WOLF - Wolfspeed: Major Headwinds Ahead

2023-11-15 01:22:07 ET

Summary

• Wolfspeed stock rose 22% after reporting better-than-expected earnings for fiscal 1Q 2024.
• The company's Mohawk fab only generated $4 million in revenue this quarter, despite a $1.2 billion investment.
• Wolfspeed's market share in the SiC device market decreased from 14.6% in CY Q2 to 13.9% in CY Q3, while competitors showed positive growth.

Wolfspeed ( WOLF ) announced fiscal Q1 2024 earnings on October 30, 2023. Following the call, the stock went Up 22% because it lost Less money than estimates!

The company reported an EPS of minus $0.99, which beat the consensus by $0.19, but revenue was $197.4 Million, which was $0.35 Million lower than the estimate.

In this deep-dive analysis, I present several significant headwinds the company faces going into 2023.

Analyzing Wolfspeed’s Mohawk Fab

An important comment from WOLF CEO Gregg Lowe:

“we’ve assembled a team comprised of internal silicon carbide experts, including one of our co-founders and external advisors from our tool manufacturers to ensure that we will achieve 20% utilization at Mohawk Valley in the June quarter of 2024.

Turning to Mohawk Valley where we continue to ramp production. This quarter, we generated $4 million in revenue from the fab, which compares to $1 million that was delivered in the previous quarter.”

Announced in 2019, the Mohawk fab cost $1.2 billion to build and outfit at the Marcy Nanocenter on the SUNY Polytechnic Institute campus, predicted to create about 600 jobs in the region.

Readers should remember that I alerted readers in my Sept. 21, 2022, Seeking Alpha article entitled “ Wolfspeed: Separating Automotive SiC Hype From Reality :”

“According to my sources, WOLF's Mohawk Valley plant opened in April 2022 with production scheduled for July, but that has been postponed to the end of 2022 or early 2023. If true, it will set back WOLF's schedule by almost one year at a time when Infineon and ST Microelectronics are shipping products to EV customers.”

To summarize the fab metrics:

• Wolfspeed spent $1.2 billion and only registered $4 million in revenue this quarter.
• Utilization will reach just 20% in the June 2024 quarter, after two years of production.
• Wolfspeed incurred $8.4 million of factory start-up costs and $34.4 million of underutilization costs in the first quarter of fiscal 2024.

Analyzing Wolfspeed’s Silicon Carbide Revenues and Market Share

Table 1 shows Wolfspeed’s revenues between Sept. 2022 and Sept. 2023. While revenues increased 4.2% YoY, on a QoQ basis total revenues decreased 3.4%.

Also note that Wolfspeed’s Silicon Carbide wafer business dropped 6.4% QoQ in the latest quarter although YoY revenues increased 13.4%.

On a competitive basis, I show in Chart 1 how Wolfspeed’s SiC device revenue QoQ change compared with those companies that have reported CY Q3 revenues so far – onsemi ( ON ), X-FAB ( OTCPK:XFABF ), and Infineon ( OTCQX:IFNNY ) - as well as those companies yet to report - ROHM ( OTCPK:ROHCF ) and STMicroelectronics ( STM ).

While Wolfspeed’s revenues decreased slightly in Q3, those competitors already reporting still showed positive growth, albeit at a slower rate for X-FAB and STM. ON recovered strongly from a sharp drop in Q2.

As a result, for the four companies reporting for CY Q3. Wolfspeed’s market share decreased from 14.6% in CY Q2 to 13.9% CY Q3.

Chart 1

Analyzing Wolfspeed’s Financials

Chart 2 shows revenue for WOLF on a quarterly basis from FY Q1 2022 (ending Sept. 2021) through FY Q1 2024 (ending Sept. 2023) after total divestiture of its lighting and LED businesses, followed by its RF business at the end of FY Q4 2023.

Chart 2

In Chart 3, however, non-GAAP EPS on a quarterly basis showing that for the entire period, Non-GAAP EPS has been negative and getting worse with recent fiscal Q1 2024 at -$0.53. As noted above, EPS continues to be negative although the drop beat consensus in the last quarter.

Chart 3

Wolfspeed had $ 2,131.5 million of long-term debt, up from $1,149.5 million a year ago and $3,027.9 million in convertible notes. It also had $3,347.6 million in cash, up from $2,954.9. At the end of the recent quarter, Wolfspeed had total long-term liabilities of $ 5,317.8 million up from $4,337.0 million a year ago.

Chart 4 shows the quarterly Debt to Equity of 0.602 over the past 3-year period and the rapid ramp since January 2022.

As a comparison, STM is its close competitor in the SiC device market (according to Chart 1, above), and it’s Debt to Equity ratio is just 0.069.

Chart 4

Headwinds for Wolfspeed

In addition to the above sections, which in my opinion are a headwind for the company, the strong growth in SiC devices has been a catalyst for a plethora of competitors entering the market.

Wolfspeed noted in its earnings call:

“In 2018, the silicon carbide device market was estimated to be about $400 million. Five years later the market size is pegged at $6 billion and the projected TAM for the end of the decade is north of $20 billion and continues to grow.”

I don’t know where this $6 billion comes from, but according to my report at The Information Network entitled Power Semiconductors: Markets, Materials and Technologies , the market in 2023 is half that value.

Headwind #1 for WOLF comes from China

Key Chinese SiC companies, including SICC, TankeBlue and San'an, have each expanded their production capacity almost uniformly by a factor of a thousand units.

There are approximately four to five leading companies engaged in SiC crystal growth in China, providing a basis for calculating the country's SiC crystal growth production capacity. Currently, their combined monthly production capacity is around 60,000 units. With each company aggressively increasing production, it is estimated that monthly production capacity could reach 120,000 units by 2024, with an annual production capacity of an estimated 1.5 million units.

Compared to the estimated global supply of SiC wafers in 2023, which stands at around 1.7 million units, it is predicted that China's 2024 supply could potentially account for about half of the global market share, according to The Information Network’s report.

Headwind #2 for WOLF comes from existing competitors

While WOLF is making slow progress at its Mohawk fab, and data in Table 1 above show flat power device sales over the past year, competitors continue strong growth in SiC devices and wafers. onsemi reported in its Q3 2023 earnings call :

“Our factories in Hudson, Roznov and Bucheon all had record output for silicon carbide in Q3. Acquiring GTAT two years ago was a strategic investment that allowed us to produce our own substrates internally and accelerate our path to becoming the world leader in silicon carbide power devices. By the end of 2023, we expect to have more than 25% market share of the silicon carbide market. We are now producing more than 50% of our own substrates internally, one quarter ahead of schedule, and we plan to continue to do so through 2024 even as we transition furnaces for 200-millimeter production.

In fact, last week, we announced that we completed our expansion of the world's largest silicon carbide fab in Bucheon. At full capacity, the state-of-the-art facility will be able to manufacture more than 1 million 200-millimeter silicon carbide wafers per year. Our manufacturing output continues to exceed expectations, and the acceleration of our ramp resulted in achieving a $1 billion run rate quarter in Q3, increasing nearly 50% over Q2.”

Also on the competitor playing field, major competitor Coherent ( COHR ) is set to receive a significant $1 billion investment from two Japanese automakers.

This investment places a valuation of approximately $4 billion on the silicon carbide unit. DENSO Corp. ( OTCPK:DNZOY ) and Mitsubishi Electric ( OTCPK:MIELY ) will each contribute $500 million, securing 12.5% stakes in the unit, while Coherent will maintain a 75% ownership share and continue to operate it as an independent subsidiary.

Following the investment announcement on October 10, 2023, a month later Mitsubishi announced on November 13, 2023 that it will enter into a strategic partnership with Nexperia to jointly develop silicon carbide power semiconductors for the power electronics market.

Headwind #3 for WOLF comes from EV manufacturers

The earnings call from ON also noted a near-term problem in SiC demand. The company noted:

“However, for the full year, a single automotive OEM's recent reduction in demand will impact our $1 billion target, and we now expect to ship more than $800 million of silicon carbide in 2023, 4x last year's revenue. In '24, we expect the growth of our silicon carbide business to double the market growth.”

onsemi shares plunged after its fourth-quarter guidance badly missed estimates, with some analysts suggesting Tesla ( TSLA ) may be to blame. For the fourth quarter, the company anticipates sales in the range of $1.95 billion to $2.05 billion. This projection falls short of the average analyst estimate, which stands at $2.18 billion. Earnings per share for the same period are expected to be between $1.13 and $1.27. This estimate is lower than the consensus forecast of $1.37 per share.

On the EV front, sales have been met with resistance in the U.S., unlike those in other countries. Ford ( F ) has made the decision to delay $12 billion in scheduled electric vehicle (EV) production. Similarly, General Motors ( GM ) has abandoned its target to manufacture 400,000 electric vehicles by mid-2024. Additionally, Volkswagen ( OTCPK:VWAGY ) has canceled its intentions to construct a new $2 billion EV manufacturing facility in Germany. Tesla’s vehicle deliveries are still growing, but at a slowing rate, despite steep price cuts. These developments reflect the challenges and shifts in the automotive industry's electric vehicle strategies.

Chart 5 shows the significance of the EV market on SiC device market, making up 63% of MOSFET’s in 2025, according to The Information Network’s report.

Chart 5

Summary

I wrote my first article on WOLF in a September 21, 2022 Seeking Alpha article entitled “ Wolfspeed: Separating Automotive SiC Hype From Reality .” I noted:

“I rate this company a Sell. Take profits now that have been based on hype, before these headwinds manifest themselves in significant top and bottom line erosion.”

At the time, WOLF was trading at $84.

Today, the share price closed at $32.6, but above its low of $28 prior to its most recent earnings call. Since the call, WOLF shares are DOWN 3.6%. However, the S&P Technology Select Sector Index ( IXT ) is UP 11.7%

I expect that analysts move past the “hype” of this call, recognize the illogic of the 22% upside, and rate the company a Strong Sell like I’m doing today. It appears that savvy investors are already doing so.

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