Shares of Wolfspeed (NYSE: WOLF) plunged 37.6% this week through Thursday trading, according to data from S&P Global Market Intelligence.
The rout in the stock largely came on Thursday, following Wednesday evening's earnings release for the company's fiscal first quarter, which missed expectations.
Wolfspeed had made some positive funding announcements in recent days, but the fruits of its massive debt-fueled buildout haven't shown up yet.
In the September quarter, Wolfspeed's revenue declined slightly to $194.7 million, missing expectations, while its non-GAAP (adjusted) earnings per share plunged to negative $0.91, well below the $0.09 forecast. The massive loss was due to a number of restructuring charges the company announced, including severance payments and an early facility closure made in an effort to cut costs and right-size its cost base for a weaker-than-expected near-term revenue outlook.
Of note, auto and industrial markets are in a down-cycle at the moment, which is an inopportune time for Wolfspeed and the massive investments it's making in silicon carbide chip manufacturing. For the fiscal second quarter ending in September, management forecasts between $160 million and $200 million in revenue, a sequential decline and well below analysts' estimates of $214.6 million.
After an 80% plunge this year, Wolfspeed surged recently after announcing it had signed a non-binding memorandum for $750 million with the CHIPS Act department and another $750 million in funding from a consortium of big-name private equity funds and hedge funds.
However, the dismal earnings report has undone that dead cat bounce for now. If Wolfspeed's massive investments don't start to yield results, the company's liquidity could be called into question. In fact, on the conference call, management noted it would have to raise up to $300 million in equity, diluting shareholders, in order to receive the CHIPS funding.
While the company has $1.69 billion in cash and the other $1.5 billion in total outside funding options, Wolfspeed also already has over $6.1 billion in debt and convertible notes, and it burned through $570 million in cash last quarter alone.
While the stock seems cheap based on its potential, the company's finances make it too risky for this investor, at least until there are real signs of silicon carbide growth.
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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wolfspeed. The Motley Fool has a disclosure policy.