Slammed 48% Wolfspeed, Inc. (NYSE:WOLF) Screens Well Here But There Might Be A Catch

Wolfspeed, Inc. (NYSE:WOLF) shareholders that were waiting for something to happen have been dealt a blow with a 48% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 78% loss during that time.

Since its price has dipped substantially, Wolfspeed's price-to-sales (or "P/S") ratio of 1.6x might make it look like a strong buy right now compared to the wider Semiconductor industry in the United States, where around half of the companies have P/S ratios above 3.8x and even P/S above 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Wolfspeed

What Does Wolfspeed's Recent Performance Look Like?

Wolfspeed could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Wolfspeed will help you uncover what's on the horizon.

How Is Wolfspeed's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Wolfspeed's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. The latest three year period has also seen an excellent 99% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 30% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 27% per year, which is noticeably less attractive.

With this information, we find it odd that Wolfspeed is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Shares in Wolfspeed have plummeted and its P/S has followed suit. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Wolfspeed's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. There could be some major risk factors that are placing downward pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

You always need to take note of risks, for example - Wolfspeed has 2 warning signs we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.