To The Moon

Summary

• WOLF recently opened a $1.2 billion state-backed factory to produce silicon carbide chips.
• The components produced from the factory will be used in consumer electronics, electric vehicles, and 5G infrastructure.
• I am bullish on these supercycles so it's only natural to be bullish on this stock as well.

jiefeng jiang/iStock via Getty Images

$Wolfspeed Inc.(WOLF)$ is a buy with theopeningof a new $1.2 billion state-backed factory in Utica, New York, that will see the company pivot into becoming a pure semiconductor company. The factory will producesilicon carbide chips and will be used in a number of products from electric vehicles, solar power inverters, and in 5G infrastructure.

In my view, WOLF's pivot towards making these chips is a smart move that will have a significant pay-off. The company is effectively positioning itself as being a key supplier to companies in several supercycles that will all need a steady stream of silicon carbide chips in order to be assembled.

I am bullish on the future of electric vehicles, 5G, and other emergent technologies that these new chips will be used in, and WOLF looks to become a key conduit of these trends.

Although a $1.2 billion dollar investment is a large and risky pivot for the company, the NY state agreed that it will reimburse the company $500 million provided that it meets its performance metrics, which makes the investment more attractive for investors.

Company Overview

Wolfspeed has been recognized as a global leader in the design and manufacture of high-power microwave semiconductors, including power amplifiers, switches, modulators, converters, and other products for use in radar, satellite communications, and wireless infrastructure applications.

The company's products have included power devices, such as power MOSFETs, IGBTs, HEMTs, diodes, thyristors, and silicon carbide devices; power modules; power subsystems; thermal management solutions comprising passive cooling components and heat sinks for electronics applications; and custom thermal management solutions.

The company has a very strong customer base with companies like Apple Inc., (AAPL) Amazon.com, Inc. (AMZN), Hewlett-Packard Company (HPQ), Microsoft Corporation (MSFT), Oracle Corporation (ORCL), and more on its books. Wolfspeed has offices in the US, Canada, Europe, and the Asia Pacific regions.

Growth of Demand for Silicon Carbide Chips

The silicon carbide chip market is set to grow at a CAGR of 16% by 2026. The demand is stimulated primarily through a need for low-power consumption devices such as cellphones and other consumer electronics.

On the downside, there are high costs related to materials & fabrication as well as a negative impact of COVID-19, which is expected to hinder the market growth. Despite these downsides, there is enormous scope for growth for these chips. In the United States alone, for example, President Joe Bidenset a goalfor 50% of all new vehicle sales to be electric by 2030. This means that car manufacturers in the US such as General Motors (GM) and Tesla (TSLA) will likely see a surge in electric vehicle sales in order to meet the demand for vehicles in the US market.

Then there's the rollout of 5G across the rest of the United States that will also presumably be using the chips made by Wolfspeed due to the ongoing supply chain constraints. The rollout in the US has been ongoing since 2019, but only2,000 citieshave access to the new technology, meaning there are roughly 17,000 cities left in the country that require the infrastructure, and by extension, silicon carbide chips.

What the New Factory Means for Wolfspeed

The importance of Wolfspeed's new factory for greater revenue growth in the future cannot be understated. In addition to beingthe world's largest200mm silicon carbide fabrication plant for use in automotive and industrial applications, it will also help fuel the company's $25B+ pipeline of chips in the semiconductor industry. One client that is already on the company's books to use the chips is Lucid Motors, whichrecently entereda multi-year agreement to use Wolfspeed's XM3 Silicon Carbide power modules in the production of its electric vehicles and other automotive products. Lucid Motors is set to deliver1,200 to 1,400vehicles this year from its factory in Arizona and 25,000 customers have already placed orders for new electric vehicles.

Wolfspeed owning the world's largest silicon carbide fabrication plant gives the company a distinct advantage over its competitors. With already $25B+ of orders in its pipeline, the company will benefit from economies of scale due to the large masses of production. One can also assume that the company will also improve its manufacturing methods as time goes on, which could further reduce its per-unit cost that will benefit the company's bottom line.

In the company's mostrecent earnings call,it was reported that the company is receiving orders for silicon carbide chips faster than expected. Wolfspeed executives said that its pipeline now consists of over 9,000 projects and that design-ins, which reflect the company's sales team's ability to convert opportunities to new orders for the company, were up $3.8 billion, for a 100% increase from last year at $1.9 billion. So the company's future growth prospects are looking quite attractive.

Financials

Wolfspeed is currently unprofitable with a high cost of revenue and is currentlyburning through its cash accountwith negative earnings. The business lost 6.86% of its cash in FY 2021 and currently has $379M cash remaining on its balance sheet. In Q3 WOLF missed its revenue target by $2.66 million, ending at $188 million. Despite missing its revenue target the business still experienced a 36.9% YoY growth.

For the rest of the year, the company posted the following guidance. It is targeting revenue in the range of $200 million to $215 million, and its net loss is expected to be between $78 million to $85 million.

Again, since the company is in the process of making a long-term pivot, I am not overly concerned with the company's cash burn rate or the amount of debt on its balance sheet. If investors believe in the future of 5G and the electric vehicle markets, they should also consider WOLF as one of the key future suppliers of silicon carbide chips in the United States.

Risks

WOLF is placing a huge bet on the future of silicon carbide chips and that of the EV and 5G supercycles that these trends depend on. If the company is overestimating the value of this market the consequences will certainly be severe, while on the other hand, the reward is equally as large as if they are right.

Another risk for the company is that they are not the only producer of chips in the market and may face fierce price competition from overseas competitors that may drive down its prices. Silicon chips are valuable and scarce now, but an overproduction of chips or an overestimation of demand could also see the company's prices and profits dwindle.

Conclusion

WOLF is positioning itself as an indispensable supplier of silicon carbide chips in the US market and is risking everything for a huge potential gain. Due to being bullish on the trends that these chips support I am rating this stock a buy and encourage investors who hold the same opinion as me to do the same.