they’re on track for 20% utilization in   fourth quarter of fiscal 2024 so they should hit  that guidance right doesn’t look like it so here   you can see revenues for fiscal 2024 you have  actuals there Q1 and Q2 then you have Q3 that’s  

At their midpoint guidance and then Q4 would need  to hit close to $400 million just to hit the low   end of their guidance so they’ve they have a real  problem with forecasting revenues and that comes   down to one metric which is that utilization guess  what shares wouldn’t be trading so low if guidance  

Was met we said that in our last piece we said  if things don’t go well with their new Factory   Shares are going to take a beating and they have  they simp not executing and markets punishing them   for that so time equals money and these delays  are going to create balance sheet weaknesses and  

Potential delution and the outcome is either one  of two stories management writes the ship in the   coming year valuations return to normal and  shares outperform as management continues to   execute through 2030 realizing the potential  of the story or you have poor execution that  

Continues and the value of this opportunity is  eroded as Wolfspeed isn’t able to accomplish   nearly what they’ve promised investors and you  ask yourself which outcome seems more likely today   well they really need to restore some confidence  for investors and one problem when you think about  

Systemic risks and survivability it’s free cash  flow remember we mentioned that as a metric to   watch so they blew through $3 billion in cash over  the past rolling year you see these charts on the  

Right one on the top there is the actuals the  one this is the free cash flow so you see it’s   trending downwards but it’s quite volatile the  chart below that simply um does a rolling one-year  

Window into that so you see that trend that’s not  good so they have $2.6 billion in cash left well   they blow they blew through $3 billion over the  last last rolling year raising more debt is not  

An option so their debt to equity somewhere around  four where greater than two is considered risky so   are they going to sell depressed shares to raise  more cash well that concern that they’re going to   dilute shareholders causes the share price to drop  and that’s a vicious cycle so the question here is  

When’s this trend going to reverse that the arrow  is pointing to there and that’s what if you’re an   investor you need to be watching paying very close  attention to that and this I think was taken from  

Their 2022 investor deck and it shows that this  year or say fiscal 2024 is expected to be the   worst year for the company and that remains to be  seen then if they’re able to turn that around you  

See is is the cash they have remaining sufficient  to get them all the way through fiscal year 2026   when they expect to have positive free cash flows  well we just don’t know and that uncertainty of  

Course is having an impact on shares here you can  see this chart by simply Wall Street showing that   spike in debt and that spike in cash alongside the  debt of course that cash is being eroded as they  

Spent I think this last quarter $750 million in  free cash went out the door and then that creates   a problem right as their ratios start to rise and  there we’ve charted their shares outstanding so  

Those have been going up over the past three years  but they seem to have steadied out over the past   year we’ll see if there’s any sort of equity raise  this is a great chart which shows how they expect  

Cash to be neutral at 30 to 40% utilization for  Mohawk Valley so at the end of this fiscal year   they’re expecting to have 20 to 25% utilization  when they get to 30 to 40 then cash neutral and  

They’ll stop burning so much cash so the question  here do we sacrifice some upside and invest when   outcomes seem more certain for example do we wait  until there’s 30 to 40% utilization when free cash  

Flows are the trend reverses you say well you know  you want to there’s the fury missing out right I   want to get involved right now and and while the  shares are to bargain well there’s also some risk  

Associated with that so when we look at gross  margins I found this very interesting in their   last quarter they said Gross margins I had to read  it twice are affected by 1,800 basis points so not   1.8% 18% of based on underutilization related to  that new Factory so they’re actually their gross  

Margins are being penalized heavily and if you  look if you back that out if they don’t have that   underutilization you’re at a 34.5% gross margin  certainly not the in the 50s that they had said   I think that was back in 2019 or 20 they talked  about hitting those numbers but what this tells  

Us then is that it’s all about utilization it’s  the important metric to watch backlog that they   have tells us they can sell all their production  they just need to get that utilization up and and   hope that they can survive until that happens  so next up what we’re going to do is decide  

What we want to do with Wolfspeed we’re going  to communicate that to premium subscribers I   think in a trade alert we’re going to explore  some other SiC players names like Infinion and   Onsemi if Wafers are only an input for a company  then price Wars are actually a good thing that  

There’s a big difference then between if you’re  just if you’re a majority supplier of Wafers or   if you’re somebody that just consumes Wafers  and a majority producer of products based on   those Wafers now what we found of course is that  semiconductors are a rabbit hole so we want to  

Start reining this whole thing in first by getting  some closure on the SiC thesis next up I think is   a premium article on Indie semiconductor this is  part of our continuing search for some Pure Play   exposure to the growth of electric vehicles  and I’ve identified a number of companies  

Here that we’re going to be looking at next  names like NXP, On, Allegro, Excelis, Indie,   and Infinion and you’ll see some names crossed off  here like Qualcomm, Wolfspeed for obvious reasons   and AEHR if you’re curious why we cross those out  you’re going to want to watch this next video it  

Talks about why we’re looking for EV chips in  the first place please make sure to subscribe   to our channel to support our work thanks so  much for taking the time to watch this today

Wolfspeed stock keeps hitting new lows as investors ask an important question. Is WOLF stock a good buy or a trap? We start by looking at the broader silicon carbide SiC thesis with a look at how China may become a major player with lots of SiC wafer production coming online. Then, we touch on the Tesla announcement of plans to cut back on silicon carbide usage in their electric vehicles, and how that may not matter all that much provided the costs of silicon carbide can fall enough to spur adoption. That brings us to the 8-inch wafer thesis which is what attracted investors to Wolfspeed stock in the first place. Well, that and the WOLF stock price which is just cratering, and the reason for that is poor execution. What key metrics should Wolfspeed investors watched? Glad you asked Johnny. That’s in the video too which you need to go watch ASAP. Aight?

RESEARCH PIECES USED IN THIS VIDEO:
1. Is Wolfspeed Stock the Best Investment for EV Chips?

Is Wolfspeed Stock the Best Investment for EV Chips? 

2. Wolfspeed Stock $WOLF Roars: EVs and More

3. Wolfspeed Stock: A Bet on Electric Vehicles and More

Wolfspeed Stock: A Bet on Electric Vehicles and More

4. Investing in Gallium Nitride and Silicon Carbide

Investing in Gallium Nitride and Silicon Carbide

CHAPTERS:
00:55 Why silicon carbide is exciting
01:40 Why 8 inches matters
03:44 How China threatens Wolfspeed
05:01 Supply, demand, and Tesla
06:33 Why we wouldn’t invest in STM
09:11 Wolfspeed’s poor execution
12:13 Watch this WOLF metric closely
14:56 WOLF’s gross margins
15:49 What’s next?

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