Wolfspeed plunges as Wall Street has issues with accounting changes, lack of profits
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Wolfspeed (NYSE:WOLF) shares plunged more than 15% in pre-market trading on Thursday after the semiconductor company posted weak fourth-quarter results and guidance, while Wall Street analysts cited issues with company's accounting changes and lack of profits.
William Blair analyst Jed Dorsheimer, who has an outperform rating on Wolfspeed (WOLF) shares, said the "abrupt change" in accounting is likely to have caused investor fatigue to "fully set," even if nothing has changed fundamentally about the business.
"Until Wolfspeed can achieve greater than 40% utilization at Mohawk Valley, the unit economics are working against it," Dorsheimer wrote in an investor note. "Clearly, investors are numb and tired of Wolfspeedâs serial disappointments; however, the opportunity in 200 mm [silicon carbide] has not shifted as meaningfully as the shares reflect, in our opinion."
Dorsheimer added that the reset in margin expectations likely added to more confusion in the stock and with the fact that there is little perceived upside in the near-term, "the stock will be volatile with risk favoring the downside." 
As part of the new accounting changes, Wolfspeed (WOLF) will no longer be able to add back adjustments for start-up or underutilization attached to the Mohawk Valley fab and the costs will go to costs of goods sold. In the first-quarter, it will likely face a $37M impairment charge from underutilization and impact margins by at least 1,600 basis points.
Oppenheimer analyst Colin Rusch, who has a perform rating on Wolfspeed (WOLF), said the quarterly results were "solid," even if margins were disappointing because of the accounting change. However, it's likely that investors will stay cautious on the stock. 
"Given the inherent challenges of [silicon carbide] production, we expect investors to be skeptical of timing on scale-up and reaching target margins even though customer engagement is high ($1.6B in design-ins during JunQ23) and reiteration of ramp cadence was in line with previous commentary," Rusch wrote in an investor note. "We believe [silicon carbide] wafer quality and supply security are critical advantages for WOLF, but note its ambitious capacity expansion has led to significant balance sheet leverage, leaving little room for error on operations." 
Bank of America analyst Vivek Arya, who has an underperform rating on Wolfspeed (WOLF), said revenue guidance missed estimates but the greater focus is on the accounting change and the resulting hit to margins. 
Arya noted that there is the potential for gross margin expansion, with Wolfspeed (WOLF) targeting 20% at the end of the fourth-quarter in fiscal 2024, but the current gross margins are likely below the competition, with On Semiconductor (ON) likely having low to mid-30s for silicon carbide.
Arya lowered his price target to $49 from $56 following the results.
Looking to the fiscal first-quarter, Wolfspeed (WOLF) said it expects sales to fall within a range of $220M and $240M, with the mid-point below the $235.5M estimate. It also expects to lose between 60 and 75 cents per share, excluding one-time items, well above the 20 cents that analysts were anticipating.

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