Wolfspeed's Recent Decline: Key Insights and Future Outlook

Understanding Wolfspeed's Share Decline

It has been around a month since the last earnings report for Wolfspeed (WOLF). During this period, the company's shares have experienced a significant downward trend, losing approximately 31.3%, which has notably lagged behind the performance of the S&P 500.

As we delve deeper, important questions arise: Will this trend persist until the next earnings release? Or are we on the brink of a potential recovery for Wolfspeed? To provide some clarity, let's recap the major points from the latest earnings report and analyze the underlying factors affecting the company's performance.

Wolfspeed's Q4 Earnings Overview

In the fourth quarter of fiscal 2024, Wolfspeed reported a non-GAAP loss of 89 cents per share. This result was wider than the analysts' consensus estimate, which anticipated a loss of 84 cents, but it was a smaller loss compared to 36 cents from the same quarter last year.

Wolfspeed's revenue for the quarter stood at $200.7 million, reflecting a 1% decrease year-over-year, and it fell short of the consensus estimate by 0.2%. Notably, the company's Mohawk Valley Fab contributed $41 million in revenues during the reported period.

Breaking down the revenue sources, Power Products accounted for 52.1%, while Materials Products made up 47.9%. Revenues from Power Products decreased by 2.3% year-over-year, totaling $104.6 million, whereas Materials Products experienced a slight increase of 0.5%, reaching $96.1 million.

The reported quarter also highlighted impressive design-ins, with power device design-ins hitting $2 billion and quarterly design wins achieving $0.5 billion, suggesting future growth potential.

Examining Wolfspeed's Operational Dynamics

Wolfspeed’s gross margin for the fourth quarter was notably low, at 5.4%, which is a significant drop from 30.7% recorded in the same quarter the previous year. This decline was primarily influenced by $24 million in underutilization costs.

Additionally, sales, general, and administrative expenses climbed to $60 million, representing 29.9% of total revenues and marking a year-over-year increase of 37.6%. Research and development expenses also rose by 4.8%, amounting to $61.6 million, or 30.7% of total revenues.

The company reported significant factory start-up costs of $20.5 million in the fourth quarter, contributing to its operational losses. Overall, Wolfspeed incurred a non-GAAP operating loss of $118.9 million, wider than the $66.8 million loss experienced a year earlier.

Assessing Wolfspeed's Financial Health

As of June 30, 2024, the financial position of Wolfspeed showed cash, cash equivalents, and short-term investments totaled $2.17 billion, a decrease from $2.55 billion reported on March 31, 2024. At the same time, the company faced long-term debts of $3.13 billion.

The free cash outflow was significant, totaling $885.3 million, driven by $239.5 million in operational cash outflow and capital expenditures of $644.2 million.

Future Guidance and Expectations

Wolfspeed has outlined its expectations for the first quarter of fiscal 2025, forecasting revenues between $185 million and $215 million. The projected non-GAAP loss is anticipated to fall between 90 cents to $1.09 per share.

The company expects to see revenues around $20 million to $30 million from Mohawk Valley Fab in the upcoming quarter. As for profit margins, non-GAAP gross margin is anticipated to be between 13% and 20%, with estimated non-GAAP operating expenses of $109 million, which includes $13 million earmarked for start-up costs.

Current Estimate Trends

In recent weeks, there has been a noticeable shift in estimate trends for Wolfspeed. The overall consensus estimate has decreased by approximately 11.14%, reflecting cautious sentiment from investors.

Wolfspeed's VGM Scores Overview

As it stands, Wolfspeed currently has low VGM scores, with a Growth Score of F and a corresponding grade on the momentum front. On the value side, the stock holds an F grade, placing it in the bottom 20% of investment strategies.

This aggregate VGM score of F should be a critical consideration for investors who utilize multiple strategies in their decision-making process.

Looking Ahead: Market Expectations

With a prevailing downward trend in estimate revisions, it's important to recognize the potential implications. Given this environment, Wolfspeed holds a Zacks Rank #3, indicating a hold position. Based on current analyses, we anticipate an in-line return from the stock over the upcoming months.

Frequently Asked Questions

What is contributing to Wolfspeed's stock decline?

The decline has been mostly attributed to disappointing earnings reports, lower-than-expected revenues, and rising operational costs.

What are the future expectations for Wolfspeed?

Wolfspeed expects revenues to range between $185 million and $215 million in the next quarter, with anticipated losses between 90 cents and $1.09 per share.

How has Wolfspeed's gross margin changed?

Wolfspeed's gross margin declined significantly, dropping from 30.7% to 5.4% year-over-year primarily due to underutilization costs.

What challenges is Wolfspeed facing currently?

The company is grappling with rising operational expenses, significant losses, and declining cash reserves.

What is Wolfspeed's current financial standing?

As of June 2024, Wolfspeed has approximately $2.17 billion in cash but is facing long-term debts of $3.13 billion.

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