Wolfspeed, Inc. (WOLF) manufactures power and radio frequency semiconductors. Formerly known as Cree, Inc., it changed its name on October 4, 2021, to reflect its overall core strategy. Over the past four years, WOLF divested two-thirds of its business to focus on its Silicon Carbide technology-based semiconductors. The company’s products have applications in electric vehicles, wireless infrastructure, 5G, and renewable energy industries.

WOLF transferred its listing from the Nasdaq Global Select Market to NYSE as part of its transformation strategy. The stock began trading on the NYSE on October 4, 2021. Regarding this, WOLF CEO Gregg Lowe said, “We are pleased to join the NYSE, one of the world’s most prestigious trading platforms, as we continue on our transformational journey as a pure play global semiconductor powerhouse leading the industry transition from silicon to Silicon Carbide …. Importantly, our company name change to Wolfspeed capitalizes on our 30-year heritage of working with Silicon Carbide and underscores our ambitious plans to compete and win in the rapidly expanding marketplace, which we believe will continue to provide long-term value for our customers and shareholders.”

Since then, shares of WOLF gained 37.7% to close Friday’s trading session at $108.97, reflecting surging investor optimism surrounding semiconductor stocks amid the ongoing chip shortage.

Here’s what could shape WOLF’s performance in the near term:

Poor Financials

For the fiscal 2022 first quarter ended September 26, 2021, WOLF’s revenues increased 35.6% year-over-year to $156.60 million. However, its operating loss widened 5.6% from the same period last year to $65.70 million. This can be attributed to a 17.8% rise in total operating expenses. Net loss and loss per share came in at $70.10 million and $0.60, respectively. Net operating cash outflow stood at $62.50 million, compared to a net operating cash inflow of $400,000 in the prior-year quarter.

Frothy Valuation

WOLF’s forward non-GAAP P/E ratio is negative 159.24. In addition, the stock’s forward EV/Sales multiple of 17.91 is 341.4% higher than the industry average of 4.06.

Its forward EV/EBITDA and Price/Sales ratios of 324.09 and 17.90 are significantly higher than the industry averages of 16.06 and 3.95, respectively. In terms of forward Price/Book, WOLF is currently trading at 6.62x, 16% higher than the industry average of 5.70x.

Negative Profit Margins

WOLF’s trailing-12-month net income margin is negative 72.28%, while its EBITDA margin is negative 15.25%. Moreover, its levered free cash flow margin of negative 128.33% compares with the industry average of 11.72%. Its ROE, ROA, and ROTC margins are negative 17.03%, 12.61%, and 4.63%, respectively.

In addition, WOLF’s trailing-12-month gross profit margin of 31.5% is 36.3% lower than the industry average of 49.42%.

POWR Ratings Reflect Bleak Prospects

WOLF has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Stability and Sentiment and an F for Quality. Its relatively high 1.53 beta is in sync with the Stability grade. In addition, analysts expect the company’s EPS to decline at a rate of 33.6% per annum over the next five years, justifying the Sentiment grade. Furthermore, WOLF’s negative net income margin and ROE account for the Quality grade.

Of the 99 stocks in the Semiconductor & Wireless Chip industry, WOLF is ranked #94.

Beyond what I’ve stated above, you can view WOLF ratings for Growth, Momentum, and Value here.

Bottom Line

Over the past year, WOLF has failed to capitalize on the industry tailwinds to improve its financials and profit margins. Currently, the company is building a $1 billion silicon carbide factory in Utica. However, this might adversely impact WOLF’s already poor financials and cash flows. Moreover, given the current market volatility, the overvalued stock might witness a sharp pullback in the near term. Thus, WOLF is best avoided now.

How Does Wolfspeed, Inc. (WOLF) Stack Up Against its Peers?

While WOLF has an F rating in our proprietary rating system, one might want to consider looking at its industry peers, Broadcom Inc. (AVGO), Semtech Corporation (SMTC), and inTest Corporation (INTT), which have an A (Strong Buy) rating.

WOLF shares were trading at $102.69 per share on Monday afternoon, down $6.28 (-5.76%). Year-to-date, WOLF has declined -8.12%, versus a -3.20% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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