While shares of Wolfspeed (WOLF +3.19%) skyrocketed following its fiscal third-quarter earnings report, the company still faces serious issues. The question is: Could the company be headed toward bankruptcy again?
Remarkably, Wolfspeed shares are up nearly 170% this year, as of this writing. The company emerged from bankruptcy last fall with reduced debt and a new management team. However, the operational issues the company has faced have not yet been fixed.
Today’s Change
(3.19%) $1.44
Current Price
$46.60
Key Data Points
Market Cap
$2.1B
Day’s Range
$45.62 – $50.99
52wk Range
$0.39 – $50.99
Volume
6.6M
Avg Vol
3.1M
Gross Margin
-2586.67%
Serious issues remain
Two of Wolfspeed’s biggest issues before bankruptcy were negative gross margins and operating cash flow, and those issues have not gone away. For fiscal Q3, Wolfspeed recorded a gross margin of -27%, while its adjusted gross margin was -21%. That means it is selling its silicon carbide components for less than it costs to make them.
This pricing crunch stems largely from underutilization of its manufacturing facility, which it said contributed roughly $46 million. However, even if you strip that out, its gross margins would still be a paltry 4.6%. The company has struggled with yield issues in the past. On the earnings call, management said that it is “making progress with qualification on 200 millimeter material.” Wolfspeed is still trying to prove to customers that its 200 millimeter wafers are reliable and defect-free.
At the same time, Wolfspeed’s sales have struggled, which is also likely contributing to its underutilization issues. In fiscal Q3, its revenue fell 19% to $150.2 million. Electric vehicles (EVs) were supposed to be the big market for its silicon carbide chips, but the company has been struggling in this segment despite increasing EV adoption. As a result, it is trying to shift into other markets, like AI data centers, but it’s still early.
Meanwhile, the company continues to burn cash. It produced negative operating cash flow of $84 million in the quarter. It ended the quarter with $1.2 billion in cash and short-term investments against $1.7 billion in debt, of which $798.3 million was in the form of convertible debt. In May, after the quarter, it closed a private placement of stock, convertible notes, and pre-funded warrants and redeemed nearly $476 million in senior secured notes. It said the move will save it $62 million a year in interest expense.
Looking ahead, Wolfspeed guided that its fiscal fourth-quarter revenue would come in between $140 million and $160 million. That’s down from $197 million last year.
Image source: Getty Images.
Is the stock headed to $0?
Given Wolfspeed’s cash on hand and cash outflows together with the interest expense savings it will get from its recent balance sheet reshuffling, it doesn’t look like the company is headed toward bankruptcy again any time soon.
However, this business continues to struggle. It doesn’t appear that Wolfspeed has convinced its customers that its yield issues with 200millimeter wafers are fully resolved, and it is already trying to move to 300mm, which is even more technologically challenging. Meanwhile, what was supposed to be its main market with EVs just isn’t materializing.
As such, this is a stock I’d be selling.
