To The Moon

$Wolfspeed Inc.(WOLF)$

Wolfspeed is another unfortunate casualty of the slow-growing electric vehicle (EV) industry. As a key supplier of silicon carbide chips critical for EV powertrains and charging infrastructure, Wolfspeed was banking on the growth of the EV sector to drive increased sales. However, the situation has gone in the opposite direction, and the company’s 12-month revenue is significantly lower than previous years. It is currently in the midst of a transition and attempting to recover, but the outcome remains uncertain.

Earning Overview

​Wolfspeed Inc. (WOLF) reported its fiscal second-quarter earnings for 2025 on January 29, 2025. The company achieved revenues of $180.5 million, slightly surpassing Wall Street's consensus estimate of $179.9 million. However, this figure represents a decline from $208.4 million in the same quarter the previous year. Wolfspeed incurred a net loss of $372.2 million, or $2.88 per share, widening from a loss of $144.7 million, or $1.15 per share, in the prior year's quarter. On an adjusted basis, the loss was 95 cents per share, better than the anticipated $1.02 loss.

A significant contributor to the quarter's revenue was the Mohawk Valley fabrication facility, which added $52 million compared to $12 million in the same quarter the previous year. Looking ahead, for the third quarter of fiscal 2025, Wolfspeed projects revenues between $170 million and $200 million. The company also expects an adjusted loss per share ranging from 88 to 76 cents.

Fundamental Analysis

Investors are wondering if this represents a buying opportunity or if they should avoid Wolfspeed stock. In this analysis, I'll answer that question by evaluating the company’s historical performance and what investors can expect going forward. I'll also share my discounted cash flow valuation model for Wolfspeed and assess its valuation using a forward price-to-sales approach to determine whether the stock is a buy, hold, or sell.

Revenue Decline and the Impact of Slowing Growth Wolfspeed’s trailing 12-month revenue of $776 million shows the impact of slowing growth, falling far below the $1.6–1.7 billion it generated in 2015. While the company began recovering in 2020, revenues have significantly increased from that point, they are still nowhere near where the company had hoped to be.

Guidance

As expected, Wolfspeed's stock price hasn't performed well in 2025, with a 19% decline year-to-date. Considering the company’s struggles, the industry it’s in, and the weak outlook for electric vehicle demand in 2025 and potentially 2026, I would have anticipated a steeper drop.

Free Cash Flow

Negative Cash Flow and Uncertain Future The company’s cash flow from operations has also taken a downturn, falling to a negative $73 million for the trailing 12 months. Wall Street analysts forecast that Wolfspeed will continue to generate negative free cash flow for the next couple of years, with the hope that a turnaround will occur in the years to follow. Unfortunately, the return on investor capital is also heading in the wrong direction, further complicating the outlook.

​Wolfspeed, Inc. (WOLF) has faced significant cash flow challenges in recent years. In the fiscal year 2024, the company reported an operating cash flow of -$239.5 million and a free cash flow decrease of $1.9 billion. To address these issues, Wolfspeed has initiated several strategic measures, including workforce reductions and targeted capital expenditure adjustments. Additionally, the company is set to receive a $750 million grant from the U.S. Commerce Department to support the development of a new manufacturing facility, aiming to enhance production capacity and financial stability.

Risks and Challenges

Challenges in the Electric Vehicle Market Challenges in the electric vehicle industry persist, with consumer demand remaining relatively weak. Despite trillions of dollars in investments from governments and businesses—spanning car manufacturers to charging station developers—the consumer response has been underwhelming outside of China, where growth rates have been modest at best (around 10-12%). This does not match the substantial financial commitment made to the industry. Still, there are hopes that improvements in technology and charging infrastructure will eventually make EVs more attractive to consumers. However, there are no immediate signs of this shift happening, and rising recession fears alongside fluctuating fuel prices, especially with falling gas costs, make the transition to electric vehicles even less appealing.

Wolfspeed's Position in a Challenging Industry Wolfspeed, unfortunately, finds itself tied to an industry that isn't currently thriving. It's one of the least attractive sectors, in my view, alongside others like airlines and traditional car manufacturers. At least Wolfspeed is providing chips for EVs rather than manufacturing the vehicles themselves, which would be a much worse position to be in.

Valuation

When evaluating a stock for investment, a return of -15.44% is definitely a red flag, and Wolfspeed’s performance certainly doesn’t look promising. The company’s balance sheet is also concerning. Its total long-term debt of $4.46 billion is roughly three times the size of its cash and short-term investments, which amount to only $1.4 billion. Additionally, Wolfspeed is burning through cash at a rapid rate, losing approximately $60 million per month. At this pace, the company has only a couple of years of runway before its cash and short-term investments are depleted. Thankfully, analysts expect Wolfspeed to start turning things around in a couple of years and return to positive cash flow, as the company can't sustain these losses much longer. Given its existing debt load of over $4.4 billion, raising more debt will be challenging, and the company will likely face prohibitively high interest rates if it tries to borrow more money under current conditions.

Looking at valuation, Wolfspeed’s stock is currently one of the cheapest it has been, according to its forward price-to-sales ratio of 8.06. This seems justified, as the company’s poor prospects, underperformance, and exposure to an unattractive industry make it reasonable for the stock to be trading at a low valuation. According to analysts’ expectations, the company will continue to face difficulties in the coming years. In 2024, Wolfspeed is projected to generate negative free cash flow of $3 billion, with additional losses expected in the following years: -$1.66 billion in 2025, -$400 million in 2026, and -$60 million in 2027. However, analysts do expect a turnaround by 2028, with positive free cash flow of $150 million, followed by $130 million in 2029.

After accounting for the anticipated turnaround and factoring in the company’s potential to generate strong free cash flow starting in 2030, I calculated Wolfspeed’s intrinsic value per share to be $5.99. This is relatively close to the current market price of $5.39.

Market sentiment

(WOLF) has experienced a series of challenges that have significantly influenced market sentiment. The company's stock has seen a substantial decline, plummeting from nearly $140 in November 2021 to around $10 in early 2025. This downturn is attributed to operational and technical issues, leading to a loss of investor confidence.

In response to these challenges, Wolfspeed has implemented strategic measures, including workforce reductions and the postponement of its planned €3 billion electric vehicle microchip factory in Ensdorf, Germany. These actions aim to address the company's operational inefficiencies and adapt to the evolving market landscape.

Analyst sentiment reflects a cautious outlook, with the stock receiving a consensus rating of "Hold." The average price target is $8.25, suggesting a potential upside of approximately 61.45% from the current trading price. However, it's important to note that these targets are based on expectations of a turnaround, which remains uncertain.

Recent news sentiment scores for Wolfspeed stand at 0.26, lower than the average of 0.68 for companies in the Computer and Technology sector. This indicates a relatively subdued perception among investors and analysts.

Conclusion

Overall, market toward Wolfspeed is characterized by caution and skepticism. While the company is taking steps to address its challenges, the path to recovery appears uncertain, and investors should remain vigilant of the inherent risks.

Given the company’s struggles, debt load, and uncertain industry prospects, I would consider Wolfspeed a hold for now. While the stock appears to be undervalued, the near-term challenges and ongoing losses pose significant risks. Investors should closely monitor the company's performance and any signs of recovery in the coming years before making a decision to buy or sell.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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