At the Crossroads: Between Barbarism and Breakthroughs
For as long as I can remember, two things have held my fascination: history and new technology. History reveals the cycles of human behavior—what we see today often mirrors the past. Technology on the other hand, opens the door to what lies ahead.
History often shows us a world filled with darkness, hardship, and raw brutality. Strangely, here in 2024, it feels like we’re witnessing a resurgence of that ancient behavior—people acting in ways that seem straight out of a less civilized past. While technology like AI and automation promises a sleek, sci-fi future, there's also an unsettling rise in violent acts that feel almost primitive. It’s as if two worlds are colliding: one pushing toward progress, the other rooted in a darker, more chaotic past.
Speaking of a sci-fi future, this month, Elon Musk unveiled robo-taxis and Optimus, a humanoid robot built for autonomous tasks. AI is going mainstream, and that’s only going to speed up breakthroughs. We’ve seen this pattern before: each tech leap builds on the last. From the 1970s to the 1980s, through the internet boom, to today’s ultra-high-tech world—each innovation sets up the next.
Silicon semiconductors have powered this evolution since the 1960s, gaining traction in the 1980s and becoming the backbone of everything digital. But that technology’s limits are showing. To keep advancing, we need a new kind of semiconductor—one that can support the demands of autonomous vehicles, humanoid robots, and AI as they take on roles once reserved for humans.
In this issue, we’re exploring a groundbreaking material set to reshape the future and drive the next wave of innovation.
The End of the Silicon Era
I try to imagine what investors in the 1970s must have thought when they first heard about semiconductors and microchips. Back then, these tiny devices probably sounded like something out of a science fiction novel—small, mysterious, and full of potential, but far from being the household essentials they are today. It was the beginning of the silicon era, a time when only a few had the foresight to understand just how transformational these technologies would become. Fast forward a few decades, and silicon chips are the foundation of everything from our smartphones to supercomputers.
Today, I believe we’re standing on the edge of a similar technological shift—one that could be just as revolutionary, if not more so. We’re entering what is being called the graphene era. Recently, I listened to a presentation by George Gilder, an influential investor and author, who discussed the incredible potential of graphene. This single layer of carbon atoms is not only 200 times stronger than steel but also a thousand times more conductive than copper. It operates at terahertz speeds—trillions of times per second—far beyond the capabilities of today’s silicon chips, which switch at gigahertz speeds.
Silicon’s limitations, especially its tendency to overheat, make it clear that it’s time for a new material—and graphene is ready to step into the spotlight. Researchers like Walter de Heer at Georgia Tech, who have been pioneering this technology for decades, have now made a monumental breakthrough: wafer-scale graphene technology. This isn’t just an incremental improvement; it’s a game-changer. By seamlessly integrating graphene onto silicon carbide wafers, they’ve opened the door to an entirely new era of computing. Imagine replacing today’s vast, power-hungry data centers with sleek, ultra-efficient wafers that could redefine the entire tech landscape. It’s a leap forward that feels like something straight out of science fiction—but it’s happening right now.
The parallels to the early silicon era are clear. Just like then, we’re at the beginning of something enormous, and only a few people have the foresight to recognize it. I’m convinced that, over the next decade, graphene will become the defining material of our time, much like silicon did in the last century. That’s why I’m exploring ways to invest in this trend early—because those who understood silicon’s potential in the 1970s and invested wisely saw incredible returns. Graphene, I believe, is the next frontier, and positioning myself now could mean seizing enormous opportunities down the road.
I’ve found a way to gain a foothold in this emerging trend: by investing in the largest producer of silicon carbide semiconductors in the United States. Silicon carbide is a key component in the transition from silicon to graphene, as it serves as the base layer for graphene production. This company is strategically positioned to benefit as the industry shifts, and they’re already leveraging their expertise in silicon carbide to lead this technological transformation. By investing now, I aim to ride the wave as the graphene era takes off, positioning the portfolio at the forefront of this next big revolution in tech.
What is Silicon Carbide?
Silicon carbide (SiC) is a material that outperforms traditional silicon by withstanding extreme temperatures and handling higher voltages. SiC is a compound of silicon and carbon atoms forming a crystalline structure, giving it exceptional thermal stability and electrical efficiency. Unlike regular silicon, SiC’s properties allow it to operate effectively in high-power and high-temperature environments, making it an ideal choice for modern technology applications, especially in industries like electric vehicles and renewable energy systems.
But it doesn’t stop there. SiC’s thermal resilience is off the charts—it can endure temperatures above 5,000 degrees Fahrenheit without losing its properties. This makes it an ideal material for next-generation semiconductors, which must perform reliably under intense heat and pressure, especially as our devices become faster and more powerful. For applications in power devices, like those in electric vehicles (EVs), SiC allows for smaller, more efficient components that can manage greater power loads while reducing weight. Unlike silicon-based devices, which often need cooling systems or fans to dissipate heat, SiC devices can operate without these extras. This not only enhances efficiency but also improves the overall performance of EVs by reducing their weight and increasing range.
The switch to SiC isn’t just about efficiency, though. It’s about positioning for the future. With more and more industries requiring high-power devices—think EVs, renewable energy systems, and most importantly, AI data centers—the demand for SiC is growing fast. According to recent market research, the global market for power semiconductor devices, much of which now incorporates SiC, has grown by 25% annually since 2017. This trend isn’t slowing down.
The Pioneer of Silicon Carbide Technology
This month's feature company is Wolfspeed. Originally founded as Cree, Inc. in 1987, the company was a pioneer in LED lighting technology. It developed the first commercially available blue-light LED, which revolutionized screen technology and enabled the development of large flat-panel displays. For decades, Cree dominated the LED space and became a well-known player in the broader semiconductor industry.
Headquartered in Durham, North Carolina, the company has a long history of innovation in SiC technology. In the early 2000s, Cree was among the first to commercially produce SiC wafers for electronic applications, setting the stage for its evolution into a major player in the semiconductor space.
In 2021, the company made a strategic pivot, rebranding itself as Wolfspeed and shifting its focus entirely to silicon carbide technology. The decision was bold but necessary, as management recognized the massive potential of SiC in emerging markets like EVs, renewable energy, and power management systems. By selling off its LED and RF (radio frequency) divisions, Wolfspeed not only generated $425 million in capital but also freed up resources to focus exclusively on becoming a leading SiC manufacturer.
This transformation wasn’t just about rebranding; it was about aligning the company with the future of semiconductors. Wolfspeed’s decision to concentrate on SiC and exit other sectors showed foresight and conviction, even if it came with short-term challenges. The company’s shift has since placed it at the forefront of the SiC revolution, making it a vital player in a market that is projected to grow exponentially in the coming years.
One of Wolfspeed’s most significant advantages is its ability to manufacture 200-millimeter (mm) SiC wafers. Traditional SiC wafers are typically 150 mm, but Wolfspeed’s larger wafers allow for greater efficiency and scalability, offering them a competitive edge in the market.
Wolfspeed’s focus on U.S.-based manufacturing also positions it as a strategic hedge against geopolitical risks, particularly the tensions in Asia where much of the world’s semiconductor production is concentrated. As geopolitical uncertainties mount, having a domestic producer of critical components like SiC could be an invaluable asset.
Silicon Carbide: The Competitive Edge in the EV Market
The electric vehicle (EV) market is one of the primary drivers of Wolfspeed’s growth. Silicon carbide’s unique properties make it especially valuable for EV power systems, where efficiency and size matter immensely. Unlike traditional silicon-based semiconductors, SiC can handle higher voltages and operate at much higher temperatures. This thermal resilience allows SiC devices to run efficiently without needing bulky cooling systems.
Traditional EV systems based on silicon components require complex cooling units to manage the heat generated during operation. SiC’s efficiency reduces the need for these systems, effectively cutting weight, which is a critical factor in EV design. By making vehicles lighter and more efficient, SiC not only enhances performance but also reduces manufacturing costs, providing automakers with a compelling reason to adopt the technology. Companies like Lucid Motors, Jaguar Land Rover, and Mercedes-Benz have already recognized this, integrating Wolfspeed’s SiC components into their power systems to gain a competitive edge.
But Wolfspeed isn’t stopping there. The company is also working on expanding its market reach beyond EVs into other critical sectors like renewable energy, industrial power, and even AI data centers. Each of these areas benefits from SiC’s high-power and high-efficiency capabilities. As global demand for clean energy and efficient computing grows, Wolfspeed is well-positioned to capture significant market share.
Wolfspeed’s Strategic Expansion: Investing for Long-term Growth
To maintain and expand its leadership position in the SiC market, Wolfspeed has been making significant investments in its production capabilities. The company currently operates multiple facilities in the United States, including the largest SiC device manufacturing plant in the world, located in Marcy, New York. This state-of-the-art facility produces the next generation of SiC components and devices, including the industry’s largest 200-mm SiC wafers.
Beyond the U.S., Wolfspeed had set its sights on expanding into international markets. In early 2023, they announced plans to build a massive SiC manufacturing plant in Saarland, Germany, designed to match the scale and capabilities of their New York facility. The aim was to meet the growing demands of European automakers and tech companies. However, this year the company decided to shelve its plan to build the Germany plant. In my opinion, this move is a positive development, as it will reduce capital expenditures and allow Wolfspeed to focus resources on optimizing its existing facilities and projects.
The company's expansion efforts have come at a substantial cost—Wolfspeed has invested over $9 billion in these projects since 2019. While such an aggressive capital expenditure strategy might seem risky, Wolfspeed is betting on the long-term growth of the SiC market, particularly in the EV sector, to pay off. These new facilities are expected to double Wolfspeed’s production capacity, positioning the company to dominate the SiC market as the demand for EVs, renewable energy systems, and AI infrastructure accelerates.
This expansion has required large investments in new facilities and technology, leading to a dip in profitability and a decline in stock price. This caught the attention of activist investment firm Jana Partners, which now owns a significant stake in the company. In a recent letter to the board, Jana highlighted the company’s strengths and emphasized the need for Wolfspeed to communicate a clear plan for achieving profitability through its new facilities.
Navigating Challenges: Wolfspeed’s Capital Investment Strategy
Wolfspeed’s ambitious expansion efforts haven’t been without challenges. The company’s decision to invest billions in building state-of-the-art facilities led to significant short-term financial pressure. This strategy has caused temporary declines in profitability as Wolfspeed navigates the growing pains of transitioning to a new business model. For example, the construction of their North Carolina facility in Siler City alone cost over $5 billion, while the Marcy, New York facility required an additional $1 billion investment.
These hefty investments have raised concerns among investors, particularly as the company has had to leverage debt and seek external funding to complete these projects. The significant capital expenditures have put a strain on Wolfspeed’s margins, and the company’s stock price has faced volatility as investors question the timeline and return on these large-scale investments.
However, Wolfspeed is not without support. The U.S. government has recognized the strategic importance of domestic semiconductor manufacturing, and Wolfspeed has secured substantial backing under the CHIPS and Science Act. On October 15th of this year, the company announced it had received $750 million in funding from the U.S. Department of Commerce and an additional $750 million in private investment led by Apollo and other prominent groups. In total, these investments provide Wolfspeed with $2.5 billion in expected capital to continue its expansion efforts, ensuring that it remains a leader in SiC technology as the global demand for advanced semiconductors grows.
Why Silicon Carbide is the Future
Beyond EVs, the use cases for silicon carbide are expanding rapidly. Renewable energy systems, industrial power applications, and data centers are all sectors where SiC technology can provide superior energy efficiency and performance. As industries worldwide grapple with energy efficiency challenges and aim to reduce carbon footprints, the demand for silicon carbide will continue to grow.
Wolfspeed has positioned itself as a leader in an industry with a significant growth trajectory. While the company faces short-term challenges due to its aggressive expansion strategy, the long-term outlook is promising. With the support of government funding, strong partnerships with top-tier automakers, and a growing presence in the global market, Wolfspeed is well on its way to becoming a dominant player in the SiC sector.
The company is strategically building out its manufacturing capabilities both in the U.S. and internationally to meet growing demand, a move that further strengthens its market position.
Annual Financial Information
| In USD$ | 2024 | 2023 | 2022 | 2021 |
|---|---|---|---|---|
| Sales | $807.2M | $758.5M | $746.2M | $525.6M |
| Gross Profit | $77.4M | $242.9M | $249.3M | $164.6M |
| Gross Margin | 9.6% | 32% | 33% | 31% |
| Net Income(loss) | ($864.2M) | ($329.9M) | ($200.9M) | ($523.9M) |
| EPS | ($6.88) | ($2.65) | ($1.67) | ($4.66) |
| Shares Outstanding | 125.6M | 124.4M | 120.1M | 112.3M |
| Cash | $2.174B | $2.955B | $1.198B | $1.155B |
| Debt | $6.161B | $4.175B | $1.021B | $824M |
| Working Capital | $2.334B | $2.978B | $1.373B | $1.029B |
| Free Cash Flows (outflows) | ($3B) | ($1.1B) | ($800M) | ($696M) |
| Current Ratio | 4.5 | 5.7 | 4.5 | 3.3 |
2024 Financial Results
In Q4 2024, Wolfspeed reported consolidated revenue of approximately $201 million, a slight decrease from $203 million in Q4 2023. Wolfspeed also reported $2 billion in power device design-ins. These are formal customer commitments to purchase products at a specified price and timeframe. They also reported $0.5 billion in design-wins, where these commitments transitioned to actual revenue-generating projects. Despite these positive indicators, gross margins were under pressure during the quarter, with GAAP gross margin declining to 1% (from 29% in Q4 2023), mainly due to $24 million in underutilization costs linked to the new Mohawk Valley facility.
Underutilization costs are the expenses incurred when a manufacturing facility, like Wolfspeed's Mohawk Valley Fab, is operating below its optimal production capacity. These costs include the fixed expenses necessary to run the facility, such as labor, utilities, and maintenance, which are spread across fewer units when production is ramping up. Since the facility isn't fully utilized, these costs are higher per unit and are not fully absorbed into inventory, impacting gross margins negatively.
As Wolfspeed ramps up production and increases utilization levels, the impact of underutilization costs is expected to decrease. When a facility reaches its target capacity (like the Mohawk Valley Fab aiming for 25% in Q1 FY25), the fixed costs are spread over a larger number of units, making production more efficient. This results in a higher absorption of costs into inventory and improves gross margins. In Wolfspeed’s case, as they gradually increase utilization and shift more device fabrication to the Mohawk Valley Fab, these costs will reduce, leading to better financial performance over time.
For the full fiscal year 2024, Wolfspeed generated $807 million in revenue, up from $759 million in fiscal 2023. However, gross margins saw declines, with GAAP gross margin at 10% (down from 32%) and non-GAAP gross margin at 13% (down from 35%). The company faced approximately $124 million in underutilization costs during the fiscal year as it scaled up production.
Wolfspeed's CEO, Gregg Lowe, emphasized the company’s dual focus on optimizing capital structure and enhancing performance at its 200-mm fab in Mohawk Valley. The facility achieved 20% utilization in June and is projected to reach 25% in Q1 FY25, ahead of schedule. Lowe highlighted that the cost efficiency of the 200-mm fab is significantly higher than that of the Durham 150-mm fab, prompting the company to accelerate its shift in device fabrication to Mohawk Valley while assessing the timeline for closing the Durham facility.
Wolfspeed is scaling back its spending by $200 million for FY25 and looking for ways to cut costs across its operations. These steps are part of a broader effort to keep expenses in check while ensuring the company stays on track with its growth plans.
Looking ahead, Wolfspeed projects Q1 FY25 revenue to range between $185 million and $215 million. The company expects a GAAP net loss of $226 million to $194 million and a non-GAAP net loss between $138 million and $114 million, factoring in various expenses and adjustments.
By strategically managing capital expenditure and focusing on the efficiency of its newer facilities, Wolfspeed is taking steps to improve profitability and streamline operations as it continues to expand its production capabilities.
Following the close of its FY2024, Wolfspeed secured a $750 million grant under the CHIPS Act, along with an additional $750 million in financing from an investment group led by Apollo. Additionally, the company anticipates more than $1 billion in cash tax refunds from Section 48D credits, with $640 million already recorded on its balance sheet. These strategic moves are designed to fortify Wolfspeed's financial standing and accelerate its long-term growth and expansion efforts.
Final Thoughts
Wolfspeed remains very much a turnaround story—or what some might call a “show me” story. It could take a few years for the company to fully find its stride and ramp up production at its new facilities. The recent decision to shelve the Germany expansion is, in my view, a positive move. By focusing on its U.S. operations, Wolfspeed can reduce capital expenditure and concentrate on scaling its current manufacturing plants, like the Mohawk Valley Fab. This could put the company in a stronger position to optimize its production and begin achieving profitability sooner.
I believe the company is somewhat unfairly labeled as an EV semiconductor play, which has led to its potential being overlooked. With automakers dialing back their EV forecasts due to soft sales, Wolfspeed’s broader capabilities and future applications beyond EVs aren’t fully appreciated. The focus on Wolfspeed as an EV-dependent company misses the mark, as its silicon carbide technology has broader applications across renewable energy, AI, and power systems.
The company undoubtedly has strong potential, but the balance sheet raises concerns. As of June 30, 2024, Wolfspeed holds around $2.1 billion in cash, but it also carries $6 billion in debt. This high debt level is my primary worry, as it adds pressure, especially if the company’s ambitious expansion plans stretch its resources further than anticipated. If we face a global economic slowdown, Wolfspeed could feel a significant impact, and despite the shares already being low, they might dip even further.
That said, the recent $750 million grant from the CHIPS Act, the additional $750 million investment led by Apollo, and the over $1 billion in expected tax refunds provide a financial boosts that should help strengthen the balance sheet, giving Wolfspeed more breathing room to manage its debt and continue its growth strategy.
This investment is all about long-term potential, with the shift from traditional silicon to silicon carbide and eventually graphene-based semiconductors. It’s a massive opportunity, even if it takes time to fully unfold. I’ve added a small position to the portfolio to balance the high risk with careful sizing—capturing the upside while keeping it manageable.
US Elections, Rate cuts, and Uncertainty
With just six days until the high-stakes U.S. elections, tensions are noticeably ramping up. I have a feeling things may intensify on election day itself. Watching from Canada offers the unique luxury of observing whatever unfolds as spectators, though rising crime here shows we aren’t entirely sheltered from the turbulence. Just last week, an Ontario mother was killed in front of her children at a park in Ottawa—a somber reminder that uneasy times are unfolding on both sides of the border.
In the Middle East, Israel and Iran continue their tense standoff. Oil prices recently dipped by $4 in a single day, due to the lack of an attack on Iran’s oil infrastructure, but I still believe any escalation would send oil soaring. For now, I’m holding onto my oil and gas stocks, collecting a high yield while I wait. I’ll only consider adding more if top names drop to clearance levels.
Meanwhile, the BRICS summit introduced Egypt, Ethiopia, Iran, and the UAE as new members, expanding the bloc’s reach. Many, myself included, anticipated (or hoped for) news of a gold-backed currency, though it didn’t materialize. Still, gold’s steady climb to $2,790, nearing the $3,000 threshold, reflects the global appetite for stability amid unpredictable times.
Closer to home, last week, the Bank of Canada cut interest rates by 50 bps. This means lower yields on cash. Last year, I could get 5.40% on 1-year GICs, but now it’s closer to 3.40%.
Many central banks have recently lowered rates, but I believe this may be a misstep. I’m not convinced inflation is fully under control, and this feels reminiscent of the 1970s. Back then, the Fed cut rates before an election, only for inflation to spiral higher. The Fed later had to step in with drastic double-digit rate hikes to stabilize the economy. Today, we could be on the verge of a similar cycle, watching history repeat itself.
There could be economic trouble on the horizon. Volkswagen recently announced a 10% workforce cut, and McDonald's has reported its second consecutive quarter of declining sales. In the United States, credit card debt has reached all-time highs. Here in Canada, the real estate market—particularly condos—is also cooling down, with sales dropping and listings surging. Something feels off, and it seems consumers are beginning to tighten their belts. We might be in for tougher times ahead.
While the S&P 500 and the Dow continue to hit new highs, I’m staying focused, keeping busy by screening for companies with strong fundamentals to add to my watchlist as I wait for stocks to hit clearance levels. With the upcoming U.S. election and the transition to a new administration, the resulting volatility could open a golden window for value investing.
Until then, it’s all about patience and waiting for that perfect entry point.
Portfolio Composition
| As of October 30th, 2024 | |
|---|---|
| Category | Portfolio Weight |
| Cash and GICs | 88.57% |
| Speculative Picks | 2.33% |
| Defensive Picks | 8.53% |
| Crypto | 0.57% |
| TOTAL | 100% |
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.