Why Wolfspeed Stock Is Plummeting Today

Key Points

• Wolfspeed is getting hit with big sell-offs today, but it's still up big over the last month.

• Wolfspeed has seen gains in conjunction with meme stock trading, but that comes with downside risk.

• The silicon-carbide specialist's restructuring will solve some problems, but that doesn't mean current shareholders will come out ahead.

• 10 stocks we like better than Wolfspeed ›

Wolfspeed (NYSE: WOLF) stock is falling rapidly in Friday's trading. The company's share price was down 10.4% as of 2:15 p.m. ET despite the S&P 500 being up 0.3% and the Nasdaq Composite being up 0.4%.

Wolfspeed's valuation is contracting today in conjunction with meme stock trading. Despite today's share price slide, the stock is still up roughly 68% over the last month of trading.

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Wolfspeed stock sinks as investors take profits on rally

Wolfspeed stock has seen big gains recently in conjunction with news that the company is poised to exit Chapter 11 bankruptcy protections in the near future. The corporate restructuring will result in 70% of the company's debt being wiped out -- but it will also result in a major restructuring for the silicon-carbide specialist's stock.

Along with explosive gains for Opendoor Technologies, some investors have been placing bets on other meme stock plays. This dynamic has helped power big gains for Wolfspeed's share price, but it's also not surprising to see big valuation pullbacks on the heels of recent rallies.

What's next for Wolfspeed?

Upon the completion of Wolfspeed's restructuring, current holders of the company's common stock will receive between 3% and 5% of the value of the new company. This sets up a very risky dynamic for current shareholders. While it's not impossible that current stockholders will come out ahead, the odds aren't necessarily favorable.

Recent gains connected to meme-stock trading could be further obscuring the outlook for some investors. Wolfspeed's restructuring will get rid of a large amount of debt by transferring asset and equity ownership to large debt holders, but the underlying business is still facing huge issues connected to weak demand and a negative gross margin.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.