Where Will Wolfspeed Stock Be in 3 Years?

Technology is one of the most exciting sectors in the stock market because of its disruptive nature. But despite excellent growth potential, things don't always work out. New materials and techniques often take years or decades to break into the mainstream because of cost challenges and lack of scale compared to legacy systems, leaving early movers struggling to turn a profit despite their innovations.

Cutting-edge semiconductor company Wolfspeed (NYSE: WOLF) is an excellent example of this phenomenon. The company chronically underperformed before completing a Chapter 11 bankruptcy restructuring in late September. But is this a new beginning, or another round of long-term disappointment? Let's dig deeper to find out.

A new beginning for Wolfspeed?

With shares up by over 2,000% since emerging from bankruptcy, Wolfspeed looks like a clear winner. However, the devil is in the details. The good news is that the restructuring agreement eliminated a whopping 70% of the company's $6.6 billion mountain of debt -- reducing annual interest expense by 60% and kicking debt maturities all the way back to 2030. However, this deal came at a significant cost to shareholders.

According to Reuters, the deal cancelled Wolfspeed's legacy shares and reissued just 1.3 million shares to existing shareholders -- an exchange ratio of less than 1% per old share. Most of the new equity will go to the company's creditors, such as Apollo Global Management and other banks.

While the deal may seem unfair, equity holders are typically the biggest losers in bankruptcy proceedings (because debt holders have a higher priority). And in this case, Wolfspeed's old shareholders are lucky to have gotten anything at all. Furthermore, the deal gives the company a new beginning where it can pioneer its exciting semiconductor technology and benefit from having large, powerful owners that may be willing to provide much-needed financial support in the future.

At the right place at the right time

Wolfspeed's restructuring deal is actually a vote of confidence in its business model and technology. The company specializes in making silicon carbide (SiC) chips -- a type of semiconductor device capable of handling higher voltages and temperatures than traditional alternatives. These characteristics make the technology ideal for next-generation applications like electric vehicles (EVs) and solar power electronics.

Image source: Getty Images.

Wolfspeed is unique because of its vertically integrated process, where it designs and produces its devices internally (through a network of U.S. facilities) instead of outsourcing the heavy lifting to foreign companies. The company's "made in America" approach has put it at the right place at the right time to benefit from political efforts to bolster advanced chip manufacturing in the U.S. amid rising geopolitical tensions with China.

In 2024, Wolfspeed secured $750 million in funding from the Biden-era CHIPS Act (although the grant hasn't been delivered yet). And while the Trump administration has taken less interest in green technology, it has also introduced a variety of tax breaks and incentives for domestic manufacturing as part of its recently passed One Big Beautiful Bill Act.

So what's the catch?

From a bird's-eye view, Wolfspeed looks like a clear winner. It is pioneering cutting-edge semiconductor technology with significant government support. Meanwhile, the recent bankruptcy deal has cleaned up its balance sheet while giving it powerful new owners. However, none of these advantages matter if the company can't make money.

Fiscal fourth-quarter earnings show clear challenges, with revenue dropping 2% year over year to $197 million, while operating losses ballooned from $148.9 million to $581.6 million. Wolfspeed's challenges could potentially worsen as the loss of U.S. electric vehicle tax credits hurts some of its top customers. Investors should stay far away for now.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.