Could Purchasing Wolfspeed Now Secure Your Financial Future?

Switching from standard silicon to silicon carbide has always been a forward-thinking move. This carbon-enhanced material is ideal for high-voltage uses such as solar inverters and electric vehicles, thanks to its ability to withstand greater heat and operate more efficiently. For this reason, Wolfspeed ( WOLF 1137.19%) faced little criticism when it decided to exit the LED lighting market—back when it was still known as Cree—in 2020 to focus on silicon carbide technology.

However, as time has passed, Wolfspeed’s silicon carbide venture has yet to deliver significant results. The company’s revenue remains modest ($758 million in its most recent fiscal year), and it continues to operate at a loss. In fact, in June of this year, Wolfspeed officially entered Chapter 11 bankruptcy protection, a move that had been anticipated for some time.

The prolonged decline in the company’s stock price is a direct reflection of these challenges.

Interestingly, this situation might be one of those rare occasions where investing in a bankrupt company before its restructuring concludes could be justified. The announcement of bankruptcy may have already inflicted the bulk of the damage to shareholder value, and all parties involved seem eager to see Wolfspeed continue developing and selling its potentially transformative material.

Still, the big question is: what lies ahead once the reorganization is complete?

Is Wolfspeed simply too early?

For those unfamiliar: traditional silicon still functions adequately in most electronics. Yet, as technology advances, especially in high-voltage sectors like electric vehicles, charging infrastructure, data centers, and renewable energy, the need for an upgrade is clear. Every bit of energy efficiency matters now. Silicon carbide, with its broader bandgap, offers a crystalline structure that handles heat better and requires less energy to transmit high-voltage currents.

The main drawback? The cost. It’s significantly pricier—about three times more than regular silicon. This steep price tag has kept many industries that could benefit from adopting it on the sidelines, despite Wolfspeed’s efforts.

It’s possible that Wolfspeed simply invested too heavily, too soon, in a technology the market wasn’t quite ready to adopt.

The twist? Even as Wolfspeed’s bankruptcy proceedings unfold, the global market may finally be catching up. According to Global Market Insights, the silicon carbide industry is projected to expand at an average annual rate exceeding 34% through 2034.

But what if Wolfspeed’s bankruptcy isn’t about survival, but rather about entering the next phase of silicon carbide’s growth with a cleaner balance sheet?

If that’s the case, then it could be a smart move.

Investing in Wolfspeed calls for careful planning

Let’s be clear: no business wants to file for bankruptcy, nor do its investors or creditors.

Yet, Wolfspeed’s bankruptcy process appears unusually cooperative. Reports suggest its lenders are on board with a plan that will erase about 70% of its $6.5 billion debt, with many bondholders receiving equity in exchange for their claims.

Additionally, new CEO Robert Feurle commented during the Chapter 11 announcement: "We are continuing to move forward with our accelerated restructuring process to strengthen our capital structure and fuel our next phase of growth."

It’s also worth noting that while existing shareholders are expected to receive only about 3% to 5% of the reorganized company’s equity, the stock’s 98% drop from its 2022 high likely already factors in this loss. In essence, those buying shares now may be purchasing at prices that already reflect the company’s current situation. In fact, new investors could be acquiring shares in a company that has never had greater potential.

Could Wolfspeed be a game-changer for investors?

Returning to the main question: is buying Wolfspeed now a life-altering opportunity?

Answering that requires acknowledging two key points.

First, this is far from a typical investment. You’d be buying into a company that has already filed for bankruptcy, and doing so before the restructuring is finalized. Although Judge Christopher Lopez in Texas has approved the proposed plan, which most creditors support, unforeseen developments can still occur.

Second, even if Wolfspeed emerges from bankruptcy in a stronger position, the silicon carbide market is still in its early stages.

That’s the challenge. Despite Global Market Insights’ optimistic 10-year forecast, Wolfspeed is currently losing hundreds of millions annually due to high operating expenses. The company needs the next two years to be exceptionally strong, but current market conditions don’t suggest an immediate turnaround. On top of that, competition in the silicon carbide space is increasing, with companies like STMicroelectronics, Entegris, and Coherent entering the field.

In summary, any progress Wolfspeed makes will likely be hard-won.

If you’re considering investing, understand the risks: while there’s a chance for significant gains, the odds are slim and the risks are high. There are other, more reliable opportunities available, even if their potential returns aren’t as dramatic as the slim possibility that Wolfspeed’s post-bankruptcy shares could skyrocket.