Wolfspeed: Superb 45% Revenue Growth (NYSE:WOLF)

In this analysis of Wolfspeed, Inc. (NYSE:WOLF), we examine the company following its strong growth in Q4 2022 of 42.0% YoY and following its announcement of its capacity expansion in Chatham County, North Carolina. We examine the supply growth of its expansions and determine whether the company could fulfill demand based on its target sales and design pipeline. Lastly, we analyze and estimate the financial impact of the US CHIPS Act on its FCF margins.

Expansion of Existing and New Facilities

Previously, Wolfspeed announced that it expected to complete the expansion of its Durham, North Carolina silicon carbide (SiC) production facility in 2024. Furthermore, the expansion was expected to generate a 30-fold increase in SiC wafer fabrication capacity and a 30-fold increase in SiC materials production when compared to Q1 of FY2017 to meet the expected market growth by 2024.

Revenue ($ mln)	2024F	2025F	2026F
Revenue (Durham Expansion)	1,658	1,658	1,658
Revenue (Mohawk Valley)	–	–	1,750
Revenue (Chatham County)	–	1,181	1,181
Total Revenue (Supply)			4,589

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Source: Wolfspeed, Khaveen Investments

To estimate the revenue expected to be generated from the expanded Durham mega factory in 2024, we obtained the revenue of SiC wafer fabrication and SiC materials production from Cree’s FY2017 annual report. We estimated the SiC segment of Cree had a revenue of about $55 mln (Revenue of $221 mln for FY2017 over 4 quarters) in Q1 FY2017. Since the expansion of the Durham facility is expected to increase the company’s SiC business by 30x of its Q1 2017 capacity, we forecasted the revenue contributed by the Durham expansion would be about $1.66 bln ($55 mln multiplied by a 30 times increase).

From its recent Q4 2022 earnings briefing, management acknowledged that Wolfspeed needs to increase its production capacity, and thus plans to

tool out the rest of Mohawk Valley earlier than expected and continue to expand our materials footprint on the Durham campus.

Management has given guidance that revenue of between $1.5 bln and $2 bln is expected from Mohawk Valley in FY2026. In our projections, we used $1.75 bln which is the average of management’s guidance.

On top of the Durham expansion, Wolfspeed recently announced in September a new SiC Materials manufacturing facility in Chatham County, North Carolina which is expected to increase its current SiC production by 10x. The facility will focus on manufacturing 200mm SiC wafers, which would be used to supply its new Mohawk Valley Fab opened in May this year.

Revenue Segments ($ mln)	2021	2022
Materials	237	295.3
Growth %		24.8%
Devices	289	450.9
Growth %		56.0%
Total	526	746

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Source: Wolfspeed, Khaveen Investments

We estimated the company’s 2022 SiC wafer revenue based on our previous 2021 estimate with the market CAGR of 24.8% ($295.3 mln). According to the company, there are two phases of expansion. Phase 1 is expected to be completed in 2024, whereas phase 2 would be completed by 2030. Since it is expected that by the end of both phases, there would be a 10-fold increase in SiC production capacity. Thus, we assumed that by 2024, Wolfspeed would be able to achieve a 5-fold increase in SiC production capacity (half of the total 10-fold increase). This gives us an estimated $1.18 bln in incremental revenues from FY2025 onwards.

Revenue ($ mln)	2022	2023F	2024F	2025F	2026F
Revenue (Supply)	746.2	1,175	1,850	2,914	4,589
Growth %		57.5%	57.5%	57.5%	57.5%

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Source: Khaveen Investments

With these expansions, we estimate that the total revenue (supply) of FY2026 would be about $4.59 bln, more than 6x its FY2022 revenue and a CAGR of 57.5% for the period.

Supply Growth Higher Than Demand

As covered previously based on the Investor Day presentation from November 2021, the company’s device pipeline was estimated to be more than $18 bln. Management has given new guidance during the Q4 2022 earnings briefing and stated the opportunity pipeline had grown to $35 bln, about 4x more than its $9 bln opportunity pipeline mentioned in November 2019.

We updated our estimates for the materials and devices segments from our previous analysis. Based on the company’s Investor Day presentation, the SiC wafer market is expected to grow from $700 mln in 2022 to $1.7 bln in 2026, which has a CAGR of 24.8%. From management guidance during the Q4 2022 earnings briefing, we forecasted its devices would increase from $451 mln in 2022 to $35 bln. Assuming it takes 10 years for the pipeline to be realized, we estimated a CAGR of 54.5% based on FY2022 Devices revenue ($450.9 mln). With our forecast, we expect the company’s total revenue to reach $3.29 bln by FY2026.

Revenue Segments ($ mln)	2021	2022	2023F	2024F	2025F	2026F
Materials	237	295.3	369	460	574	717
Growth %		24.8%	24.8%	24.8%	24.8%	24.8%
Devices	289	450.9	697	1,077	1,664	2,571
Growth %		56.0%	54.5%	54.5%	54.5%	54.5%
Total Revenue (Demand)	526	746	1,065	1,537	2,238	3,288
Growth %	11.8%	41.9%	42.8%	44.3%	45.6%	46.9%

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Source: Yole, Wolfspeed, Khaveen Investments

From our last coverage on Wolfspeed, we have adjusted CAGR of the SiC wafer market from 16.3% to 24.8% as management has engaged YOLE and Company to forecast market CAGR, and the higher opportunity pipeline highlighted by management from $18 bln to $35 bln.

Revenue ($ mln)	2022	2023F	2024F	2025F	2026F
Revenue (Supply)	746.2	1,175	1,850	2,914	4,589
Growth %		57.5%	57.5%	57.5%	57.5%
Revenue (Demand)	746.2	1,065	1,537	2,238	3,288
Growth %		42.8%	44.3%	45.6%	46.9%
Total Revenue	746.2	1,065	1,537	2,238	3,288
Growth %		42.8%	44.3%	45.6%	46.9%

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Source: Khaveen Investments

Comparing our revenue projections based on supply (factory capacities) and demand (management estimates for devices pipeline and market CAGR for SiC wafers), we based our overall revenue projections on the demand projection as it is lower than our supply growth projection. Overall, we obtained an average revenue growth of 44.9% through 2026

Revenue Estimates ($ mln)	2022	2023F	2024F	2025F	2026F
Our Revenue Projections	746	1,065	1,537	2,238	3,288
Growth %		42.8%	44.3%	45.6%	46.9%
Management Revenue Guidance	746	1,042	1,454	2,031	2,835
Growth %		39.6%	39.6%	39.6%	39.6%
Average Analyst Consensus	746	1,070	1,520	2,050	2,580
Growth %		43.4%	42.1%	34.9%	25.9%

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Source: Wolfspeed, Seeking Alpha, Khaveen Investments

Our revenue projection of $3.29 bln by FY2026 is slightly above management’s revised revenue projection of $2.835 bln at the midpoint of the 30% to 40% increase of its previous $2.1 bln target. Additionally, analyst revenue consensus has the lowest revenue estimates of $2.58 bln in 2026.

Revenue Estimates ($ mln)	Q4 2021	Q1 2022	Q2 2022	Q3 2022	Q4 2022	Average
Revenue Actual	145.8	156.6	173.1	188.0	228.5
Analysts Revenue Estimate	144.8	149.6	169.3	190.7	207.6
Difference %	0.68%	4.69%	2.24%	-1.40%	10.08%	3.26%
Management Estimate	145.0	149.0	170.0	190.0	207.5
Difference %	0.55%	5.10%	1.82%	-1.05%	10.12%	3.31%

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Source: Wolfspeed, SeekingAlpha, Khaveen Investments

We tabulated the last 5 quarters of estimated and actual revenues of Wolfspeed by both analysts and management and calculated the average difference was 3.36% (analyst estimates) and 3.31% (management guidance). Thus, we believe management’s guidance and average analyst consensus revenue estimates are less reliable to base our projections on and decided to base our projections on our derived revenue estimates.

Government Assistance Support Cash Flow Margins

In terms of capex, management has mentioned that they will provide further updates and guidance once they have “more visibility to the nature and timing of the expansions”. In its recent Q4 2022 earnings briefing, management stated that its Mohawk Valley expansion would cost $550 mln in FY2023. In September 2022, Wolfspeed announced the construction of its materials factory in Chatham County which is expected to cost the company $5 bln.

Capex Projections ($ mln)	2022	2023F	2024F	2025F	2026F	2027F	2028F	2029F	2030F
Capex (excluding Chatham County) (‘a’)	391	550	799	1,164	1,710	2,341	2,971	3,474	3,714
Capex as a % of Revenue (‘b’)	52.4%	51.6%	52.0%	52.0%	52.0%	52.0%	52.0%	52.0%	52.0%
Revenue (‘c’)	746	1,065	1,537	2,238	3,288	4,502	5,713	6,679	7,140
Chatham County Construction Costs (‘d’)		625	625	625	625	625	625	625	625
Total Capex (‘e’)	391	1,175	1,424	1,789	2,335	2,966	3,596	4,099	4,339

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* a = b × c

e = a + d

Source: Khaveen Investments

For our capex projections, we used the guidance of $550 mln from the earnings brief and calculated the capex as a % of projected revenue, which gives us 52%. We used the 2-year average as we believe capex of FY2020 and FY2021 are inflated due to the construction of Mohawk Valley.

Company	Planned Investments ($ bln)	Share
GlobalFoundries (GFS)	1	0.40%
Intel (INTC)	42.5	17.10%
Micron (MU)	40	16.09%
Samsung (OTCPK:SSNLF)	96.05	38.64%
SK Hynix	22	8.85%
TSMC (TSM)	12	4.83%
Texas Instruments (TXN)	30	12.07%
Wolfspeed	5	2.01%
Total	248.55	100%

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Source: Company Data, Khaveen Investments

Based on our previous analysis, we complied and estimated the share of subsidies from the US CHIPS Act. According to the Act, $19 bln out of the $39 bln for all semiconductor companies are allocated in FY2022, and then $5 bln for the next 4 years from FY2023 to FY2026. Since Wolfspeed plans to invest $5 bln into their new Chatham County materials manufacturing facility, we estimate it to benefit from $780 mln in incentives.

We included the estimated construction costs of Chatham County and added them with our projected capex which is 52% of our projected revenue. To calculate net capex, we subtracted incentives from the US CHIPS Act. Additionally, North Carolina state had also announced to provide the company with $1 bln in incentives. Assuming these incentives are given periodically over the total duration of construction from FY2023 to FY2030, this would improve the free cash flows of Wolfspeed every year by about $125 mln. Furthermore, we also factored in a 25% tax credit from the CHIPS Act in our estimates.

Capex ($ mln)	2022	2023F	2024F	2025F	2026F	2027F	2028F	2029F	2030F
Total Capex	391	1,175	1,424	1,789	2,335	2,966	3,596	4,099	4,339
Chips Act Incentives		(382)	(101)	(101)	(101)	(101)
State Incentives		(125)	(125)	(125)	(125)	(125)	(125)	(125)	(125)
Net Capex	391	668	1,199	1,564	2,110	2,741	3,471	3,974	4,214
Tax Credit		(167)	(300)	(391)	(527)	(685)	(868)	(993)	(1,053)
Total Capex as a % of Revenue	52.4%	110.3%	92.7%	79.9%	71.0%	65.9%	63.0%	61.4%	60.8%
Net Capex as a % of Revenue	52.4%	62.7%	78.0%	69.9%	64.2%	60.9%	60.8%	59.5%	59.0%

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Source: Wolfspeed, Khaveen Investments

Wolfspeed FCF ($ mln)	2023F	2024F	2025F	2026F
Operating Cash Flow (With Incentives)	(105)	(187)	(277)	(416)
Capital Expenditure (With Incentives)	(668)	(1,199)	(1,564)	(2,110)
Free Cash Flow Margin (%) (With Incentives)	-70.8%	-88.9%	-81.4%	-76.2%
Operating Cash Flow (Without Incentives)	(105)	(177)	(263)	(399)
Capital Expenditure (Without Incentives)	(1,175)	(1,424)	(1,789)	(2,335)
Free Cash Flow Margin (%) (Without Incentives)	-118%	-103%	-90.8%	-82.6%

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Source: Khaveen Investments

With the incentives provided by the US CHIPS Act and state subsidies, we expect Wolfspeed’s FCF margins to improve but remain negative with a 4-year forward average of -79.3%. However, this is lower compared to our estimate of its FCF margins without subsidies at an average of -98.67%.

Risk: Strong Competition and Bleeding Cash

ON Semiconductor (ON) has recently opened its new SiC production facility in Hudson, New Hampshire which would allow them to have

full control of its SiC manufacturing supply chain, starting with the sourcing of SiC powder and graphite raw material to the delivery of fully packaged SiC devices.

Infineon (OTCQX:IFNNY) has a strong lineup of SiC CoolSiC MOSFETs switches. Additionally, STMicroelectronics has begun construction of a SiC substrate plant in Europe as it aims to source 40% of its substrates internally by 2024. Thus, we believe Wolfspeed has strong competition from other chipmakers such as ON Semiconductor, Infineon and STMicroelectronics (STM).

Company	Revenue TTM ($ mln)	FCF Margin (5-year average)
Wolfspeed	746.2	-22.21%
ON Semiconductor	7,618	8.73%
Infineon	13,706	5.27%
STMicroelectronics	14,136	3.07%

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Source: SeekingAlpha, Wolfspeed

Also, we believe Wolfspeed would also be disadvantaged in the long run unless it can achieve profitability and be cash flow positive. Since it is cash flow negative but has high revenue growth (20%+), we decide to value the company based on a P/S valuation.

Verdict

All in all, we expect the revenues of Wolfspeed to continue growing at a CAGR of around 45% as the company focuses its efforts on expanding its current manufacturing facilities and building new ones to support the demand for SiC materials and wafers. Though, as we project Wolfspeed’s supply growth and the SiC market’s demand growth, we expect supply growth to exceed demand growth. For its Mohawk Valley and Chatham County manufacturing facilities, Wolfspeed is expected to receive state subsidies and additional subsidies from the US CHIPS Act. We expect this to have a positive impact on Wolfspeed’s FCF margins, however, we expect it to still be cash flow negative with an average FCF margin of -79.3%.

Valuation	2023F	2024F	2025F	2026F
Revenue ($ mln)	1,065	1,537	2,238	3,288
Growth %	42.8%	44.3%	45.6%	46.9%
P/S	15.00x	12.64x	10.56x	8.74x
Valuation ($ mln)	15,976	19,430	23,629	28,737
Shares outstanding (‘mln’)	124.20	124.20	124.20	124.20
Price Target	$128.63	$156.44	$190.25	$231.37
Current Price	$105.77	$105.77	$105.77	$105.77
Upside	21.6%	47.9%	79.9%	118.8%

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Source: Khaveen Investments

We updated our valuation for Wolfspeed with our revised revenue projections. Based on the table above, we used a P/S comparable valuation as we expect the company to have high growth at an average revenue growth rate of 44.9% through 2026 but remain unprofitable with our forecasted 5-year forward average FCF margins of -79.3%. Based on our projected revenue of $3.29 bln in FY2026 and the average P/S of 8.74x of the US semicon companies with 3-year revenue CAGR of 20%+, we obtained a price target of $231.37 in 2026. Based on this price target, we prorated it to obtain our 2023 price target of $128.63 with an upside of 21.6%, which is in line with our previous price target. However, we now downgrade the company from a STRONG BUY to a BUY as the company’s stock had increased by 13% since our previous coverage.