Unlocking the Potential of This Technology Stock
In today’s market, Wolfspeed’s stock is priced at around $5, reflecting a significant downturn as growth stagnated and profit margins weakened. Considering this downturn, could it be a strategic move to go against the grain and consider investing in Wolfspeed’s stock while others are hesitant?
What led to Wolfspeed’s stock decline?
In the fiscal year ending in June 2022, Wolfspeed saw a 42% surge in revenue, with an adjusted gross margin increase to 36%. The growth was largely fueled by the rapid expansion of the electric vehicle (EV) market. However, in fiscal 2023, revenue growth slowed to 24% while the adjusted gross margin declined to 33%. By fiscal 2024, revenue growth further decelerated to just 6%, with the adjusted gross margin plunging to 13%. This downward trend persisted into the first half of fiscal 2025.
PeriodQ2 2024Q3 2024Q4 2024Q1 2025Q2 2025Revenue growth20%4%(1%)(1%)(13%)Adjusted gross margin16%15%5%3%2%Data source: Wolfspeed
Wolfspeed’s sales growth hit a standstill as the EV market cooled off and more companies shifted their focus to purchasing AI-centric data center chips. Notably, one of Wolfspeed’s major clients, Tesla, announced plans to reduce silicon carbide chip usage in its upcoming powertrains by 75%. Competition also intensified, as established chipmakers like Infineon and On Semiconductor entered the silicon carbide market.
For the third quarter of fiscal 2025, Wolfspeed anticipates a year-over-year revenue decline of 0% to 15%, with analysts forecasting a 6% revenue decline for the full year. This gloomy projection indicates a prolonged period of challenging conditions in the SiC market.
Sluggish growth, escalating costs
As revenue growth slowed, Wolfspeed accelerated its plant expansion efforts in New York and North Carolina over the past two years. While the company expects increased plant utilization to lower die costs by over 50%, the full benefits may not be realized for some time. Presently, these investments are exerting pressure on gross margins.
To counterbalance this, Wolfspeed initiated workforce reductions, business restructuring, and secured $750 million in direct funding from the U.S. Department of Commerce through the CHIPS and Science Act. Despite these measures, the company remains deeply unprofitable, concluding the latest quarter with total liabilities of $6.66 billion, resulting in a high debt-to-equity ratio of 17.9.
In response to the slowdown, Wolfspeed’s board ousted CEO Gregg Lowe in November. A permanent replacement has not been named, raising uncertainties regarding future strategic priorities.
Yet, a potential turning point in 2025
While
Should Wolfspeed be purchased today? If it makes a comeback from its cyclical trough this year and resumes growth in fiscal 2026, it may present a compelling opportunity. However, betting on this cyclical recovery before clear signs of improvement emerge could be risky. Wolfspeed’s stock might linger in the penalty box for an extended period as the SiC market warms up, yet the company continues to grapple with numerous near-term challenges. Consequently, it may be prudent to steer clear of Wolfspeed for now and opt for more dependable semiconductor stocks instead.
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*Stock Advisor returns as of February 21, 2025
Leo Sun does not have a position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla and Wolfspeed. The Motley Fool recommends ON Semiconductor. The Motley Fool upholds a disclosure policy.
