Greenfield Facilities And CHIPS Act Support Will Drive Operational Success

Key Takeaways

• Closing inefficient facilities will lower the breakeven point, enhancing net margins through reduced operating costs.
  
• Advancements in 200-millimeter technology position Wolfspeed to capture market share in the growing EV and renewable energy sectors, driving revenue growth.
  
• Slowing EV market growth, cost challenges, and competitive risks from China threaten Wolfspeed's revenue, profitability, and market share, with facility costs affecting margins.

Catalysts

Operates as a bandgap semiconductor company focuses on silicon carbide and gallium nitride (GaN) technologies in Europe, Hong Kong, China, rest of Asia-Pacific, the United States, and internationally.

• Wolfspeed is aggressively executing a plan to improve financial performance and accelerate the path to profitability by leveraging its advanced 200-millimeter greenfield facilities, which should positively impact operating margins and earnings.
  
• The company is closing its less efficient Durham and Farmers Branch facilities, which will lower its breakeven point and enhance net margins through reduced operating costs.
  
• Wolfspeed is focusing on reducing CapEx by leveraging modular facility designs, which will improve cash flow and financial flexibility, impacting earnings positively.
  
• The receipt of U.S. government support, including CHIPS Act funding, is expected to significantly enhance liquidity and enable future growth, thereby improving the company's capital structure and potentially boosting future revenue.
  
• Wolfspeed's advancements in 200-millimeter technology and its leadership in silicon carbide production are poised to capture market share in the growing EV and renewable energy sectors, driving revenue growth in the coming years.

Wolfspeed Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wolfspeed's revenue will grow by 15.1% annually over the next 3 years.
• Analysts are not forecasting that Wolfspeed will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Wolfspeed's profit margin will increase from -146.4% to the average US Semiconductor industry of 13.8% in 3 years.
• If Wolfspeed's profit margin were to converge on the industry average, you could expect earnings to reach $159.8 million (and earnings per share of $0.84) by about July 2028, up from $-1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.4x on those 2028 earnings, up from -0.2x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Wolfspeed Future Earnings Per Share Growth

Risks

• Slowing growth in the EV market and other macroeconomic pressures could impact Wolfspeed's ability to increase revenue as anticipated, affecting future earnings.
  
• The company faces challenges in reducing costs and achieving positive free cash flow, which might delay improvements in net margins and profitability.
  
• The reliance on government funding, such as the CHIPS Act, introduces risk if operational milestones or financial requirements are not met, potentially impacting capital availability and liquidity.
  
• The competitive landscape, especially from China, presents risks that could affect Wolfspeed's market share and revenues in the silicon carbide sector.
  
• Underutilization and start-up costs related to new facilities like Mohawk Valley are expected to impact gross margins until sufficient revenue ramp-up occurs.

Valuation

• The analysts have a consensus price target of $3.9 for Wolfspeed based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $159.8 million, and it would be trading on a PE ratio of 6.4x, assuming you use a discount rate of 11.6%.
• Given the current share price of $1.42, the analyst price target of $3.9 is 63.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.