Why Is Wolfspeed Stock Jumping This Week?

Key Points

• Last week, news that a bankruptcy court had approved Wolfspeed's reorganization plan sent shares flying.

• Momentum continued until its high on Tuesday morning. Performance has been mixed since.

• The plan will see Wolfspeed shed $4.6 billion in burdensome debt.

• 10 stocks we like better than Wolfspeed ›

Shares of Wolfspeed (NYSE: WOLF) are on the move this week, up 5.6% as of market close on Thursday, though they gained as much as 25.8% earlier in the week. The jump comes as the S&P 500 and Nasdaq-100 gained 0.7% and 1.5%, respectively.

The embattled chipmaker's stock is up and down this week after gaining nearly 90% last week. Investors are weighing what the company might be worth after exiting bankruptcy.

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Wolfspeed could soon exit bankruptcy

Wolfspeed management expects the company to emerge from Chapter 11 bankruptcy within just a few weeks. A bankruptcy court approved Wolfspeed's plan to slash $4.6 billion in debt, paving the way for the company to exit bankruptcy. The plan will see Wolfspeed reduce its debt load by 70% and its annual interest expenses by 60%. Wolfspeed filed for Chapter 11 bankruptcy on June 30 this year after its debt problems proved insurmountable.

Image source: Getty Images.

There's more to the story

Wolfspeed's significant reduction in debt is great news for the company, but not for Wolfspeed shareholders. Part of the bankruptcy reorganization includes eliminating its existing stock and issuing new shares. Only 3% to 5% of the new shares are allocated to holders of its common stock. The lion's share go to the holders of Wolfspeed's convertible debt notes.

Even if this weren't the case, I would steer clear of the stock. The company will still have its work cut out for it. Its target market -- electric vehicles -- is facing its own problems. The company may have less debt to worry about, but it is still the same company that found itself in this position.

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