This Billionaire Started a Position in Wolfspeed. Should Investors Follow Suit?

Billionaire investor Stanley Druckenmiller was busy buying and selling stocks in Q4, but one of his more interesting purchases was in Wolfspeed (NYSE: WOLF). He added 187,000 shares in the quarter, currently worth under $4 million, so this was a very small starter position for him.

Wolfspeed is a maker of silicon carbide material and silicon carbide chips. Because silicon carbide performs better at high temperatures than silicon, it is popular in electric vehicles (EVs), as these chips can help increase EV ranges and improve charging times.

The company emerged from a prepackaged bankruptcy last fall with a better balance and plans to improve the production issues that had been plaguing it. It spent a boatload of money the past few years building its John Palmour Materials facility in North Carolina and its Mohawk Valley semiconductor fabrication plant in New York. That spending is now largely behind it.

Image source: Getty Images.

A speculative bet

However, Wolfspeed's production issues remain. Manufacturing silicon carbide chips is difficult, and traditional foundries like Taiwan Semiconductor Manufacturing don't manufacture them.

That's why the company had to build out its own special fab. To improve its economics, Wolfspeed has increased the size of its wafers to 200 mm, which fits more chips, but it has been plagued by low yields (high defect rate). This, in turn, has led to underutilization of its Mohawk manufacturing facility and negative gross margins.

Things did not get any better for the company when it reported its first quarterly results since emerging from bankruptcy. It recorded a fiscal Q2 negative gross margin of 46%, although, in addition to plant underutilization, it was also negatively impacted by inventory reserves and fresh start accounting. It expects fiscal Q3 gross margins to remain negative due to continued operational issues and the underutilization of its fab.

Equally concerning was that the company saw its revenue fall 7% in the quarter, as its core EV market has struggled. It forecast these issues to continue, projecting fiscal Q3 revenue to come in between $140 million and $160 million, down from $185 million last year and $201 million two years ago. As such, Wolfspeed is looking to get a bigger foothold in other markets, including artificial intelligence (AI) data centers and the aerospace and defense market.

Should investors follow Druckenmiller into the stock?

Druckenmiller placed a small speculative bet on Wolfspeed stock, and at this point, that should be the extent of the investment anyone makes. Even after emerging from bankruptcy, with its production struggles and a weakening EV market, the stock is still not completely out of the woods, even with its debt greatly reduced.

The company would need to greatly improve yields and see a boost from something like EV robotaxi adoption or other industries starting to embrace silicon carbide chips for the stock to really take off. I'd personally stay on the sidelines.

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