Wolfspeed Shares Fall Following Mizuho’s Downgrade to Sell

Mizuho analysts have downgraded Wolfspeed Inc stock from Neutral to Underperform, resulting in a more than 5% decline in the company’s shares during premarket trading on Thursday. The investment bank has also lowered its price target for the stock from $17 to $7.

This downgrade is attributed to several challenges identified by the analysts, including a reduced global electric vehicle (EV) sales forecast for the latter half of 2024 and for the entire year of 2025, increased supply of silicon carbide (SiC) from China, and expected declines in SiC pricing.

Mizuho emphasized a notable slowdown in the EV market, forecasting a growth rate of only 6% year-over-year for 2024, down from prior estimates of 33%. The revised forecast for 2025 now anticipates merely a 10% year-over-year growth in EV sales, a significant drop from the previous 40% forecast.

The analysts noted rising competition from China in the SiC market, predicting that Chinese suppliers will boost production by 50-100% year-over-year by 2025, which could result in an oversupply situation.

This increased competition, combined with lower pricing from Chinese rivals, is likely to further pressure SiC pricing and profit margins. Wolfspeed’s status as the exclusive provider of 200mm SiC wafers is under threat as other companies, including Coherent and China’s Sanan Optoelectronics Co Ltd, enter the market.

According to Mizuho, SiC substrates from China are now priced approximately 30-50% lower than those from Wolfspeed. The growing competition from China and its efforts to enhance domestic sourcing present ongoing challenges.

Mizuho’s revised projections indicate that Wolfspeed’s revenue and gross margins for fiscal years 2025 and 2026 will fall well below consensus expectations, reflecting reductions of 6% and 10% in revenue, and declines of 195 and 204 basis points in gross margins, respectively.

Concerns about Wolfspeed’s balance sheet have also been raised, with a high net debt-to-sales ratio of approximately 6.3 times and negative free cash flow expected through fiscal year 2027.

In terms of valuation, Mizuho’s new price target of $8 for Wolfspeed is based on a 5.2x enterprise value-to-sales ratio for the estimated fiscal year 2026. This valuation is regarded as overvalued compared to the average of its peer group, which stands at around 2.7x.

Looking ahead, Mizuho acknowledged the potential for long-term advantages for Wolfspeed from factory optimizations and the rollout of new, more affordable 800V EV models.