Advertisement

NC chipmaker Wolfspeed is hiring and growing. So why has it lost half its value?

Jed Dorsheimer still believes in the cutting-edge technology Wolfspeed produces: a 200-millimeter circular substrate cut from a light-weight semiconductor material called silicon carbide. He’s just lost patience with the company itself.

As global head of the energy and sustainability sector at the investment firm William Blair, Dorsheimer has tracked Wolfspeed since before October 2021, when the Durham-based company ditched its former name (Cree) and LED lights division to focus exclusively on silicon carbide. What distinguishes silicon carbide from regular silicon chips is a chemical process called sublimation in which solids are converted into gases — and then back into solids. By skipping the liquid phase, the semiconductor reduces electrical leakage and performs more efficiently.

“Anytime that you’re stepping up or stepping down voltages, silicon carbide has a role to replace silicon,” Dorsheimer said.

What further separates Wolfspeed’s silicon carbide semiconductors is their size; the Triangle company has pioneered production of 200-millimeter substrates, larger in diameter than the industry standard 150-millimeters. Bigger wafers yield more chips, tiny square “die” that power a wide range of appliances like solar converters and electric vehicles. Extracting greater quantities of die from each substrate offers customers significant potential cost advantages.

ADVERTISEMENT

Like the semiconductor sector itself, Wolfspeed is growing. It employs 4,500 people worldwide, most based in the state. And in September 2022, North Carolina awarded the company an economic incentive to build a new $5 billion materials plant near Siler City, which it anticipates opening by the end of the year. In March 2023, President Joe Biden visited Wolfspeed’s headquarters near Research Triangle Park to tout the importance of domestic chipmakers, a sign the company is well positioned to receive federal CHIPS Act money.

From many angles, Wolfspeed appears to have a lot going for it. But its share price tells another story.

Investors have driven Wolfspeed stock down for the better part of the past year, including a 40% drop since Jan 1. Dorsheimer had remained optimistic during most of this period, especially as shares became more and more affordable. Yet after witnessing the company lower revenue targets and move production goalposts, he advised William Blair on May 2 to downgrade the stock from a buy to a hold.

“Either (Wolfspeed is) missing revenue numbers for the quarter or the outlook, which undermines investor confidence,” he said. More bluntly, Dorsheimer said Wolfspeed “is one of the worst-performing stocks I have ever covered.”

The fall in share price has been precipitous: In November 2022, Wolfspeed stock sold for more than $120 a share. It still sold above $64 as of last July. This week, a share can be bought for around $26.

Now, a prominent activist investor has entered the picture, pledging to shake up Wolfspeed’s operations if the company’s market performance doesn’t improve. Last Wednesday, the New York investment firm Jana Partners revealed in a filing with the U.S. Securities and Exchange Commission that it has taken a 3.6% stake in Wolfspeed. This is up from an initial 0.75% stake Jana took last fall.

Jana is currently the company’s ninth-largest shareholder.

In contrast to passive investors, activist investors take minority ownership of companies to rally support from other shareholders for reforms they believe will raise the businesses’ values and earn them profits. Goals vary, from changing the composition of executive boards to pushing for acquisitions.

In a letter to Wolfspeed’s board last month, Jana pushed the company to improve its worth and raised the prospect of Wolfspeed selling to another business. The firm’s past investments include Whole Foods, PetSmart, Walgreens and Tiffany’s.

President Joe Biden greets Wolfspeed CTO Elif Balkas during a visit to Durham, N.C. on Tuesday, March 28, 2023.
President Joe Biden greets Wolfspeed CTO Elif Balkas during a visit to Durham, N.C. on Tuesday, March 28, 2023.

Activist investors aren’t rare but neither are they prevalent; of the more than 50 companies Dorsheimer has covered in his career, he recalled activists taking stakes in only a pair. But some analysts weren’t surprised an activist honed in on the Durham chipmaker.

“When there are incredibly valuable assets, like Wolfspeed, with a stock that’s underperformed, this happens,” said George Gianarikas, managing director of the investment bank Canaccord Genuity. “Because smart enough people know this is a very, very important company that has high asset value and (is) potentially interested in being acquired by other companies.”

Owning less than 5% of total shares may not seem significant, but any investment from a well-known activist firm signals an intent to see changes, said Alon Brav, who researches corporate governance and investor activism at the Duke Fuqua School of Business.

“It is not that large but the effect is not only based on what the stake is now but what it might be later,” Brav said.

Jana Partners did not respond to multiple requests to address its purchase of Wolfspeed stock. In a statement responding to Jana’s letter to its board, Wolfspeed said it maintains “an open dialogue with, and value constructive input from, our shareholders,” adding, “The Wolfspeed Board will carefully review JANA’s letter, and we look forward to engaging with them in the near future.”

What put Wolfspeed in this situation?

Shortly after its stock peaked in 2022, Wolfspeed started to experience operational problems, says Jack Egan, a research analyst at Colorado-based Charter Equity Research. Chief among them were delays to its facility in New York State’s Mohawk Valley, which opened in April 2022. Known as a fabrication plant, or “fab,” the Mohawk Valley site converts blank silicon carbide wafers from North Carolina into usable chips.

Many foresee robust industry interest in 200-millimeter fabricated substrates, but scaling production at Mohawk Valley has hit snags.. Dorsheimer said the plant has been about a year behind schedule. No competitor is producing 200-millimeter at scale either, but it’s an advantage analysts say Wolfspeed can’t afford to squander.

“If it takes them longer to actually achieve that plan, then you run the risk where competitors can shorten the lead time,” Dorsheimer said. If Wolfspeed were more realistic about its ramp up of Mohawk Valley, he believes its stock would be trading higher today.

Mohawk Valley is already fabricating chips; over the first three months of 2024, the New York site generated revenues of $28 million. But some investors expected the factory to scale more quickly. During the company’s May 1 earnings call, CEO Gregg Lowe said the New York State site should run at 20% production capacity by next month, with future ramp ups expected to be completed faster.

In an interview Tuesday with The News & Observer, Wolfspeed vice president of external affairs Tyler Gronbach noted “this is the first time anyone has ever attempted to run 200-millimeter silicon carbide through a brand new, state-of-the-art automated fab.”

“While there have been challenges along the way, we’re pioneering a new technology that is going to be kind of groundbreaking for both the automotive and industrial and energy markets,” he said. “So anything that you do for the first time, you’re going to learn along the way.”

The Durham semiconductor chipmaker Wolfspeed celebrated the “topping out” of its Chatham County facility near Siler City on March 26, 2024. Construction on the site began in June.
The Durham semiconductor chipmaker Wolfspeed celebrated the “topping out” of its Chatham County facility near Siler City on March 26, 2024. Construction on the site began in June.

But as Wolfspeed has worked through supply delays, new concerns have emerged about chip demand. During a February interview with the N&O, Gronbach said “weaker prospects in Asia” have hindered the stock price as countries like China saw a “softening in industrial and energy sectors.” More recently in 2024, the electric vehicle market has slowed, suppressing interest in EV chips.

“It’s been one hit after another,” Gianarikas said.

“We call it investor exhaustion, and it kind of sets in when it’s just quarter after quarter of something goes wrong,” Egan said. “Whether it’s an operational delay or it’s lower demand or an accounting change, at some point investors just want off the ride.”

The analysts who spoke to the N&O said Jana Partners may help Wolfspeed be more disciplined in meeting manufacturing milestones. Dorsheimer suggested the chipmaker would benefit by appointing a chief operating officer, noting it was rare in his experience for a company of this size to not have this executive role.

Asked about the absence of a COO, Gronbach said Wolfspeed has “a robust operations team led by industry experts, from across the semiconductor and silicon carbide industries, all of whom bring decades of experience in operations.”

Egan said the Jana Partners board letter could be a first step “to rebuild investor confidence” in a company that’s working with an exciting technology. “It’s not a death sentence,” he said of Wolfspeed’s recent stock slump. “But it takes time.”

NC Reality Check is an N&O series holding those in power accountable and shining a light on public issues that affect the Triangle or North Carolina. Have a suggestion for a future story? Email realitycheck@newsobserver.com