The New York Stock Exchange welcomes executives and guests from Wolfspeed (NYSE: WOLF), on Oct. 4th, 2021, in celebration of its listing.
NYSE
Company: Wolfspeed (WOLF)
Business: Wolfspeed is a semiconductor company focused on silicon carbide technologies. The company provides solutions for efficient energy consumption and a sustainable future. Its product families include silicon carbide material and power devices targeted for various applications such as electric vehicles and fast charging, as well as renewable energy and storage.
Stock Market Value: $3.3B ($26.25 per share)
Activist: Jana Partners
Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: Jana is a very experienced activist investor founded in 2001 by Barry Rosenstein. The firm made its name taking deeply researched activist positions with well-conceived plans for long term value. Rosenstein called his activist strategy “V cubed.” The three “Vs” were” (i) Value: buying at the right price; (ii) Votes: knowing whether you have the votes before commencing a proxy fight; and (iii) Variety of ways to win: having more than one strategy to enhance value and exit an investment. Since 2008, the firm has gradually shifted from that strategy to one which we characterize as the three “Ss” (i) Stock price – buying at the right price; (ii) Strategic activism – sale of company or spinoff of a business; and (iii) Star advisors/nominees – aligning with top industry executives to advise them and take board seats if necessary.
What’s happening
On April 22, Jana sent a letter urging Wolfspeed to engage in a comprehensive review of strategic alternatives, including a sale of the company.
Behind the Scenes
Wolfspeed is the world’s leading producer of silicon carbide, or SiC, and a manufacturer of silicon carbide applications. SiC is an extremely difficult and expensive substrate to manufacture: It requires growing epitaxial layers, baking at up to 4,532 degrees Fahrenheit, and then using ion implantation. This gives Wolfspeed a competitive advantage as the market leader. As a first mover, the company enjoys domination of the global market for SiC, having produced on the order of 90% of the material to ever exist. Due to the increased demand for their materials products and power devices in EVs, motor drives, power supplies, solar and transportation applications, the company sold its LED business in 2021 and its radio frequency business in 2023 to, in part, fund an increase in manufacturing capacity of SiC and vertically integrated manufacturing. The company has announced and is in the process of ramping up two major manufacturing facilities simultaneously in Siler City, N.C. and Marcy, N.Y. The John Palmour Manufacturing Center for Silicon Carbide in North Carolina is a facility dedicated to the production of SiC wafers. The company’s Mohawk Valley project in New York will produce advanced SiC devices like metal oxide semiconductor field-effect transistors, or MOSFETs, which are widely used in electronics and power applications.
Over the past one-, three-, five- and 10-year periods, Wolfspeed has had a negative total shareholder return and has vastly underperformed its peers. The company doesn’t have a demand problem. In fact, demand is quite robust, and the company has a substantial moat in SiC. For example, in 2023, Renesas made a customer deposit of $2 billion to Wolfspeed in order to secure a 10-year supply agreement for SiC wafers. Further, from a current base of nearly $1 billion, the company’s expansion plan supports a $20 billion market opportunity by 2030. Even in the event of an EV slowdown, Wolfspeed is such a small part of the market, that it could easily reach capacity on its facilities.
What Wolfspeed really has is a supply and ambition problem. The rollout of its two new facilities have been plagued by delays, and the company still only projects 20% utilization for the Mohawk Valley plant by the end of fiscal 2024. Even more concerning for investors has been the fact that the company announced in early 2023 plans to construct the world’s largest and most advanced SiC device manufacturing facility in Germany. Expansion is a great idea for a company that is executing well and reaching capacity. Wolfspeed is doing neither right now, and announcing further expansion plans before proving that it can execute scares the market as evidenced by the stock’s performance. Jana would like to see Wolfspeed do the following: (i) prioritize execution at Mohawk Valley and Siler City, (ii) earn an acceptable return on capital, (iii) set realistic targets and (iv) outline a clear plan for capital expenditures to assure that the company will not need to pursue any additional dilutive capital raises. If the company can create a credible forward-looking plan to earning an acceptable return on capital and set realistic targets, then the market will begin to regain confidence and the stock should rebound from its current depressed levels.
Jana also recommends that the board commences a review of strategic alternatives, including a possible sale of the company. However, with a stock price teetering at about $25 per share – it was trading as high as $70 per share in July 2023 – a sale of the company at an acceptable premium is highly unlikely here. The more likely outcome is for management to fix the problems with the company and potentially pursue a future sale or look for an investment from a strategic investor that might be willing to invest at a high multiple to shore up supply. Jana notes that Denso and Mitsubishi Electric recently made a minority investment in Coherent at a multiple of 10 times revenue. Wolfspeed presently trades at less than six times revenue.
This is similar to the issues Jana identified at Freshpet when the firm invested there: supply shortages and difficulty rolling out its U.S. manufacturing operations. At Freshpet, Jana also made operational and capital allocation recommendations in addition to reviewing a sale of the company. Jana ultimately received board representation and a sale never happened as the operational fixes worked. Freshpet’s stock closed at $106.36 on Friday, up from $45.37 in September 2022. As is customary for Jana, at Freshpet, the investor launched its activist campaign with a team of experienced industry executives ready to be board nominees, if necessary. Here, there has been no such mention of a “Jana Dream Team,” but it is a little too early for that. The director nomination window does not open until June 25 and closes on July 25, at which time we will have more clarity on which road this campaign will take.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
