Here's Why Wolfspeed Stock Is Soaring Today

Shares of industrial outfit Wolfspeed (NYSE: WOLF) are ending a raucous trading week as wildly as they started it, rallying again on Friday to overcome Tuesday's sizable pullback from the prior week's explosive gains. As of 12:56 p.m. ET, the stock is up 23%, in fact, or 35% above last Friday's close.

There's a clear catalyst for today's big move, too. But, there's also (much) more to the story.

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Relief on the horizon

Wolfspeed's core business is silicon carbide, used in a range of industrial applications including utility-scale power facilities, data center power supplies, HVAC equipment, and electric vehicle charging technology, just to name a few. The company's proprietary carbon-toughed silicon can handle higher heat and greater power loads than conventional silicon can, making it a particularly important material in an era marked by the efficient electrification of... well, everything.

This shift isn't proving easy or cheap for the world's small handful of silicon carbide manufacturers, though, and Wolfspeed is no exception. The company's taken on significant debt to prepare for demand that's yet to materialize as fully as hoped. As of the end of last year, in fact, the unprofitable $680 million (market cap) company is sitting on nearly $6.7 billion worth of long-term liabilities. It's taking a toll on the stock, too, if only because it's so worrisome to current and would-be investors.

And it is worrisome to be sure -- so much so that 64% of the stock's float and 41% of its total outstanding shares have been sold short, meaning lots of traders are betting the stock's price will fall rather than rise. That's a significant vote of no confidence.

Relief may be in the works, though. After Thursday's close, Wolfspeed announced that current CFO Neill Reynolds is stepping down from the position. Although not being blamed for Wolfspeed's current difficult financial position, executive chairman Thomas Werner's comment of "Neill has been an important partner as we navigate our liability-management initiatives and position Wolfspeed for its next phase" does imply that Wolfspeed recognizes something needs to change -- soon -- with the balance sheet. The market is simply celebrating this prospect.

Short squeeze underway

That being said, it would be naïve to pretend a short squeeze wasn't also a factor here, if not the biggest one.

Simply put, short-selling is the sale of shares not yet actually owned. A short-seller's intent is rather to buy that stock at a lower price in the future to cover the commitment made by such a trade. It's risky, though, since there's no price ceiling on those shares that will eventually need to be purchased to close out a short sale.

If enough gains from a heavily shorted stock -- like Wolfspeed -- cause short sellers to panic en masse, they'll buy that stock even at a high and rising price just to cut their losses before they widen any further. This buying of course puts further bullish pressure on a stock, causing even more short-sellers to make a panicked purchase, driving its price higher still. This self-fueling covering of many short positions is called a short squeeze.

That's very likely what's happening here with Wolfspeed, given the degree of its gains just since last week. Just bear in mind that short squeezes don't last forever.

Worth a well-timed shot

A prospective short squeeze isn't a reason to buy a particular stock; this one's likely already run much of its full course anyway. Expect erratic volatility in the immediate future all the same, though, as is often the case following extreme moves.

Wolfspeed is still a compelling long-term prospect, however, particularly if you can wait for a decent dip to step into it. Global Market Insights' prediction that the worldwide silicon carbide market is set to grow at an annualized pace of 34.5% through 2034 suggests there will be more than enough business for this company to grow its way out of debt. It's just going to take some time.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wolfspeed. The Motley Fool has a disclosure policy.