29 Sep Wolfspeed: Transformative Leader of Silicon Carbide Industry
Wolfspeed, Inc. (NYSE: WOLF) innovates wide bandgap semiconductors focused on silicon carbide and gallium nitride (GaN) materials and devices for power applications.
Wolfspeed, Inc. (NYSE: WOLF)
Market Cap: $4.73B; Current Share Price: 37.77 USD
Data by YCharts
The Company and its Products
Wolfspeed is the leading pure-play, vertically integrated silicon carbide company.
The Company’s product families include silicon carbide and GaN materials, power devices, and RF devices. They are targeted for applications such as electric vehicles, fast charging, 5G, renewable energy and storage, and aerospace and defense.
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Materials products and power devices are used in electric vehicles, motor drives, power supplies, solar, and transportation applications. In contrast, materials products and RF devices are used in military communications, radar, satellite, and telecommunication applications.
Most products are manufactured at North Carolina, California, and Arkansas production facilities. Additionally, the Company recently opened a silicon carbide device fabrication facility in New York and started constructing a new materials manufacturing facility in North Carolina. Wolfspeed operates research and development facilities in North Carolina, California, Arkansas, Arizona, and New York.
We’ll discuss the critical rationale for covering this Company.
- Massive Opportunity Driven by Increasing Silicon Carbide Adoption
Today, the demand for silicon carbide is increasing exponentially due to its utilization in next-gen vehicles. Of late, automakers’ announced investments in next-gen vehicles have only grown. Consider the following –
- Jaguar Land Rover has launched the goal of Jaguar electric-only vehicles from 2025 onwards
- GM plans to transition to an all-electric fleet by 2035
- Stellantis has announced that 40-50% of US sales will be EVs by 2030
- Tesla targets selling 20M EVs/year before 2030
- Mercedes Benz has announced that 50% of cars will be EVs by 2025 and 100% by 2030
- Volkswagen plans for 50% of sales to be BEVs by 2030
Due to the increase in planned investments in next-gen vehicles, the EV investment market is expected to reach at least $500 billion by 2030.
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The silicon carbide content in EVs is increasing. The transition from Internal Combustion Engines (ICE) to Battery Electric Vehicle (BEV) has nearly doubled the amount of semiconductor content per vehicle from ~$500 per vehicle to ~$1,000 per vehicle.
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Success in EVs also drives silicon carbide adoption across other mobility segments and broader industrial applications, which presents a massive opportunity for silicon carbide companies.
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Wolfspeed is one of the largest suppliers of Silicon Carbide to Original Equipment Manufacturers (OEMs) and is thus poised to benefit from upcoming opportunities. In 2019, Wolfspeed announced the construction of the world’s largest Silicon Carbide device fab (Mohawk Valley Fab), which helped build tremendous momentum and resulted in a large and growing opportunity pipeline for Silicon Carbide devices. The Company also has a partnership with Arrow Electronics, through which it can access the global sales force to enter new markets and expand its customer base.
Further, Wolfspeed continues to capture design-ins (customer commitments to purchase products and one of the factors used to forecast long-term demand and future revenue) to capitalize on the available pipeline. The Company has $14.8 billion of cumulative Design-ins since 2019, with a Design-in to Design-win conversion rate of ~43%.
Overall, Wolfspeed has an opportunity pipeline of $40 billion, which presents a window to expand its reach in the market. Additionally, the Company is exponentially increasing capacity with greenfield fabs and facilities to support $14.8 billion in Design-ins. In other words, Wolfspeed is doing what it can to benefit from upcoming expansion in its target market.
- Leading Industry Transformation with Superior Quality Product
Silicon carbide is superior to silicon because of its higher efficiency, faster switching, improved thermal performance, reliability, and lower system costs.
Producing Silicon Carbide requires experience and proprietary tools and processes. Wolfspeed has continuously refined low-defect Silicon Carbide production over the last 35 years. The Company’s wafer processing technology is critical for device design, performance, and quality, making Wolfspeed’s silicon carbide the future semiconductor.
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The Company continues to invest in research and development to develop silicon carbide materials and fabrication technology for a 200mm platform, develop higher performance power, increase the quality, performance, and diameter of substrate and epitaxial materials, and continually improve manufacturing processes.
Additionally, to meet expected growth in demand for silicon carbide, Wolfspeed is increasing capacity through measures such as opening and ramping of a state-of-the-art, automated 200mm capable silicon carbide device fabrication facility in New York, an expansion of materials factory in Durham, North Carolina, the construction of a new materials manufacturing facility in Siler City, North Carolina, and the planned construction of a new 200mm capable silicon carbide device fabrication facility in Saarland, Germany.
Wolfspeed’s Durham facility is currently the world’s largest Silicon Carbide Materials facility. However, Siler City is expected to have a capacity that’s 10X bigger than the current manufacturing capacity of the Durham facility. Thus, all the measures taken by Wolfspeed would ultimately lead to the world’s most extensive silicon carbide manufacturing footprint.
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Overall, Wolfspeed is leading the industry transformation and defining the roadmap for Silicon Carbide quality. For example, it is advancing industry standards by leading g Silicon Carbide engagement in industry standards organizations [JEDEC, ECPE (including AQG), ZVEI, ICE, SEMI].
Further, Wolfspeed’s commitment to quality is evident through its automotive-certified business and factories, global manufacturing, supplier and customer quality teams, industry-standard qualifications and metrics, compliance, and continual improvement.
The Company also implements key quality initiatives such as zero defect strategies and an auto-centric Quality Management System to ensure improved customer satisfaction.
Thus, Wolfspeed is prepared to transform and rule the rapidly expanding silicon carbide industry, primarily due to its capacity expansion and focus on quality.
- Financial Performance and Outlook
For FY23, Wolfspeed recorded revenue of $921.9 million, compared to $746.2 million in FY22, representing growth of 24% YoY.
GAAP Gross Margin for FY23 was 30.3%, compared to 33.4% the previous year. GAAP net loss from continuing operations was $329.9 million in FY23, or $2.65 per diluted share, compared to $295.1 million, or $2.46 per diluted share the previous year.
Wolfspeed had incurred $160.2 million of factory start-up costs for FY23, which accounted for a significant portion of its operating expenses.
For Q1 FY24, Wolfspeed targets revenue from $220 million to $240 million.
It is important to note that during FY23, the Company secured $5 billion of funding to support continued capacity expansion plans, initiated construction on a 200mm materials factory in North Carolina, and generated initial revenue from the Mohawk Valley 200mm device fab. Thus, Wolfspeed is committed to making the most of the upcoming expansion and has access to sufficient funding to allow it to do so.
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Over the next few years, Wolfspeed revenue is expected to grow faster than the market at a CAGR of about 40%.
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At present, there is significant capital expenditure, as it is required in advance of revenue growth; however, capital returns are expected to improve post facilities build-out.
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Nevertheless, it must be mentioned that as per a press release dated August 22, 2023, Wolfspeed has entered into a definitive agreement to sell its radio frequency business (Wolfspeed RF) to MACOM Technology Solutions Holdings, Inc. for approximately $75 million in cash, subject to a customary purchase price adjustment, and 711,528 shares of MACOM common stock, valued at $50 million based on the 30-trading day average for MACOM’s common stock through August 21, 2023.
The company expects to close the transaction by the end of this year, so in the future, all revenue will be derived from sales related to material and power products only.
In FY23, RF products revenue accounted for $163.7 million, about 17.76% of total revenues. Since most revenues are derived from materials and power products, Wolfspeed should continue to perform well, even in the absence of the RF products division.
Risks
Though Wolfspeed’s future seems promising, there is always the possibility that its performance may disappoint due to global macroeconomic and market risks. The Company may not be able to execute its growth strategy as expected, and variations in its production could impact its ability to reduce costs – this, in turn, could cause margins to decline and operating results to suffer.
Finally, Wolfspeed operates in a highly competitive market, and innovations or aggressive pricing actions by competitors could reduce Wolfspeed’s margins if it cannot reduce costs at an equal or greater rate than the sales price decline.
Conclusion
The increasing adoption of EVs is expected to cause an explosion and present a $40 billion opportunity pipeline in the silicon carbide market. Wolfspeed’s Silicon Carbide expertise, technology, and volume are unmatched in the industry, and the Company is increasing production capacity even further to make the most of the upcoming opportunity.
Nevertheless, the Company faces several risks, such as those associated with global macroeconomic conditions and innovations and aggressive pricing by competitors. Hence, investors must move ahead with caution.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Reference:
https://s29.q4cdn.com/278875087/files/doc_presentations/2022/Wolfspeed-Investor-Day-2022-Slides.pdf
https://s29.q4cdn.com/278875087/files/doc_financials/2023/q3/Wolfspeed_Q3_2023_Earnings_Release.pdf
https://www.sec.gov/ix?doc=/Archives/edgar/data/895419/000089541923000061/wolf-20230625.htm
https://www.sec.gov/ix?doc=/Archives/edgar/data/895419/000089541923000025/wolf-20230326.htm
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