WOLF - Wolfspeed: Not Howling Along Anymore After Fiscal Q3 (Rating Upgrade)

2023-04-27 11:31:28 ET

Summary

• Wolfspeed, Inc. guided to disappointing FY24 numbers.
• The semiconductor company is struggling to ramp up 200mm silicon carbide materials at a new plant.
• Wolfspeed, Inc. still forecasts 300% revenue growth by FY27 with the stock trading at 2x sales targets.

The path to fast growth is often bumpy. Wolfspeed, Inc. ( WOLF ) reinforced this concept with another big design-ins total while guiding down revenue expectations in the near term. The semiconductor company faces some bumps in the road ramping up a new facility, but Wolfspeed is making huge progress towards massively expanding capacity. My investment thesis is ultra Bullish on loading up on the stock on weakness after Wolfspeed was originally unappealing trading above $100.

Focus On Progress

The big news for the fiscal third quarter is that Wolfspeed started shipping product out of the new Mohawk Valley fab. The bad news is that the semiconductor company had to cut guidance big time for FY24 due to the slower than expected ramp at the facility from a lack of silicon carbide material to build power devices.

For FQ3'23 , Wolfspeed produced solid numbers with a revenue beat, leading to 22% growth as follows:

The problem is that the good news ended here, at least for the short term. Though, investors need to focus on the progress of ramping up new facilities building the business for the future.

The semi company added another $1.7 billion worth of design-ins for the quarter, leading to quarterly record for non-automotive designs of $700 million. So far, Wolfspeed has added $18.0 billion worth of design-ins since FY20.

In fact, the company added nearly 50% more in design-ins during FQ3 than Wolfspeed now forecasts to generate in revenues for next FY. The company reduced guidance for FY24 revenues to only $1.0 to $1.1 billion versus consensus estimates of $1.3 billion and prior corporate forecasts of ~$1.6 billion at the Investors Day 2022 back in October.

The market won't take the reduced guidance in stride, but the management team remains confident Wolfspeed will get the Building 10 facility at Durham up to full speed to feed material to the new massive Mohawk Valley fab. Probably the best news is that the company doesn't expect to lose any customers due to the delays in ramping up production.

Per CEO Greg Lowe on the FQ3'23 earnings call :

So, if we didn't have anything as close to turning on as Mohawk Valley, I think it would be a much bigger issue. But quite frankly, I think when they look around the world and scout for alternatives, I don't think they see anything quite like what we're doing in Mohawk Valley. So, the customers are sticking with us. And the best testament of that is we just delivered $1.7 billion worth of design-ins in the quarter and over the year -- over the first two, three quarters of this year, $700 million of that has transitioned to -- actually $1.7 billion has transitioned to a design win.

In all regards, Wolfspeed is poised to make substantial progress in the next year. The company only expects to end FY24 with 20% utilization of the Mohawk Valley fab. The new Siler City materials plant will come on line during FY24 to provide the silicon carbon substrates needed to fully pump the new fab leading to a production surge.

Wolfspeed continues to forecast hitting the FY27 revenue targets, with some of the slowdown in the 200mm silicon carbide production at the Durham Building 10 to set up a faster ramp at the new Siler City fab with 10x the materials capacity.

The company maintained the ability to hit the $4 billion revenue target for FY27 with 73% of revenues from power devices. Wolfspeed forecasts the power device market will reach up to a $20 billion market opportunity with a 40% EV penetration rate. The company targets reaching $5 billion in power device sales by decade end.

Focus On Funding

Wolfspeed faces the need to fund the aggressive capex plan while the company is cutting short-term revenue targets. The semi company has a cash balance of $2.25 billion with FY24 capex spending at ~$2.0 billion.

The company predicts the need for $1.0 billion in internal funding based on obtaining some government incentives. Management suggests the funding will likely come from the following sources: upfront customer payments, debt financing, and government funding.

FY24 is the big capex spending year with a dip in FY25 and beyond. By mid-FY24, Wolfspeed will have Mohawk Valley and Siler City producing solid output setting up easier funding for any needs for the Next Fab set for a FY27 open.

A big question on funding will be whether Wolfspeed can recapture the FY25 plans for solid operating cash flows to reduce the future funding needs. The original goal was for positive free cash flows by FY26 and any deviation from this plan hurts shareholders.

The major stock dip leaves Wolfspeed trading below 2x FY27 sales targets. Considering the massive growth and the ultimate demand during this period, the company will generate 300% sales growth to go from FY24 revenue targets at $1 billion now and the forecast for $4 billion in FY27. The semi company will have a further path to even higher revenue in the years ahead.

Takeaway

The key investor takeaway is that shareholders face a tough year ahead as Wolfspeed, Inc. slows down the 200mm silicon carbide ramp. Ultimately, the company appears on a path to hit the ultimate growth targets with the growing EV demand driving the market opportunity. Investors should use the weakness to slowly build a position in Wolfspeed, Inc. stock knowing FY24 will be a long year of limited to no growth.

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