Why Is Wolfspeed Stock Plummeting Today?

Key Points

• Wolfspeed canceled its existing common stock and issued shares of a new stock earlier this week as part of its bankruptcy.

• Shareholders of the old stock received only one share for every 120 they owned, but unlike in a reverse split, the new shares are not worth 120 times the old shares.

• Investors need to know that dilution will continue.

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Shares of Wolfspeed (NYSE: WOLF) are sinking on Wednesday, down 12.1% as of 1:35 p.m. E.T. The drop comes as the S&P 500 and Nasdaq Composite have both gained modestly.

The embattled chipmaker finally exited Chapter 11 protection after successfully restructuring. As part of the process, however, holders of its common stock were severely diluted in order to satisfy its creditors. The stock is falling today as the dust settles and more investors understand what is happening.

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Wolfspeed gets a new stock

On Monday, Wolfspeed canceled all its existing shares and issued new stock. The majority of the new shares are allocated to those to whom the company owes money, while previous shareholders of the old common stock receive roughly one share for every 120 shares they owned.

Image source: Getty Images.

Buyer beware: Dilution will continue

Unfortunately, many investors didn't realize this would happen, purchasing shares last week at what may have seemed like bargain-bin prices. It's a clear illustration of how critical it is to read the fine print, especially when investing in a company with expectations of a turnaround. Buried in a Form 8-K filed with the SEC last week, Wolfspeed admitted the danger: "Wolfspeed expects that its equity holders may experience a significant loss on their investment."

I would stay away from Wolfspeed stock until the situation reaches equilibrium. More shares could be issued in the coming days, and dilution will continue for some time.

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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.