AI Power Demand And 200 Millimeter Ramp Will Shape Long-Term Earnings Potential

Catalysts

About Wolfspeed

Wolfspeed focuses on silicon carbide materials and power devices for applications such as AI data centers, electric vehicles, industrial power and aerospace and defense.

What are the underlying business or industry changes driving this perspective?

• Although Wolfspeed reports growing AI data center engagement, with revenue in this segment more than doubling year on year and gaining new design wins with LITEON, MacMic and other power supply vendors, the market is still described as early stage. The timing of broader hyperscaler deployments remains uncertain, which can limit the pace at which this opportunity contributes to revenue and gross margin improvement.
• The move toward higher voltage AI and data center architectures, including 800 volt systems and solid state transformers using 2.3 kilovolt and 3.3 kilovolt silicon carbide devices, supports a larger addressable market. However, qualification cycles and customer reliability requirements can extend ramp timelines and delay the utilization gains needed to lift gross margins from current negative levels.
• Wolfspeed highlights Gen 5 silicon carbide MOSFETs with what it describes as leading specific on state resistance and the first commercially available 10 kilovolt MOSFET for high voltage industrial, aerospace and defense use. Customers still need to translate this technology into volume programs, and any slower than expected adoption would constrain revenue growth and the earnings contribution from higher value products.
• There has been progress in transitioning to 200 millimeter manufacturing at the Mohawk Valley facility and beginning shipments of 200 millimeter substrate engineering samples. However, current gross margins remain negative and factory underutilization is still the main drag, so any delay in customers moving from evaluation to volume orders could limit improvement in net margins and EBITDA.
• The company reports a strengthened balance sheet with approximately US$1.1b in cash and short term investments and some reduction of interest expense through partial convertible note conversion. Net debt of about US$600 million and high cost first lien debt mean that future refinancing terms and cash burn will be important, since slower progress toward the roughly US$800 million annual revenue level cited as a rough breakeven gross margin point would keep earnings under pressure.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Wolfspeed compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Wolfspeed's revenue will grow by 9.5% annually over the next 3 years.
• The bearish 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 0.7% to the average US Semiconductor industry of 19.8% in 3 years.
• If Wolfspeed's profit margin were to converge on the industry average, you could expect earnings to reach $173.3 million (and earnings per share of $2.67) by about August 2029, up from $4.4 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.4x on those 2029 earnings, down from 298.2x today. This future PE is lower than the current PE for the US Semiconductor industry at 46.0x.
• The bearish 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 12.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Wolfspeed reports that AI data center revenue more than doubled between fiscal 2025 and 2026 and that this end market is described as its fastest growing business. If this segment continues to scale from a modest base, stronger long-term demand for silicon carbide devices in AI infrastructure could support higher revenue and improve earnings power over time.
• The company highlights Gen 5 silicon carbide MOSFETs that it describes as a substantial performance leap and is already running this technology in its highly automated 200 millimeter Mohawk Valley facility. If customers move these products from design wins into volume programs across EVs, industrial power and data centers, a higher value product mix and better factory utilization could lift gross margins and support higher net margins.
• Management points to growing traction across automotive, industrial, aerospace and defense, including new onboard charger business with a European Tier 1 supplier and a memorandum of understanding with GE Aerospace for 10 kilovolt devices. If these long-term secular trends in electrification and high voltage power conversion translate into sustained order growth, Wolfspeed’s revenue base could broaden and support stronger earnings.
• The transition to 200 millimeter substrates is under way, with engineering samples already shipping and customers working on their own 200 millimeter transitions. If the wider silicon carbide industry continues to move to 200 millimeter wafers and Wolfspeed’s vertically integrated model remains attractive to device customers, higher substrate and device volumes could improve factory utilization and support better gross margins and EBITDA.
• Wolfspeed reports approximately US$1.1b in cash and short term investments and has already reduced some interest expense through partial convertible note conversions, while targeting refinancing of high cost first lien debt at about 16%. If refinancing reduces interest costs and cash burn more than expected while revenue grows toward the US$800 million annual run rate cited as a breakeven gross margin ballpark, this could support improving net income and strengthen the valuation of the stock.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Wolfspeed is $25.0, which represents up to two standard deviations below the consensus price target of $27.5. This valuation is based on what can be assumed as the expectations of Wolfspeed's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $873.6 million, earnings will come to $173.3 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 12.5%.
• Given the current share price of $24.76, the analyst price target of $25.0 is 1.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.