Shares of silicon carbide chipmaker Wolfspeed (NYSE: WOLF) rocketed 26.9% on Monday. The move follows on a big up day last Wednesday as well.
Wolfspeed doesn't report earnings until May 8, and there wasn't any especially relevant company-specific news today. However, the beginning of earnings season has spurred some cautious optimism that Wolfspeed's end markets might be recovering.
With such a sky-high short interest of 41% of shares outstanding and 64% of Wolfspeed's float as of April 15, it appears as though many short sellers have decided -- or have been forced -- to close out their positions, leading to a "short squeeze."
Texas Instruments sees an industrial and auto chip recovery
Wolfspeed has spent billions of dollars and taken on significant debt in order to build out silicon carbide (SiC) manufacturing capacity in the U.S. SiC is a difficult material to work with, but it also makes for a more conductive chip, which is especially useful in high-voltage, high-temperature applications like electric vehicles (EV) and other industrial infrastructure.
While a strong industrial and auto market seems far-fetched in light of the administration's tariff policies, industrial and auto chips have actually already been in a protracted downturn ever since interest rates shot up at the end of 2022 and into 2023. Starting in 2023, the industrial chip market saw seven straight quarters of declines. Over that time, Wolfspeed's stock has cratered under the weight of its ambitious investments and tepid demand. The stock cratered another 47% in March after it was suspected the company might not receive its expected $750 million in CHIPS Act money.
However, last week on April 23, chip giant Texas Instruments (NASDAQ: TXN), which also has a high concentration in auto and industrial markets, noted it was seeing a "broad recovery across sectors and geographies," with low inventories across all end markets. Also encouraging was that TI executive Haviv Ilan said he believed the recovery was real and not just a pull-in to get ahead of impending tariffs.
While Texas Instruments doesn't make SiC chips as Wolfspeed does, it is known as somewhat of a bellwether in the industrial and auto chip markets. Thus, Wolfspeed's stock took off the next day on Wednesday of last week, and the rally held up through Friday.
So why the spike today? It's hard to say, but there's the potential that some hedge funds may have received margin calls over the weekend from banks and were therefore forced to close out more of their short positions by buying the stock back today.
The beginning of a massive recovery? Not so fast
Despite the past week's massive short squeeze that has lifted Wolfspeed's shares some 65% off of their lows to begin last week, investors should not take this as an "all clear." Wolfspeed is still heavily indebted, and it may not receive the promised CHIPS Act money, which could stress the company despite signs of an end-market recovery. Moreover, Wolfspeed has appointed a new CEO, who will begin his tenure this week on May 1. A new company head adds even more uncertainty.
There are other automotive/industrial chip plays with much less risk than Wolfspeed at the moment and which should also see a big upside if a recovery materializes. Investors would take much less risk with one of Wolfspeed's profitable rivals, rather than this loss-making meme stock, which is more like a lottery ticket at this point.
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Billy Duberstein and/or his clients have positions in Texas Instruments. The Motley Fool has positions in and recommends Texas Instruments and Wolfspeed. The Motley Fool has a disclosure policy.
