Wolfspeed’s beaten-down shares saw a short-covering rally, thanks in part to the U.S. government.
Shares of chipmaker Wolfspeed (WOLF 1.95%) rocketed 41.2% this week through Thursday trading, according to data from S&P Global Market Intelligence.
Shares were down more than 80% on the year as of last week, and had garnered a very high short interest. Therefore, any good news had the potential to spark a vicious short-covering rally.
Wolfspeed then got not one but several pieces of good news on Tuesday and Wednesday.
Uncle Sam swoops in
On Tuesday, the U.S. Department of Commerce signed a non-binding memorandum for $750 million in direct CHIPS Act funding for Wolfspeed to go toward its North Carolina and New York silicon carbide plant expansions. In conjunction with the CHIPS Act funding, Wolfspeed also announced a matching $750 million investment from major investors Apollo, The Baupost Group, Fidelity Management & Research Company, and the Capital Group.
Wolfspeed has been investing in a very expensive buildout to support vertically integrated silicon carbide (SiC) manufacturing on 200mm wafers. Producing SiC on 200mm is difficult to do, but ultimately should, in theory, result in lower-cost chips.
Silicon carbide is thought to be a strong growth area, as it’s increasingly being used to boost the range of electric vehicles relative to traditional silicon chips. But with the EV market struggling over the past couple of years and Wolfspeed continuing to burn cash, some had wondered as to whether the big bet will pay off. So, the CHIPS Act money and vote of confidence from big-name hedge funds and private equity funds went a long way.
Wednesday, then, saw even more good news for Wolfspeed, as the company officially nominated Cloudflare Chief Financial Officer Thomas Seifert and former investment banker and tech executive Woody Young to its board of directors. Wolfspeed saw activist investor JANA Partners invest in its stock back in April, so the two nominations could be interpreted as a friendly move for JANA and other shareholders.
Additionally, Wednesday also saw sell-side analysts at Morgan Stanley raise the firm’s price target on Wolfspeed shares from $10 to $15 in the wake of the positive news flow. But before one gets too excited, the new and improved price target is still below Thursday’s closing share price of $16.21.
Be cautious with Wolfspeed
Investors should be careful chasing Wolfspeed stock, especially after this week’s massive rally. After all, revenue was merely flat last quarter, and the company is still losing money. While funding news was a big positive, it’s unclear exactly when the EV market will begin to grow in earnest again. So, while a market turnaround could lead to big rewards, a more drawn-out EV bear market could also lead to another sell-off.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cloudflare and Wolfspeed. The Motley Fool has a disclosure policy.
