AI Power Demand And Electrification Will Transform This Silicon Carbide Leader

Catalysts

About Wolfspeed

Wolfspeed focuses on silicon carbide materials and power devices for high voltage applications across automotive, industrial, data center and aerospace markets.

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

• Rising power needs from AI data centers, including the shift from 400-volt to 800-volt architectures and much higher power per rack, align directly with Wolfspeed's silicon carbide strengths, which can support higher power density and system efficiency and may support revenue growth and better factory utilization over time.
• Broad electrification across autos, grid, storage and aerospace, combined with steadily higher operating voltages, positions silicon carbide as a preferred technology over legacy silicon for many systems. This can support Wolfspeed's device and materials revenue base and eventually help gross margins as volumes build.
• The full transition of device production to 200-millimeter wafers and the shutdown of 150-millimeter lines reduce structural costs and simplify the footprint. This can support future improvements in gross margin and earnings as fab utilization improves.
• Early success in 300-millimeter single crystal silicon carbide and the ability to serve both internal device needs and external wafer demand give Wolfspeed a potential advantage in future high performance applications such as AR and VR. This can expand the addressable market and support longer term revenue and earnings potential.
• A stronger balance sheet after restructuring, cash of US$1.3b, reduced annual interest expense and lower CapEx commitments create more room to focus on high return R&D and customer programs. This can support more efficient growth, operating leverage and improved net margins over time.

Assumptions

This narrative explores a more optimistic perspective on Wolfspeed compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Wolfspeed's revenue will grow by 14.0% annually over the next 3 years.
• The bullish 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 -91.6% to the average US Semiconductor industry of 15.5% in 3 years.
• If Wolfspeed's profit margin were to converge on the industry average, you could expect earnings to reach $172.1 million (and earnings per share of $3.12) by about February 2029, up from $-685.2 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.1x on those 2029 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Semiconductor industry at 42.1x.
• The bullish 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 12.33%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Wolfspeed is still running with negative gross margins and adjusted EBITDA of negative US$82 million, and management expects gross margin to remain negative in fiscal Q3. A slower than expected improvement in factory utilization or cost reductions could keep the business loss making for longer, weighing on net margins and delaying any path to positive earnings.
• The company is highly focused on EVs and mid to high voltage applications at a time when EV demand is described as muted, with weaker automotive conditions and some customers pursuing second sourcing and inventory adjustments. This could cap silicon carbide device volumes and limit revenue growth from key automotive programs.
• Wolfspeed operates with a meaningful debt load, with net debt of about US$600 million and first lien debt that is expected to see an interest rate step up around mid calendar 2026. If refinancing options are limited or costly, higher interest expense could absorb a large portion of any future operating improvement and pressure earnings and cash flow.
• Materials revenue of US$50 million is already affected by a tightening demand environment and increased competition. As more players move into silicon carbide wafers, Wolfspeed's merchant materials business could face pricing and volume pressure, which would impact revenue and gross margins across the vertically integrated model.
• The growth story depends heavily on scaling newer areas such as AI data centers, grid storage, solid state transformers and 300-millimeter materials. Management acknowledges these opportunities will take time to offset continued softness in EVs and that customer adoption and architectural choices are outside the company’s direct control, which introduces execution risk around future utilization, revenue and ultimately earnings.

Valuation

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

• The assumed bullish price target for Wolfspeed is $20.0, which represents up to two standard deviations above the consensus price target of $17.5. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $15.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.1 billion, earnings will come to $172.1 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $17.74, the analyst price target of $20.0 is 11.3% 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.