On Monday, Mizuho Securities updated its outlook on Wolfspeed (NYSE: NYSE:WOLF) shares, a semiconductor company, raising its price target to $11.00 from the previous $9.50. Despite the increase, the firm maintained an Underperform rating on the stock. The adjustment reflects a consideration of several factors influencing the company's financial position and market challenges.
The presence of restructuring and sale experts Apollo and Jana has been noted as a supportive element for Wolfspeed's stock. Discussions around potential strategic alternatives, such as a breakup or sale, have been circulating among investors. However, it is acknowledged that Wolfspeed's current enterprise value to sales ratio is higher than all of its peers, indicating a possibly inflated valuation.
Wolfspeed's balance sheet has been bolstered by a $2.5 billion infusion, which includes contributions from the CHIPS Act and private equity firms such as Apollo, FMR, and Capital. The analyst points out that this financial support is significant, equating to an approximate valuation support of $18 to $20 per share.
Despite the improved cash position, Wolfspeed faces ongoing challenges, including a negative free cash flow exceeding $1.5 billion per year. The semiconductor industry is also experiencing specific headwinds, such as pricing and margin difficulties in the silicon carbide (SiC) market. The analyst highlights the increasing supply of 150/200mm SiC and lower profitability in this segment.
Furthermore, the limited opportunities in the 800V electric vehicle (EV) original equipment manufacturers market, new European Union tariffs on EV imports, and the continued high average selling prices (ASPs) for EVs contribute to the company's challenges.
The analyst anticipates that while the number of EVs in 2025 is expected to increase by approximately 10% year-over-year, SiC pricing could decline by around 15% year-over-year, exacerbated by an oversupply from China.
In conclusion, although the price target for Wolfspeed has been raised based on the additional cash valuation support, Mizuho Securities remains cautious about the company's fundamental outlook due to the various industry and financial challenges it faces.
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