Why Wolfspeed Stock Is Plummeting Today

Key Points

• Wolfspeed stock is getting hit with a double-digit pullback after a huge rally yesterday.

• Investors are locking in profits after an unexpected valuation surge driven by news that the company's restructuring plan has been approved.

• Wolfspeed will complete its restructuring in the near future, but the stock looks risky.

• 10 stocks we like better than Wolfspeed ›

After huge gains yesterday, Wolfspeed (NYSE: WOLF) stock is getting hit with a big pullback in Wednesday's trading. The company's share price was down 18.4% as of 2:45 p.m. ET.

Wolfspeed surged on Tuesday after the company announced that its restructuring plan had been approved in court and that the company would soon emerge from Chapter 11 bankruptcy protection. While there doesn't appear to be any fresh business-specific news pushing the stock lower today, investors are dumping shares after yesterday's rally.

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Wolfspeed stock sinks as yesterday's rally fades

Wolfspeed stock has seen volatile trading since the company announced at the end of June that it was filing for Chapter 11 bankruptcy protections. With yesterday's news that the company's restructuring plan had been approved, the stock managed to rocket 43% higher in the daily session. Some investors have been trading Wolfspeed stock in the hopes of scoring quick short-term gains, and many are opting to move out of their positions today after the recent valuation surge.

What's next for Wolfspeed?

As part of its restructuring, Wolfspeed will transfer ownership of key assets to its largest credit holders and form a new corporate entity. As part of the process, shareholders of the company's common stock will receive somewhere between 3% and 5% of the value of the new company.

While the restructuring will result in most of the company's debt being taken off the books, current stockholders could wind up seeing the value of their shares fall well below current levels. Even if the stock were to sustain its current valuation or rise following the restructuring, weak sales momentum and negative gross margins suggest that the restructured Wolfspeed could face an uphill battle.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.