Is Wolfspeed the Ultimate Contrarian Play Right Now?

Silicon carbide darling Wolfspeed just got thrown in the penalty box—but smart money's circling.

The bear case in 30 seconds: Supply chain snarls crushed margins, shorts piled on, and the stock got halved faster than a Bitcoin miner's rig during a power crunch.

Why contrarians care: EV revolution isn't canceled. When legacy automakers finally admit their silicon chips can't handle 800V architectures? Cue the multi-year backlog for Wolfspeed's wafers.

Risks worth sweating: Capex burns cash like a degen trading leverage, and China's cloning their tech. But with shorts over 20% of float? This could squeeze harder than a stablecoin losing its peg.

Bottom line: Either you believe in electrification—or you're still waiting for hydrogen cars to 'arrive any decade now.'

Image source: Getty Images.

Is a turnaround possible for Wolfspeed?

Wolfspeed's financials need a lot of work. Over the nine-month period ending March 30, the company incurred an operating loss totaling $748 million, which was higher than the $561 million it generated in revenue. The company's gross margins are incredibly low and sometimes even negative. On top of this, the business has long-term debt and convertible notes totaling a whopping $6.5 billion. While those are long-term liabilities, they are staggering amounts for a business that isn't even profitable.

Getting out from under such a debt load likely wasn't going to happen over the course of Wolfspeed's day-to-day operating activities. But through a bankruptcy filing, the company believes it can slash its debt by close to 70%.

And to help with its efforts to transform its business, the company has brought on a seasoned executive with experience in turnarounds in the tech sector -- Gregor Van Issum, who will take over as the company's chief financial officer as of Sept. 1. With 20 years of experience in technology, Van Issum says a key priority will be to improve profitability for the business. It won't be an easy task, however, given how poor the company's margins are and the significant operating expenses it incurs.

I'm skeptical about how likely it will be for Wolfspeed to get out of the red. It may successfully emerge from bankruptcy, but that doesn't mean the business will be able to transform into a healthy and profitable business.

Why a turnaround may not matter

The bigger problem for investors is that even if Wolfspeed emerges from bankruptcy protection, they may not have much to show for it. That's because under the restructuring, existing equity in the company will be cancelled, and current shareholders will receive between 3% and 5% of the new restructured business.

That means generating big gains for investors who own shares today may not be all that likely, even if the company's turnaround efforts work. With a much smaller position, it'll be more difficult to generate large gains from any increase in the company's value. Meanwhile, there are still no guarantees that the business will be able to successfully execute a turnaround. As a result, there may be limited upside from investing in Wolfspeed's stock today.

Wolfspeed isn't worth the risk

Even if you are a contrarian investor, Wolfspeed may not be a stock worth investing in today. The potential gains from a turnaround may be limited given how much shareholders will be left with in the restructured business. A safer option WOULD be to invest in a company that at least isn't in the midst of bankruptcy, and which has a clearer path forward.