WOLF - Wolfspeed: Strong Headwinds Amid RF Business Slowdown And Increasing Competition

Summary

• Wolfspeed has not had a profitable quarter since 2020, and its New York facility is delayed by one year.
• Wolfspeed is building and expanding its wafer and device Silicon Carbide facilities and now wants to build another device facility close to a customer in Germany.
• Wolfspeed is facing strong headwinds from its RF business, numerous companies entering the market, and a move by Tesla to stick with silicon instead of silicon carbide.
• Wolfspeed, which would need to ship blank SiC wafers to Germany to make devices anyway, why not make devices in the U.S. and ship the completed devices?

Wolfspeed ( WOLF ) announced in early February 2023 it plans to build a highly sophisticated wafer fabrication facility in Saarland, Germany. Wolfspeed and ZF announced a strategic partnership that includes the creation of a joint innovation lab to drive advances in Silicon Carbide ("SiC") systems and devices for mobility, industrial and energy applications.

The European fab is part of Wolfspeed’s broader $6.5 billion capacity expansion effort that includes the opening of the company’s 200 mm Mohawk Valley device fab in April of last year and the construction of a SiC wafer fab, the John Palmour Manufacturing Center for Silicon Carbide in North Carolina.

The SiC industry, particularly for automobiles, has strong growth potential as I discuss in my March 1, 2023, Seeking Alpha article entitled " STMicroelectronics: Top Pick For Both Silicon And SiC Power Chips ." However, WOLF has had a negative non-GAAP EPS for the last three fiscal years and is being impacted by several Headwinds, which I discuss in this article.

Tailwind

Strong EV Demand

Global EV deliveries in 2022 increased by +55 % YoY in totaling 10.5 million new BEVs and PHEVs, but that was down from 109% in 2021. In January 2023, demand was uneven. Demand for EVs dropped 35% YoY in Europe and 5.6% in China. But EV demand in the U.S. increased 78.2% YoY.

EVs are the greatest opportunity for SiC chips. In 2020, power semiconductors for automobiles represented about 25% of total applications, growing to 35% in 2025, according to our report entitled “ Power Semiconductors: Markets, Materials and Technologies .”

Headwinds

Slow RF Product Business

WOLF CFO Neill Reynolds noted at the earnings call :

"During the quarter, we also saw weaker demand for RF products due to secular headwinds with recession related pullback in 5G demand. This resulted in lower than expected revenue for RF devices, which we expect to remain weaker in the second half of this fiscal year.

In addition, RF devices continue to be dilutive to our consolidated gross margin. As we discussed, because of the immense demand for our power devices, we have not been able to optimize the RF manufacturing footprint as we had previously planned. We expect our RF product line will negatively impact our consolidated gross margin for the next few years."

Mohawk Fab now 1 year Late

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.”

The Mohawk fab was supposed to start production in July 2022 and I alerted readers to a delay until early 2023. Now, WOLF is saying the fab will begin scaling production in fiscal 4Q 2023 ending June 2023.

CEO Gregg Lowe reported during the earnings call:

“We continue to successfully run test lots through Mohawk Valley, which gives us confidence that we are ready to begin scaling production and recognizing revenue from Mohawk Valley in the fourth quarter of this fiscal year.”

Keeping with Si-based chips Instead of Silicon Carbide

On March 1, 2023, Tesla ( TSLA ) announced during its Investor Day a plan to use 75% less silicon carbide vehicles without compromising the performance or the efficiency of the cars.

To increase EV ranges and reduce charging times, EV manufacturers have plans to upgrade to 800-V batteries. Typically, 800-V systems also move from Si-based IGBTs to SiC MOSFETs.

Currently, the vast majority of EVs with 400-volt systems use silicon chips. While the SiC chip is the top contender to take on silicon, not everyone is moving to the new technology yet.

Traditional IGBT companies Infineon, Fuji Electric, and Mitsubishi Electric are now competing to meet demand from Chinese manufacturers. These companies are signing up customers from Chinese EV manufacturers. For example, BYD ( OTCPK:BYDDF ) signed IGBT supply orders with Silan Micro, Star Semiconductor, Times Electric, and China Resources Micro in late 2021.

Musk Comment on SiC

Now Tesla announced a plan to use 75% less silicon carbide vehicles without compromising the performance or the efficiency of the cars. I disagree with the statement of the Roth MKM analyst Craig Irwin who said:

"In our opinion, Tesla has a history of overstatement, so in all likelihood this claimed improvement in heat extraction (packaging technology) accelerates industry adoption to WOLF's benefit."

I noted in an earlier article that technology is already available to reduce the need for SiC chips. These devices will compete with SiC MOSFETs from WOLF, and will be in production around the same time WOLF's new fab opens.

"As the industry moves to 800-volt EV systems, Renesas Electronics (RNECY) rolled out a new generation of compact high-voltage IGBTs with withstand voltages of up to 1,200 V and current ratings of up to 300 A, in a bid to boost the power electronics at the heart of EVs. These devices will compete with SiC MOSFETs from WOLF, and will be in production around the same time WOLF's new fab opens.

Its 400-800V silicon-based AE5 process for IGBTs achieves a 10% reduction in power losses compared to the current-generation AE4 products, a power savings that will help EV developers save battery power and increase driving range. In addition, the new products are approximately 10% smaller."

According to Renesas, the AE5-generation IGBTs will be mass produced starting in the first half of 2023 on Renesas' 200- and 300-mm wafer lines at the company's factory in Naka, Japan. Additionally, Renesas will ramp up production starting in the first half of 2024 at its new power semiconductor 300-mm wafer fab in Kofu, Japan to meet the growing demand for power semiconductor products.

Huge Ramp in SiC Chip Companies Entering Market

The report above-mentioned report details 47 companies making Power Semiconductor companies, and the majority of companies make SiC chips, as shown in Table 1. Also detailed in the report are 13 companies making SiC wafers, some of which like WOLF make wafers and ICs.

WOLF isn’t among the top companies making power semiconductors, with a share that is <4% of the market.

Investor Takeaway

In the previous Fiscal Q2 2023 earnings call, Wolfspeed reported Q2 Non-GAAP EPS of -$0.11, which beat by $0.03. Revenue was $216.1 million (+24.8% YoY), which missed by $10.68 million.

For its third quarter of fiscal 2023, Wolfspeed targets revenue in a range of $210 million to $230 million. GAAP net loss is targeted at $81 million to $88 million, or $0.65 to $0.71 per diluted share. Non-GAAP net loss is targeted to be in a range of $15 million to $20 million, or $0.12 to $0.16 per diluted share vs. -0.08 consensus.

Chart 1 shows revenue for WOLF on a quarterly basis from FQ1 2021 (ending Sept. 2021) through FQ2 2022 after total divestiture of its lighting and LED businesses. Revenues have increased quarterly until the last quarter as discussed above when it missed by $11 million.

Chart 1

Chart 2 shows non-GAAP EPS on a quarterly basis showing that for the entire period, EPS has been negative.

Chart 2

Now WOLF wants to build another fab in Germany at a time when its fab in Mohawk Valley, NY is one year behind schedule and a second fab for SiC wafers is being constructed in Silar, North Carolina.

• In May 2019, the Company started a significant, multi-year factory optimization plan anchored by a state-of-the-art, automated 200mm capable Silicon Carbide and GaN power semiconductor fabrication facility and a large materials factory at its U.S. campus headquarters in Durham, North Carolina. The Durham crystal growth operation, which is the world’s largest silicon carbide materials factory, currently supplies our entire device business

• In September 2019, the company announced its intent to build a new Silicon Carbide power device fabrication facility in Marcy, New York (Mohawk Valley fab) now one-year late.

• In September 2022, the company announced will build a new, state-of-the-art, multi-billion-dollar Materials manufacturing facility in Silar City, North Carolina. The investment is targeted to generate a more than 10 fold increase from Wolfspeed’s current Silicon Carbide production capacity on its Durham campus. Phase one construction is anticipated to be completed in 2024 and cost approximately $1.3 billion.

This strategy is not thought out correctly. The facilities in the U.S. already have a supply-chain infrastructure – North Carolina for wafers and devices, New York for devices. WOLF would still need to ship wafers to Germany for the devices to be built, why not make the devices in the U.S. and drop ship them to the company in Germany?

Chart 3 shows why I rate WOLF a Strong Sell. For the one-year period, share price is -28.4% compared to that of STMicroelectronics ( STM ), its strongest competitor, which has a +18.0% growth. By the way, I have a Buy on STM.

Chart 3

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