Description

Executive Summary/Investment Thesis

• Dominant market share in oligopolistic Silicon Carbide (SiC) market that is superior to silicon for advanced semiconductors in markets like EVs, 5G, etc

• Company is at inflection point as their capex spend nears its end and capacity greatly expands to meet the overwhelming demand

• Backdoor EV play and beneficiary of CHIPS Act to bring semi manufacturing back to US

• Capex for additional fabs to accommodate demand and lower cost 

• Steady state should be high growth, high margin and profitable

• Strong management team

• Large and growing backlog – strong visibility (~$6B+ in design-ins for FY22)

• Growth potential beyond EVs is significant (5G, solar, etc) as chips transition to SiC from silicon

• Opportunity exists due to near term headwinds that should abate and expose huge opportunity

• Stock doesn’t appear “cheap” today, but the company is spending on capex ahead of strong and growing demand.

• Oligopolistic market leaders are rarely cheap, but this is an opportunity to accumulate shares before the market fully appreciates the upside potential

• The top line of WOLF should outpace the growth rate of the underlying EV production, which in combination with the company’s strong margin trajectory, given its vertical integration and increasing volume, will drive an even stronger earnings growth ramp

• As the company fills the expanded capacity, it should be able to achieve >$6B in revenue and >$10 in EPS – setting it up for sizable gains.

Recent News:

In the process of writing this investment idea, two pieces of material information (both very bullish) were announced:

a.       On 11.16.22 WOLF announced a multi-year deal with auto and mobility supplier BorgWarner to allow the company to invest $500mm in WOLF’s financing in exchange for SiC device capacity. The agreement allows BorgWarner to purchase up to $650mm a year of devices.

b.      On 11.17.22 WOLF announced the pricing of $1.5B convert that should help finance the growth plan and reduce the risk of capital markets closing.

Corporate Overview

Wolfspeed (WOLF), formerly Cree, has completely transformed itself from an LED manufacturer to the largest Silicon Carbide (SiC) manufacturer in the world.  In 2021, the company completed the sale of its LED business and formally changed its name to Wolfspeed. 

Wolfspeed is the global leader in Silicon Carbide technology providing power and radio frequency (RF) semiconductors. Wolfspeed’s product families include Silicon Carbide materials, power-switching devices and RF devices targeted for applications such as electric vehicles, fast charging inverters, power supplies, telecom and military and aerospace.

WOLF is the only player in the industry with a fully commercialized, broad portfolio of field-tested SiC and GaN-on-SiC solutions on the market. While there is a great degree of complexity and IP in WOLF’s designs and solutions, what they do is simple, they make systems more efficient while reducing cost and increasing performance.

The company has more than 60% market share in a market that is growing more than 25% CAGR and expected to continue until the end of the decade.  Semiconductors made from silicon carbide are more expensive (currently) but can operate at much higher voltages, temperatures and frequencies than traditional semiconductors.  SiC is lighter, smaller, and more efficient than traditional silicon.

WOLF has tremendous momentum in its business across a growing number of mid and high-powered applications. In the most recent quarter, the company won $3.5 billion of design-ins, which is 6x last year and the opportunity pipeline exceeds $40 billion.

 In April, WOLF opened the world’s largest semiconductor fab for making SiC chips from 200 millimeter wafers in Marcy, NY. The company announced in September that it will build a new, state-of-the-art multibillion dollar materials manufacturing facility in North Carolina that will generate a 10x increase from Wolfspeed’s current SiC production capacity, supporting the company’s long-term growth strategy, accelerating the adoption of SiC semiconductors across a wide array of end-markets and unlocking a new era of energy efficiency.

Management

CEO / President:

Greg Lowe joined the company in 2017 from Freescale Semiconductor where he served as President and CEO.  Freescale was acquired by NXP Semiconductors N.V. to form a $10+ billion mixed-signal semiconductor industry leader.  Greg was an executive of Texas Instruments where he worked for 28 years prior to Freescale.

CFO:

Neill Reynolds joined the company in 2018 from NXP Semiconductors N.V. where he served as SVP of Finance, strategy and procurement.  Prior to NXP, Neill was in management at General Electric.

SVP & GM Materials:

Cenzig Balkas joined the company in 2006 from INTRINSIC Semiconductor Corporation which he founded in 2002 and sold to Cree in 2006. He has more than 20 years of experience in the development and commercialization of SiC materials and semiconductors.

Why This Opportunity Exists

There is a big change occurring in the analog power semiconductor industry due to the adoption of Silicon Carbide. The driving range of an Electric Vehicle improves by 10% when using SiC in the traction converter versus silicon.

As the market is transitioning to 200 mm scale, the benefits of margin improvement should extend to the vertically integrated companies like WOLF as they are the only ones with a 200 mm IC Fab in operation.

The opportunity in EVs and 5G is not debated in the market. Capacity to meet the explosive demand is the missing piece to the puzzle.

 The company is spending ~$1B in FY23 (June) on capex, and then ~$700mm/yr through FY26

Competitive Landscape

Wolfspeed dominates the SiC materials market and has over 30 years of experience perfecting its SiC technology and IP. The company has over 412 materials patents, 1200 power patents and 1300 RF patents. Today WOLF holds over 60% of global market share and over $1.3B in long term wafer supply agreements. Materials currently represents ~50% of WOLF’s revenue and in 2023 it’s estimated that will fall to ~40% as the company ramps up its higher margin devices segment.

Strictly using its internal material, WOLF creates both power and RF devices. The company’s leading share in materials and vertical integration in device development is the key differentiator and long-term competitive advantage.

Several of WOLF’s device competitors, including STMicro, ON Semi, and Infineon use WOLF’s material in their device production. The “coopetition” model creates some risk of potential disruption to WOLF if a large customer were to abruptly shift to internal sourcing of materials, however, the alternatives are limited and these customers cannot reach their lofty goals without WOLF.

The transition to 8” (200mm) wafer diameter and vertical integration are key competitive advantages for WOLF. The company’s move to 200mm will showcase the company’s lead in SiC, create an opportunity to grow share, and create a path for strong margin expansion.

Moving to more device production is accomplished with the 200mm fab and the payback period is estimated to be less than 4 years while creating a 5x multiplier to ebitda.

Risks

1.  Slower adoption of EVs could drive downside to estimate of sales/ebitda. EVs are the largest near-term driven and are forecasted to grow 20% CAGR through the end of the decade.

2.  Risks to ramp of Mohawk Valley facility. The capacity is critical to the bull case on WOLF and any major issues or delays will cause the company to miss estimates. WOLF has been on track to ramp MV and early customer qualification work has been taking place all year.

3.  Competition is intensifying as demand for SiC increases. WOLF’s market share and expanding capacity should allow it to stay ahead of competitors while growing share.

4.  Issues financing the growth. The company could need more capital.

Valuation

As the company ramps up capacity to fulfill its growing backlog, and transitions to more device sales from materials sales, it should see more sales dollars fall to the bottom line.

In FY2023 (June), revenues should be $1B expanding to over $2B in FY2025 (JPM is estimating $2.5B in 2025). EBITDA will be ~$100mm in 2023 and reach >$525mm in 2025 (JPM at $660mm). EPS of $0.13 in 2023 should expand to $2.75 in 2025 (JPM $3.86) and reach close to $5/share in FY26. In addition, in FY26 FCF should be >$2.00

With the stock in the high $80s, it trades at <30x a conservative 2025 EPS estimate and 22x JPM’s estimate. While this may seem expensive in this environment, it doesn’t take into account the dominant and expanding market share in a fast growing industry where the spend is front-end loaded and the revenue/profits will follow with visibility as the company scales.

Applying a 30x multiple to a conservative EPS for FY26 of $5-7/share leads to a valuation of $150->$200. 

Catalyst

More design wins

Completion of Fab

EV adoption