Should Investors Buy Into Wolfspeed's Huge Rally?

Even after its share price dropped more than 20% at one point on no news on May 27, Wolfspeed (NYSE: WOLF) has been one of the hottest stocks in the market the past month, more than doubling in value. The rise in the stock appears to stem largely from Substack publication Citrini Research pumping it up.

Run by James van Geelen, whose past experience has been running an "alternative medicine" business and working as an emergency medical technician (EMT), Citrini has managed to gain a following despite its founder's lack of investment experience. The research outfit has made a name for itself in some peculiar ways over the past year.

It helped sink software-as-a-service (SaaS) stocks after publishing a thought piece about how artificial intelligence (AI) could negatively impact different businesses in the future. It was later revealed that the idea came from small hedge fund manager, Alap Shah, who was shorting the stocks mentioned in the article. Then earlier this year, Citrini claimed it sent an analyst to the Strait of Hormuz to interview smugglers, fishermen, and officials armed with $15,000 in cash, Cuban cigars, and a roll of Zyn. While news outlets, including CNBC, reported on this, it was never independently confirmed that this actually happened.

Image source: The Motley Fool.

More recently, Citrini has been pumping up Wolfspeed's stock, highlighting the value of its fabs, saying they deserve a premium as they are unlikely to ever be replicated. It also sees a huge opportunity in its silicon carbide (SiC) powered chips within AI data centers. With much of its debt wiped out following its previous bankruptcy, Citrini called this the perfect setup.

Looking for a new market

The big gap in Citrini's argument, though, is that Wolfspeed is really a company looking to find a market for its chips. The company was originally supposed to become the dominant player in the electric vehicle (EV) market due to the superior heat-conducting properties of its SiC chips, which would enable faster charging times and longer ranges. However, Tesla was able to improve its thermal dynamics and mix SiC with traditional silicon chips to reduce its SiC utilization by 75%, really denting Wolfspeed's sales. Today, SiC is mostly used in high-performance EVs and not in the mass market.

As such, sales have been on the decline, and Wolfspeed is looking to turn to the AI market. Now there is some potential here, as distributing power at higher voltages through the use of SiC solid-state transformers (SSTs) can improve power efficiency and reduce maintenance costs. If data centers are going to want to move up to 800 volts, they could have to turn to SiC.

However, SiC is much more expensive than silicon chips, and Citrini is trying to enter a market that is looking to reduce infrastructure capital expenditures (capex), not drive them higher. At the same time, it has run into a lot of yield issues in the past, and it has negative gross margins, as its fab remains underutilized. It's tough to imagine hyperscalers or chip designers feeling comfortable changing architecture that would solely rely on a supplier with a history of operational hiccups.

Wolfspeed's gains over the past month can largely be attributed to Citrini pumping a stock that has a 33% short interest. The company has yet to prove it has a business model that works, and it's rare to luck into finding a new market for a product after the first one didn't play out as hoped. Wolfspeed's business remains an incredibly risky, unprofitable manufacturing operation that still has to prove it can run its fabs at a high enough yield to survive without further dilution.

While it has an outside chance of becoming an AI winner, I'd stay far away from the stock after this run.

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