Should Investors Buy the Dip in Wolfspeed's Stock?

Wolfspeed's post-bankruptcy recovery remains fragile after fiscal Q2 (ended Dec. 28, 2025) results showed a -46% gross margin driven by inventory reserves, fresh-start accounting and plant underutilization, revenue down 7% to $168.5 million, operating cash flow negative $42.6 million and free cash flow negative $72.6 million. Balance sheet improvements cut debt from $13.6 billion to $1.7 billion (including $1.4 billion convertible) with $1.3 billion cash on hand, but management still expects fiscal Q3 revenue of $140–$160 million and a continued negative gross margin with only modest sequential margin improvement. While Wolfspeed reports a 50% sequential revenue increase in AI data centers and is targeting aerospace/defense and materials markets, persistent margin losses, declining EV demand and plant underutilization make the equity highly speculative. Investors should weigh near-term operational drag and guidance weakness against potential upside from successful market pivots.

Analysis

Market structure: Wolfspeed’s bankruptcy exit reduced leverage but left a firm with -46% gross margin, underutilized fab capacity and declining EV-led revenue (Q2 revenue $168.5m, guidance Q3 $140–160m). Direct losers are WOLF equity and suppliers tied to EV traction; winners are incumbent SiC competitors who can consolidate pricing if Wolfspeed cuts output, and AI/data-center semiconductor suppliers (NVDA, select foundries) benefiting from Wolfspeed’s pivot. Underutilization signals demand-driven oversupply in SiC for EVs; a sustained EV demand shortfall implies lower realized SiC prices for 6–18 months.

Risks: Tail risks include a second restructuring or insolvency if operating cash flow stays < -$50m/quarter beyond two more quarters, or rapid convert-holder dilution if the $1.4bn convertible converts en masse. Near-term (days–weeks) expect headline-driven equity volatility and rising CDS spreads; short-term (quarters) hinge on Q3 revenue hitting the $140–160m guide; long-term (12–36 months) outcomes depend on successful qualification into AI/defense customers and plant utilization >50% to approach breakeven. Hidden dependencies: customer qualification lead times (6–12 months), substrate supply, and defense contracting cycles.

Trades and positioning: Primary tactical is asymmetric downside protection on WOLF — preferred via put spreads to limit capital and vega exposure — sized small (1–3% portfolio). Relative-value: short WOLF vs long NVDA or INTC (1–2% each) to play AI demand tailwind; rotate 2–4% away from EV supply-chain names into defense primes (e.g., LMT) and foundries. Entry: deploy options within 10 trading days while volatility remains elevated; reassess after next quarter’s gross-margin print.

Contrarian angles: Consensus ignores that a strategic asset sale or fab carve-out could tighten SiC supply and benefit survivors, creating a multi-quarter price recovery; this is a low-probability, high-return scenario if Wolfspeed sells capacity at >$1bn enterprise value. Conversely, the market may be underpricing conversion dilution risk — threshold: if convertible conversion would push shares outstanding >2x current, adjust to full short. Historical analogue: Cree’s split and reorgs show asset-light plays can succeed but require 12–24 months to manifest.

Key Decisions for Investors

• Establish a tactical short on WOLF sized 2–3% of portfolio via a Sep/Dec 2026 put spread (10–25% OTM buys / 5–15% OTM sells) to cap capital, target 30–50% potential return if shares fall 30–50%; enter within 10 trading days.
• Implement a pair trade: short WOLF (1–2%) and use proceeds to long NVDA (1–2%) and INTC (1%) to capture AI/data-center upside; hold 3–9 months and trim if quarterly revenue < $150m or gross margin fails to improve sequentially.
• Rotate 3–5% of EV supply-chain exposure into defense primes (e.g., LMT) and foundry/SiC survivors over 1–3 months to hedge EV cyclical risk and benefit from potential SiC supply tightening.
• Monitor three specific triggers over the next 60 days: (1) Q3 revenue < $140m, (2) operating cash flow <-$50m per quarter persists, (3) any convertible conversion terms that would increase diluted share count >50%; if two triggers hit, increase short WOLF to 5% of portfolio.