Why Rivian, Wolfspeed, and Navitas Semiconductor Plunged Today

Shares of electric vehicle company Rivian (NASDAQ: RIVN) and EV-related power chipmakers Wolfspeed (NYSE: WOLF) and Navitas Semiconductor (NASDAQ: NVTS) were down on Wednesday, falling 5.7%, 15.2%, and 13%, respectively, as of 12:25 p.m. ET.

Rivian is an upstart electric vehicle challenger, while Wolfspeed is an emerging player in silicon carbide (SiC) wafer production and SiC-based chips used predominantly in EVs. Meanwhile, Navitas is a small-cap chip designer of both SiC and gallium nitride power chips for EVs, industrial, and consumer electronics applications.

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The plunge today appeared to be partly a continuation of yesterday's down market in response to higher interest rates. But the overly harsh sell-off in EV-related stocks and semiconductor players can likely be attributed to a layoff announcement at a large Japanese competitor. The announcement suggested continued weak demand in the space, casting a pall over the EV and power semiconductor sectors.

Renesas lays off 5% of its workforce

Last night, Japanese chipmaker Renesas (OTC: RNECY) announced it would be laying off a little less than 5% of its workforce. While that may not sound like much, Renesas is one of the larger players in the automotive and industrial chip sector, with a $24 billion market cap. The total number of layoffs would amount to about 1,000 employees.

The layoffs are a sign of continued awful demand for auto and industrial-related chips. And keep in mind, this is despite these markets having already been in a downturn for almost three years now. Semiconductor cycles typically last about one and a half to two years, so the fact that Renesas is laying off 5% of its workforce at this seemingly late stage of the downcycle is quite worrying. Given the length of this downcycle, one would think an upturn might be imminent, but apparently that's not the case.

RNECY Revenue (Quarterly) data by YCharts

The cause of the extended downturn is up for debate, but it's likely a combination of higher-for-longer interest rates, an extended downturn in China that shows little signs of recovery, and a slowdown in electric vehicle adoption in the U.S. and Europe.

That's unfortunate news for companies in this space, but it's especially bad for those that don't yet make profits -- like these three stocks.

Although Rivian gave some positive news last week that it beat analyst expectations for fourth-quarter deliveries, it is still losing quite a bit of money as it attempts to ramp up volumes from its factories, with a $1.1 billion operating loss in the third quarter alone.

Meanwhile, Wolfspeed has spent a huge amount of money and is taking on significant debt to do so in order to build up new silicon carbide factories ahead of anticipated demand. But if that demand doesn't show up, then the company could get into serious trouble with its creditors. This is why the stock is down significantly today, even as it has already fallen 85% over the past year.

As a small player in the space, Navitas has seen stagnating revenues and continued operating losses, and is down 50% over the past year. That being said, it doesn't have the debt problems Wolfspeed has.

A recovery looks further off

It has been frustrating for investors in EV stocks, as well as automotive and industrial chip stocks, of late, as this downturn has been quite prolonged. With the Renesas news, it seems the downturn could go on for that much longer.

At this point, investors in this space should only stick with profitable companies with strong balance sheets, which should be able to weather and potentially capitalize on industry weakness and potential consolidation. While a potential recovery could be quite strong, given the length of this downturn, there is also a possibility a recovery may not happen anytime soon if interest rates don't come down and China's economy falls into a prolonged slump, like Japan experienced since the 1990s.

All this means it's better to invest in the financially stronger companies in the space, rather than higher-upside but higher-risk companies like these three.

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Billy Duberstein and/or his clients has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wolfspeed. The Motley Fool has a disclosure policy.