Back in May, I believed that Wolfspeed, Inc. (WOLF) was showing anything, but progress. Shares fell to fresh lows as anticipated improvements in the results did not materialize, nor come through in the outlook.

The transition to become a silicon carbide supplier has gone hand in hand with huge losses and capital spending needs. Despite promising EV developments and touted designed wins, the cold hard financial numbers tell an entirely different situation, as the company is quickly running out of options here.

The Transition

Known as Cree with long-term investors, Wolfspeed has seen many boom-bust cycles in the past, but in general, many investors have been disappointed, with no sustainable value created for investors.

The company sold off the lighting and LED business at very modest prices in the 2010s, leaving the company with only one of the three original units, called Wolfspeed, hence the decision to change the name of the company altogether.

This meant that Wolfspeed became a pure play on silicon carbide, with a prominent application being EVs. A $20 stock got lifted by spirits and peaked around the $140 mark in 2021, with hopes and anticipations running high. At the time, the company posted sales of around half a billion, while it incurred operating losses to the tune of $300 million per annum. That excludes the huge capital spending needs.

The company grew first quarter sales in 2023 by 55% to $241 million as momentum appeared to be unleashed, while it still incurred a $75 million operating loss. The issue is that revenues were stuck, reported at $216 million in the second quarter, $229 million in the third quarter and $236 million in the fourth quarter. The lack of progress went hand in hand with operating losses increasing to about $100 million per quarter.

2024 — A Disaster

The company originally guided for fiscal 2024 sales came in at around $1.0-$1.1 billion. The lack of sequential progress is very modest and disturbing, setting the company up for continued losses. This meant that the company decided to raise $2 billion with Apollo Global Management last year at coupons of around 10%.

Things even took a thing for the worst, as the company posted first quarter sales for the fiscal year 2024 at $197 million, with the new Mohawk facility responsible for $4 million in sales. The company guided for 20% capacity rates by the summer of 2024, suggesting a $400 million annualized sales contribution from that facility.

Second quarter sales came in at $208 million, this time including a $12 million revenue contribution from the Mohawk facility. By April, third quarter sales were posted at $201 million, even as Mohawk contributed $28 million in sales, as operating losses were posted at $106 million.

Despite the talks, improvements were clearly not seen in the results, even as the company guided for a $40-$50 million revenue contribution from Mohawk in the fourth quarter of 2024. That was desperately needed as net debt rose to $3.1 billion, a massive sum given the cold hard financial numbers reported.

Capital spending was trending around $2 billion per annum, as the dire situation meant that Jana Partners urged the business to explore strategic alternatives. The company addressed part of this, seeing 2025 capital spending down to about $1.5 billion, still providing a massive drain on cash flows amidst the continued losses.

With the company guiding for the business to generate $3 billion in sales and 40% EBITDA margins in the long haul, I was very cautious. The debt was quite high, but moreover is increasing rapidly, which means that shares are more or less an option.

Even at $24 in May, the company was granted a $3 billion equity valuation based on a share tally of 125 million shares. This was far too rich for me to consider the shares, as the story was uninvestable to me. The risk-reward was not compelling at all, amidst a sky-high cash burn and painfully slow progress.

The Implosion Continues

Between the spring and today, shares have lost another 60% of their value, having fallen from about $25 per share to the current lows of $10 per share. This is despite some upbeat news in June, when the company announced the achievement of key milestones of its Mohawk Valley silicon carbide fab plant, including a 20% utilization target.

In August, the company announced its much awaited fourth quarter results for the fiscal year 2024. Revenues came in at $201 million, including a $41 million contribution from the Mohawk facility, with both numbers coming in soft. Even worse, operating losses increased further to $146 million.

As if the lack of progress is not disappointing enough, the company moreover guided for first quarter sales for the fiscal year 2025 to come in dead flat at a midpoint of $200 million. GAAP losses are seen exceeding the anticipated revenue numbers.

Moreover, the company has seen net debt tick up materially to $4 billion, as the 126 million shares now grant the company a mere $1.2 billion equity valuation. Even remarks about a $200 million reduction in capital spending in 2025 are going to change the situation (i.e., cash burn) here.

A Gamble

The truth is that shares are nothing but a gamble, in my view. The cautious approach has served me well, despite the promise of the technology and market.

Wolfspeed, Inc. continues to see lack of growth, even as Mohawk is gradually coming online. The net debt load is huge and growing rapidly. The strategy has been mismanaged from a capital perspective, with delays in commercial traction jeopardizing the financial future of the business.

All this stands in contrast to the huge design wins reported, which never seem to materialize here, as this is the balancing act in this investment story. While the company has considerable debt, it still holds over $2 billion in cash holdings, granting the company time. The company is aiming to buy time, with capital spending seen coming down to $1.2 billion in 2025. The company is hoping and betting on proceeds from the CHIPS Act, and at some point, a ramp-up in the business.

For me, the complete lack of improvement makes it very easy for me to avoid Wolfspeed, Inc. shares here, although the underlying factories could be worth a lot to strategic investors. For now, my working assumption is that common equity holders find themselves in a very risky position, one which I am not willing to join.