The world’s increasing reliance on technology has been driving the demand for semiconductor chips. However, not all semiconductor stocks are worth investing in to capitalize on the industry’s long-term prospects.
Wide-bandgap chipmaker Wolfspeed, Inc. (WOLF) is one such stock that I believe should not be on one’s watchlist. In this piece, I have discussed several reasons I am bearish on this stock.
WOLF focuses on silicon carbide and gallium nitride materials and devices for power and radio-frequency (RF) applications. The company serves applications such as transportation, power supplies, inverters, and wireless systems. While it surpassed the consensus EPS estimate by 19.9% in the second quarter, it missed the revenue estimate by 4.7%.
WOLF’s CEO Gregg Lowe said, “Though there has been some demand pressure on 5G that has impacted our RF product line, our power devices continue to penetrate more of the market, with strong customer demand and new partnerships with large multinational auto manufacturers, such as Jaguar Land Rover and Mercedes, and automotive Tier-1s, such as BorgWarner and ZF.”
On February 1, 2023, WOLF announced its plans to build a 200mm wafer fabrication facility in Saarland, Germany. This will be the world’s largest silicon carbide manufacturing facility. Lowe said, “Silicon carbide devices offer greater energy efficiency and are essential in the global shift toward sustainable electrification.”
“This new facility will be crucial to supporting our expansion in a capacity-constrained industry that is growing very rapidly, especially across the EV marketplace. It was important for us to have a facility located in the heart of Europe, near many of our customers and partners, to foster collaboration on the next generation of silicon carbide technologies,” he added.
WOLF's third-quarter non-GAAP net loss is expected to be between $15 million and $20 million, or $0.12 and $0.16 per share. The targeted non-GAAP net loss excludes $66 million to $68 million of estimated expenses, net of tax. Its revenue is expected to come between $210 million and $230 million.
Earlier this month, electric vehicle giant Tesla, Inc. (TSLA) said that it plans to use 75% less silicon carbide (SiC) transistors in its next-generation power train. Powertrain engineering chief Colin Campbell said that the use of fewer silicon carbide (SiC) transistors would not compromise the performance or efficiency of the car.
Campbell said, “Silicon carbide is an amazing semiconductor, but it’s also expensive, and it’s really hard to scale. So, using less of it is a big win for us.”
WOLF’s stock has declined 38.5% in price over the past six months and 45% over the past year to close the last trading session at $63.56.
Here’s what could influence WOLF’s performance in the upcoming months:
Mixed Financials
WOLF’s revenue increased 24.8% year-over-year to $216.10 million for the second quarter ended December 25, 2022. Its non-GAAP gross profit increased 18.8% year-over-year to $72.70 million.
The company’s non-GAAP operating loss narrowed 2.8% over the prior-year quarter to $24.70 million. Its non-GAAP net loss narrowed 23.7% year-over-year to $14.20 million. In addition, its non-GAAP loss per share came in at $0.11, narrowing 31.3% year-over-year.
Mixed Analyst Estimates
Analysts expect WOLF’s revenue for fiscal 2023 and 2024 to increase 22.9% and 43.6% year-over-year to $917.31 million and $1.32 billion, respectively. Its EPS for fiscal 2023 is expected to remain negative, while its EPS for fiscal 2024 is expected to increase 220.5% year-over-year to $0.53.
Its EPS for the quarter ending March 2023 is expected to remain negative. Its EPS is expected to decline 23.7% per annum over the next five years.
Stretched Valuation
In terms of forward P/S, WOLF’s 9x is 225.1% higher than the 2.77x industry average. Its 119.41x forward EV/EBITDA is 774.6% higher than the 13.65x industry average. Likewise, its 4.29x forward P/B is 15.5% higher than the 3.71x industry average.
Weak Profitability
WOLF’s trailing-12-month net income margin of negative 17.30% compares to the 2.71% industry average. Its trailing-12-month levered FCF margin of negative 44.17% compares to the 6.05% industry average. In addition, its trailing-12-month EBIT margin of negative 16.95% compares to the 4.61% industry average.
POWR Ratings Reflect Bleak Prospects
WOLF has an overall F rating, equating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. WOLF has a D grade for Value, consistent with its stretched valuation.
It has an F grade for Quality, in sync with its weak profitability. Also, its 1.55 beta justifies its D grade for Stability.
WOLF is ranked #90 out of 91 stocks in the Semiconductor & Wireless Chip industry. Click here to access WOLF’s Growth, Momentum, and Sentiment ratings.
Bottom Line
WOLF’s stock is trading below its 50-day and 200-day moving averages of $72.88 and $84.76, respectively, indicating a downtrend. Despite WOLF’s big growth plans, the company looks far from becoming profitable. Moreover, it is currently trading at an expensive valuation compared to its peers. Also, its high debt-to-equity ratio makes the stock a risky investment.
Given its stretched valuation, poor profitability, and high beta, it could be wise to avoid the stock now.
Stocks to Consider Instead of Wolfspeed, Inc. (WOLF)
The odds of WOLF outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Semiconductor & Wireless Chip industry instead:
STMicroelectronics N.V. (STM)
Tower Semiconductor Ltd. (TSEM)
Infineon Technologies AG (IFNNY)
Consider This Before Placing Your Next Trade…
We are still in the midst of a bear market.
Yes, some special stocks may go up like the ones discussed in this article. But most will tumble as the bear market claws ever lower this year.
That is why you need to discover the “REVISED: 2023 Stock Market Outlook” that was just created by 40 year investment veteran Steve Reitmeister. There he explains:
- 5 Warnings Signs the Bear Returns Starting Now!
- Banking Crisis Concerns Another Nail in the Coffin
- How Low Will Stocks Go?
- 7 Timely Trades to Profit on the Way Down
- Plan to Bottom Fish For Next Bull Market
- 2 Trades with 100%+ Upside Potential as New Bull Emerges
- And Much More!
You owe it to yourself to watch this timely presentation before placing your next trade.
REVISED: 2023 Stock Market Outlook >
WOLF shares were unchanged in premarket trading Friday. Year-to-date, WOLF has declined -8.01%, versus a 6.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Woof, This Semiconductor Stock Should Be at the Bottom of Every Investors List StockNews.com
