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Investment Thesis
The SiC market is one way for investors to capitalize on the growth of EVs, which remains ongoing. Wolfspeed, Inc. (NYSE:WOLF) is the only pure-play company in that regard. The main thesis is strong growth, which should eventually lead to increased margins and profitability. That should allow the company to roughly maintain (or even expand, in the best case) its P/S ratio, given its modest current valuation, which is, for example, a bit lower than ON Semiconductor Corporation (ON).
This means the stock price should roughly correlate with revenue growth in the long term. As a (high) growth company, this could lead to strong stock returns in my view.
SiC
The SiC market started in 2018 with the Tesla, Inc. (TSLA) Model 3, supplied by STMicroelectronics N.V. (STM). The following report lays out the case for SiC:
Our analysis shows that compared to their silicon-based counterparts,2 SiC metal-oxide-semiconductor field-effect-transistors (MOSFETs) 3 used in EV powertrains (primarily inverters, but also DC-DC converters and onboard chargers) 4 provide higher switching frequency, thermal resistance, and breakdown voltage. These differences contribute to higher efficiency (extended vehicle range) and lower total system cost (reduced battery capacity and thermal management requirements) for the powertrain. These benefits are amplified at the higher voltages needed for battery electric vehicles (BEVs), which are expected to account for most EVs produced by 2030.
It further estimates that the SiC market will grow from $2B to $14B by 2030. This is driven for a large part by EV volume growing by 4x. According to one forecast, the market for SiC in EVs will grow over 10x by 2030 from $0.9B in 2022.
Company
Wolfspeed calls itself the “world’s only pure-play vertically integrated silicon carbide company”, across materials (crystals) and devices, on 200 mm wafers.
It is currently ramping its Mohawk Valley fab, which is on track to achieve 20% utilization in calendar Q2, which represents $100M in quarterly revenue (i.e., $2B annually at full utilization), although there will be a delay of two quarters for this production to become reported revenue. In the last quarter (FY24 Q2), it contributed $12M, tripling QoQ. It has qualified over a dozen parts, including some of its most complicated and largest devices.
We have talked about a dozen or so parts that are qualified out of Mohawk Valley, including our biggest parts, and most complicated parts, and so forth. The other thing to realize is all of these MOSFETs that I just talked about qualifying, they qualified first-pass. And that is not normal. There’s — you normally find something, some problem or qualify with an asterisk saying you’re going to put some kind of something in place to kind of make sure that the quality that we only ship quality products to customers, we qualified first-pass on all those parts. And I think that gives us a huge boost of confidence in the underlying capability of this factory.
Earnings results
Wolfspeed tracks design-ins and design wins (when the design-in gets converted into production orders for 20% of first year volume). Design-ins worth $2.1B were achieved, and a record $2.9B in design wins, including 28 EVs (and it was able to confirm it is the primary source in at least 27 of those). Wolfspeed further has a line of sight towards 120 models across 30 OEMs.
The total design-in value is over $20B, with over $8B added in FY23. This shows the company is able to sustain a design-in rate of over $2B per quarter.
This compares to actual FY24 Q2 revenue of $208M, up 20% YoY, including a record of $108M power revenue. Materials reported 29% growth. Non-GAAP EPS loss was $0.55, nearly doubling YoY. Non-GAAP gross margin was 16.4%, which includes underutilization and start-up charges. Wolfspeed mentioned a long-term target of 50%.
As such, one risk regarding Wolfspeed is that ramping fab is expensive, with an FCF outflow of $755M during the quarter, composed of $183M operating cash outflow and $572M capex.
Guidance
For Q3 of FY24, revenue of $200M is expected, slightly down QoQ due to lower materials revenue. Revenue from the Mohawk fab is expected to roughly double.
Valuation
The current market cap of $3.6B makes for a 3.7x P/S multiple of FY24 sales, expected to drop to 3.3x for FY25, which isn’t very high, between for example On Semi and ST. However, given the current earnings, FCF, and gross margin profiles, the valuation might also be considered expensive.
On the other hand, since it is a growth company, P/S valuation would be most relevant, based on the assumption that it would reach profitability-related metrics closer to the semiconductor average in the long term. As such, the valuation is quite compelling for long-term investors.
For example, Wolfspeed expects to generate $4B revenue by FY27, which is more than its current market cap. Even if there is some uncertainty regarding the accuracy of this outlook, based on its design-in trends (which in turn are reflecting the increased adoption of EVs), there certainly seems to be some credibility regarding this growth outlook.
A 7investing analysis has come up with a current intrinsic value of $63-67. While it claimed to use quite modest assumptions (current consensus estimates in the near-term, and reaching the $4B management outlook), it then used at least double-digit growth through 3038, resulting in over $18.5B in revenue. Depending on its exact profitability at scale (assumed to reach 20%), then annual earnings could become about as large as its current market cap. However, given the competition in this market, including On Semi, the overall market likely would have to become even larger.
While it might be debatable if the SiC market and Wolfspeed’s revenue will really become that large, arguably there is already enough evidence for solid growth in the next several years, with revenue possibly trending towards its current market cap (never mind even higher).
Investor Takeaway
Even if the financials in the near term aren’t stellar, the new fab that is being ramped can add $2B to revenue, over 2x more than the expected FY24 revenue. In addition, as proof of the long-term demand and potential revenue (increase), Wolfspeed has added over $2B in design-ins for quite a few quarters, representing a pipeline worth over $20B.
Although current analyst estimates aren’t as high, Wolfspeed has a 2027 target for $4B revenue, which is higher than its current market cap. Even if the exact figure remains uncertain, the trend is clearly up. As discussed, the P/S valuation is quite modest, which means the stock price might reasonably correlate with revenue growth. So given the possible long-term growth, this implies a relatively low-risk stock with potentially ample stock upside.
