Wolfspeed Stock: A Bet on Electric Vehicles and More
Here’s a fun exercise. Take the latest investor deck available for any given company and see if you can understand their value proposition and potential opportunity by reading the deck from end to end. If you can, the investor relations team did their job properly. Less is more, and the ideal deck doesn’t drown the user in the details. Given there’s a direct correlation between the quality of investor relations and the cost of raising capital, we’re puzzled why some industries assume their investors should have the same level of subject matter expertise they do. Drug development companies are probably the worst offenders, followed closely by electronics hardware manufacturers. For example, look at this gem found about halfway through the deck of a $14 billion company.
If you randomly selected 1,000 investors, maybe several would understand what’s being conveyed on the above slide. Should companies expect their audience of investors to have prerequisite knowledge of the industry to understand the value proposition? Maybe in the days of Liar’s Poker that was acceptable, but today’s technology companies should be able to articulate their value proposition so investors can easily understand it when window shopping. A simple deck can be supplemented by technical presentations for subject matter experts who want to dig deeper.
Wolfspeed Stock Surges
Wolfspeed stock was up +30% several days ago as the company released their 2022 earnings while beating expectations and raising guidance. Revenues came in at $746 million compared to the $850 million they promised. Yes, that’s right, The Rona tripped them up. Despite the pandemic setback, Wolfspeed was able to successfully decouple themselves from their legacy LED business so they can now focus on the real opportunity ahead – silicon carbide (SiC). It’s important to understand the potential of SiC because that’s at the core of Wolfspeed’s bull thesis.
We always enjoy finding someone who has already done the research on a topic so that we can do what any MBA would – stand on their shoulders and parrot their findings as if they’re our own. Tiernan Ray wrote a piece in 2019 titled Silicon Carbide and the Age of Electrification which spells out the bull thesis perfectly, albeit rather verbosely. We’ll summarize it as follows.
The semiconductors you’re most familiar with are the computing microprocessors that process ones and zeroes so that you can read this article. Then you have power semiconductors which “shape the continuous waveform of an electrical current, to do things such as converting a direct current into alternating current.” One type of power semiconductor is made by compressing a wafer of silicon and carbon – SiC – and the resulting material “needs just one tenth the area of silicon to manage the same amount of voltage, an increase in efficiency.” It’s a material with a great deal of promise as the world moves towards electrification.
In 2017, Elon Musk used first principles thinking and employed SiC in the “traction inverter” which converts the direct current stored in the battery to alternating current used to power the motor(s). By using SiC, batteries can be smaller and last longer. Not only that, but the higher the voltage, the more efficient SiC becomes, the faster the battery charges. As the technology improves, larger wafers can be produced which lowers the cost of production which spurs adoption. That’s precisely what Wolfspeed is doing today with their new factory in New York which is the first production facility to produce 200mm SiC wafers.
The larger wafer costs 20% more to produce yet yields 3X the amount of product which means gross margins increase substantially. It’s one factor contributing to Wolfspeed’s guidance of margin expansion from mid-30s today to mid-50s by 2024 when revenues are expected to more than double the $746 million reported in Fiscal 2022.
The growth continues beyond 2024 as Wolfspeed looks to capitalize on the strong demand for SiC components by electric vehicle manufacturers.
Wolfspeed EV Opportunity
We had a phenomenal record of $2.6 billion of design-ins in the fourth quarter. This achievement, coupled with the previous two quarters of $1.6 billion each, provides further evidence of the upward pressure we are seeing on our 2026 revenue outlook, which we now believe is between 30 to 40 percent higher than the $2.1 billion we forecasted at the end of last year.”Credit: Wolfspeed Fiscal 2022 Earnings Release
Wolfspeed uses the term “design-in” quite liberally without defining exactly what that is. A design-in is similar to a design-win which is when a customer incorporates your component in their product design plans. This means down the road there’s a high likelihood – not a certainty – that they’ll be buying your component. These potential sales are referred to as “pipeline,” and Wolfspeed claims to have $18 billion in pipeline extending through 2027, of which 70% represents the auto industry. Of that, 80% represents inverters. As vehicle manufacturers move to electric vehicles, Wolfspeed stands to benefit as the market leader in SiC with a 60% market share.
The world’s first 200mm SiC factory is now open in New Yawk, and Wolfspeed sees a bright future ahead as they progress down the path to $2.73 billion in 2026 revenues (at the lower end of their guidance). Provided the new factory operates as planned, there appears to be plenty of demand for their product which can be met just as fast as they can open factories that produce more chips. As wafer costs are reduced, industrial applications become more economically viable, and demand will increase further. By 2026, it’s expected that half the market will be for non-auto use cases. There’s a lot to like about Wolfspeed’s bull thesis, and the main points are as follows:
- Market leader in SiC
- Pick-and-shovel play on an exciting trend in the semiconductor industry that’s largely exposed to the growth of electric vehicles, renewable energy, and 5G
- Future potential of SiC to transform other industries such as industrial motors which consume 45% of the world’s power
As risk-averse investors, we’re always concerned with thinking about what could go wrong.
The Bear Thesis
A lot of Wolfspeed’s path to greatness is hinging on the success of a single factory which just started operations on a completely new wafer size. Imagine what happens to shares if the company starts reporting problems at the factory. That’s probably a good buying opportunity because they’ll inevitably fix whatever problems arise. Operational risks come from the company’s inability to execute, something referred to as “company-specific risk.” Every firm carries such risks, so what about external risks? The growth of electric vehicles could stall, but that seems unlikely given the commitments made by automakers and the green push by America’s current administration.
Overall, we came away from this piece thinking more favorably about Wolfspeed than expected. If you can look past the verbose 132-page investor deck, there’s a simple thesis that’s quite compelling. A miracle material promises to transform anything that’s electrified and Wolfspeed is the leader in this space. All they need to do is execute and hopefully, the margin expansion plan is realized.
It’s all about economies of scale and R&D. Bigger wafers and bigger factories drop the price of SiC wafers. As the price drops, more use cases become economically viable and demand increases. That spurs more investment and the cycle continues. Wolfspeed estimates a $9 billion total addressable market by 2026 which is likely to keep growing as SiC gains in popularity.
It all sounds great, but there’s one point of contention we have regarding Wolfspeed’s investor relations (IR) efforts.
The Importance of Investor Relations
We cannot go long a stock we don’t sufficiently understand. Why? Because when we go long a stock, we tell our subscribers every detail of that decision. When things go pear-shaped, we need granular information that tells us where things went wrong. Cognex is a great example of a company that doesn’t provide insights as to where success or failure comes from. Some fellow reads a script during earnings calls and makes vague comments which you need to piece together four times a year while listening to dead boring conference calls. Altair Engineering is another firm which doesn’t provide revenue reporting granularity so that we can see what exposure we’re getting.
Wolfspeed needs to upgrade their IR game and start providing investors with downloadable quarterly results with key metrics. Don’t make investors sit through a one hour audio-only earnings call every quarter to try and extrapolate key metrics while company management reads prepared scripts then take questions. Don’t slap a cover sheet on the 10-K and call it an “annual report.” Make it easy for investors to monitor key metrics and replace the 132-page investor deck with something more concise and accessible.
We came away from this research piece liking Wolfspeed more than when we started. Maybe we’re drinking the Kool-Aid a bit too much, but we feel the thesis is compelling enough to merit consideration in a tech stock portfolio. We don’t typically like firms that lack recurring revenues, but it’s tough to ignore the potential for SiC well into the future once the electric vehicle boom has subsided and industrial applications start adopting SiC to create efficiencies. It’s an electrifying opportunity provided Wolfspeed can continue executing.
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