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Consumer demand for electronics and automotive products continued to drive the global semiconductor market. At the height of the pandemic in 2020, the tech industry was at a critical point due to the shortage of semiconductor chips. Inadvertently, manufacturers increased their orders for future supplies, forcing chipmakers to expand their capacities. Limited supply has forced smartphone giant Apple (AAPL) to cut sales worth $6 billion by Q3 2021. Others like Samsung (OTC:SSNLF), Ford (F) and Caterpillar (CAT) also reported lower earnings in 2022 as a result. shortage of chips.

Thesis

Ahead of its next earnings date at the end of January 2022, Wolfspeed (WOLF) is looking to solidify its status as a high-growth disruptor in the semiconductor industry. The silicon carbide plant offers applications for advancing renewable energy generation, quantum communication, electric vehicle charging systems, industrial power generation, and more. In this article, I will give the reasons why I am raising my rating to prevent this stock from being sold with a positive recommendation until 2022.

Over the past year, WOLF has lost 12.57% in shareholder return value, although it has gained more than 132% since the start of 2019 when it was called Cree, Inc.

WOLF's Rising Stock Yield Level

3-Year Wolfspeed Share Price Return

Looking for Alpha

Even so, with the stock hovering around $108, it is still ~24% below its 52-week high of $142, giving investors an opportunity for growth. I’ve been WOLF for a while, but my attention was caught by the recent report on Neumann Advisory Hong Kong’s initiation into the company.

Neumann, an investment company, bought the shares at an average price of $112.22, although the purchase price fluctuated between $80.07 and $141.87. While the impact on the stock price at the time was minimal, it indicated dynamic progress in the world of electric vehicles. Neumann already owns up to 215,000 shares of Tesla, Inc. (TSLA) representing 39% of his total portfolio. He also raised his position in XPeng, Inc. (XPEV) to 9.35% and Twilio Inc (TWLO) to 17.29%.

From Scream to Wolfspeed

The transition from Cree to Wolfspeed from October 2021 marked a special era for the company in terms of capacity expansion. As Cree, the company focused on the design and manufacture of light-emitting diode (LED) products. The Cree-LED venture was straining its finances, forcing the company to sell the LED unit to Smart Global Holdings (SGH) for nearly $300 million (sale closing March 2021).

The agreement included a cash payment of $50 million, a promissory note of $125 million and a potential top-up of $2.5 to $125 million depending on SGH’s revenue and gross margin over the 4 first full trimesters. In my opinion, Wolfspeed did a good business as the net loss had increased from $64.7 million in June 2015 to $409.6 million in December 2021. In June 2021, the company’s net loss had already reached $523.9 million, an increase of more than 700%.

The situation gets a bit worse when you consider that total liabilities have fallen from $354.2 million in June 2014 to $1.209 billion in the first quarter of 2022 in view of a future upgrade by SGH.

In his first quarter 2022 earnings call, SGH CEO Mark Adams said quarterly revenue reached $470 million with gross margins of 27% and net income of $20 million. The previous year (when SGH did not have the LED systems), it reported revenues of $291.7 million and a net profit of $2 million. It can be seen here that with LED, SGH gained $178.3 million (+61.12%) in revenue and up to 900% in net profit.

Silicon Carbide Market Dynamics

For Wolfspeed, the use of gallium nitride (GaN) on SiC solutions is presented as a central component of modern wireless communication, radar technology and telecommunication systems.

Additionally, the market is evaluating the shift from silicone to silicon carbide (SiC). By 2026, the global SiC market is expected to reach at least $2.2 billion, driven by the growth in power electronics consumption.

Research is underway to determine the use of chromium atoms as potential spin qubits through the production of commercial silicon carbide.

Quantum networking platform showing the integration of Spin qubits in SiC

Spin qubits

Europe

We live in a time when scientists are looking to integrate nanotechnology into the telecommunications industry. In particular, through the use of high-quality qubit hardware, we will achieve quantum communication, which will allow the writing and sending of information by light or optical technology.

It was not until January 2021 that China built the world’s first quantum communication network. The system combined 700 ground-based optical fibers with two ground-to-satellite links to send the quantum nearly 5,000 kilometers into the country.

The world's first quantum communication network

Integrated quantum communication system

Physical Organization

More importantly, quantum communication uses quantum key distribution (QKD). This in turn applies optical fibers to transmit highly stabilized information between satellites and ground stations.

According to scientists, quantum communication cannot be hacked, unlike conventional encryption. It presents the future of information security. It will be used by banks, power grids, industrial applications and many more. It is estimated that by 2024, the global quantum crypto market will have reached $1.3 billion. It stood at $347.2 million in 2019 and is therefore expected to grow at a compound annual growth rate (CAGR) of 30.7%.

Additionally, silicon carbide (SiC) power electronics that increase the efficiency of electric vehicles could transition to consumer technology in 2022. When the first production Air Luxury sedans launch by the end of 2021, Lucid Motors of Lucid Group (LCID) used a 900 volt battery. pack using silicon carbide.

Electric vehicle industry observers believe that the voltage of the pack is on track to exceed 1,000 volts. Porsche Automobil Holding’s (OTCPK:POAHY) Porsche Taycan already has an 800-volt pack, while Tesla runs on a 400-volt system. SiC systems allow electric vehicles to change frequency faster and increase voltage capability. In the long term, upgrading to SiC from conventional semiconductors will not only make electric vehicle power electronics attractive, but also efficient.

Risks

Wolfspeed has yet to resolve production issues in its Malaysian manufacturing space for radio frequency (RF) devices. Despite revenue growth of 57% in the first quarter of 2022, WOLF’s retained earnings representing shareholders’ accumulated losses amount to $1.633 billion. The losses resulted from supply constraints in the face of strong demand. Unmet demand through 2022 was $100 million, slowing the company’s organic throughput.

Conclusion

Wolfspeed’s transition from Cree, Inc was a follow-up call after the company divested from the Cree-LED business. A strong focus on silicon carbide production will be a game-changer in the market for power electronics and industrial applications. Smart Global Holding’s recent revenue growth after acquiring WOLF’s Cree-LED business indicates mismanagement by Wolfspeed. The company experienced an increase in net losses, including retained earnings representing accumulated shareholder losses of $1.633 billion. The focus on quantum communication will also help boost SiC’s market value in light of its success in the electric vehicle industry. Readers and investors should stick with this title as they expose themselves to its handling of apparent supply challenges, segment financials and management strategies, as will be discussed in the upcoming earnings report.