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Wolfspeed(NYSE: WOLF) had been one of the hottest stocks in the market this spring, surging on hopes that it could become the next AI winner.
The rise coincided with a bullish report from Substack publication Citrini Research, which had earlier come into prominence after publishing a thought piece about how artificial intelligence (AI) would negatively impact software-as-a-service (SaaS) stocks, helping sink that sector.
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However, after its shares reached more than $80, Wolfspeed stock has come crashing back down to earth, retracing the big move it had made in May following Citrini pumping the stock. Its latest pullback coincided with another disheartening earnings report on Aug. 19.
Negative gross margins and weak sales persist
Wolfspeed emerged from bankruptcy last fall, wiping out some expensive debt and finding itself on better footing. However, many of the issues that pushed it into bankruptcy in the first place remain. The chief among them is negative gross margins.
Wolfspeed positioned itself as the leader in silicon carbide (SiC) powered chips. The company constructed expensive manufacturing plants to build out a vertically integrated supply chain. SiC has superior heat-conducting properties compared to typical silicon chips, and thus initially was projected to play a major role in the electric vehicle (EV) market.
However, the company ran into severe execution bottlenecks and market headwinds. The move to larger 200mm wafers proved to be more technically challenging than imagined, while EV demand started to slow. Meanwhile, Tesla decided to greatly reduce its use of SiC moving forward.
That left Wolfspeed with severely underutilized, brand-spanking-new plants, which is one of the worst things a semiconductor company can experience. It is also one of the reasons why most traditional silicon-based chipmakers use a fabless model and rely on third-party foundries like Taiwan Semiconductor Manufacturing.
Wolfspeed’s operational issues persisted in its fiscal fourth quarter, with the company seeing negative gross margins of 25% due to continued plant underutilization. Adjusted gross margins, meanwhile, came in at negative 19.9%, a 70-basis point sequential improvement.
Revenue growth continues to be an issue, with revenue falling 24% year over year from $197 million to $149.6 million. It was also a slight sequential decline from $150.2 million in fiscal Q3 and right in the middle of its $140 million to $160 million outlook.
