Wolfspeed: Designed For The Future (NYSE:WOLF)

Wolfspeed, Inc. (NYSE:WOLF) has been stuck in neutral for a few years now while the stock has plunged. The silicon carbide company has built a massive potential order book, but the business has yet to really launch, leading to investors increasingly throwing in the towel. My investment thesis remains ultra-Bullish on the big opportunity ahead on the global shift to EVs and the need for electrified power solutions.

Stuck In Neutral

An investor doesn’t have to do a lot of due diligence to see that Wolfspeed is struggling right now. The company reported the following weak FQ4’24 results:

Wolfspeed has reported quarterly revenues topping $200 million going all the way back to pre-Covid. The power solutions company just reported FQ4 revenues of only $201 million and guided to revenues potentially slipping to only $185 million in the current quarter.

A big part of the weakness is the decline in the I&E segment while EV sales grow. For FQ4, EV related revenues were up 100% while I&E revenues were down substantially, contributing to the Durham Device Fab reporting a revenue decline of 40% YoY to only $64 million.

Wolfspeed faces high expenses due to underutilized fabs and building the business for a multi-billion dollar future. The company lost $112 million during the June quarter and guided to another big loss of $126 million to start FY25, with ~$50 million in quarterly costs related to start-up issues.

Designed For The Future

The real key to the investment story is the design-in deals. Wolfspeed added another $2.0 billion worth of design-ins during FQ4, leading to cumulative power device wins to ~$27.2 billion.

Wolfspeed didn’t start winning the big design-ins until FY21, and the company needs the new fab in order to produce the devices to meet this demand. Now, the company produces $2+ billion in quarterly design-ins while the market cap has slipped to $1.65 billion, or below the average potential future quarterly order rate.

The key to the investment story is that these design-ins have to eventually turn into design-wins, or the equivalent of an official order. In FQ4, Wolfspeed got ~$500 million in actual design-wins.

Once Wolfspeed gets a design-in award for an EV, the company has to wait a couple of years for the award to turn into an actual order, which then takes another 5–7 years to turn into full production monetization.

While the stock is trading based off fears of customers pushing out or even canceling EV plans, Wolfspeed has a massive order book of 125 vehicle models from 30 OEMs. The company is now recognizing more 800-Volt EV wins as automakers shift to higher performing and more efficient battery systems.

In essence, the company has a future order book so large, the auto sector could cancel 50% of design-ins and Wolfspeed would still produce massive growth. On top of the EV opportunity, the company expects demand for AI data center power solutions and solar inverters to lead to future strong demand in the struggling I&E segment.

The biggest lingering risk is the capital position. Wolfspeed ended FY24 with a cash balance of $2.2 billion and the company plans to spend $1.2+ billion on capex this year while fully building out the capacity of the Mohawk Valley fab and the JP Siler City materials building.

The power solutions company has multiple paths for additional capital from the CHIPS Act alone. Management expects to get a $1 billion 48D tax refund, while also in the final stages of a grant from the CHIPS Act.

These solutions would allow Wolfspeed to end FY25 with a cash balance of $1+ billion, with plans for limited capex of $200-$600 million in FY26. The business has the potential for turning cash flow positive by FY26, with a lot of the capex spending based on adding equipment to the new facilities providing the company with the flexibility of when to spend.

The main risk for investors is that the EV demand continues getting pushed out and Wolfspeed ends up needing to raise more capital at dilutive rates. For now, though, the opportunity is to buy the beaten stock with big upside potential.

Wolfspeed has ultimate targets for sales of $3 billion and adjusted EBITDA margins of 40% leading to adjusted EBITDA of $1.2 billion. The stock is far too cheap at hardly 1x the EBITDA target a few years from now.

Takeaway

The key investor takeaway is that the price action on Wolfspeed is clearly following the dismal results reported over the last year. Investors appear far too focused on current results providing the opportunity to load up here at stock prices not fathomable, even, months ago.