Should Investors Buy the Dip in Wolfspeed's Stock?
Key Points
Many of the issues that plagued Wolfspeed before it went bankrupt remain.
The company is seeing a negative gross margin and negative cash flow.
Meanwhile, its revenue is also declining.
Coming out of bankruptcy, Wolfspeed (NYSE: WOLF) was expected to offer investors a way to play the silicon carbide market without the shackles of its overly burdensome debt. However, the company's fiscal second-quarter earnings report showed that many of the problems that plagued the company and led to its bankruptcy still exist.
Issues remain
Two of Wolfspeed's biggest issues before bankruptcy were negative gross margins and operating cash flow. And those two issues continued to be a problem when the company reported its fiscal Q2 2026 results.
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For the quarter, which ended Dec. 28, 2025, Wolfspeed recorded a negative gross margin of 46%, hurt by costs from inventory reserves and fresh start accounting, as well as the continued underutilization of its manufacturing facility. It expects its gross margin to remain negative in fiscal Q3 2026 as it continues to deal with operational issues.
Following the bankruptcy, the company's debt was greatly reduced from $13.6 billion to $1.7 billion in debt, of which $1.4 billion is in the form of a convertible note. It also had $1.3 billion in cash on its balance sheet. The company did continue to bleed cash in the quarter, with negative operating cash flow of $42.6 million. However, the bulk of its spending is behind it, so its negative free cash flow was just $72.6 million.
Revenue, meanwhile, fell 7% to $168.5 million. Silicon carbide was supposed to be a game changer in the electric vehicle (EV) market, as it performs better than silicon at high temperatures, helping performance and range. With the emergence of robotaxis, this would seemingly be a good market, but overall EV sales have been down, hurting sales. As such, the company has been trying to pivot to other markets. It saw a 50% sequential revenue increase in the artificial intelligence (AI) data center market, while it is also looking toward the aerospace and defense market, as well as the materials market.
Looking ahead, Wolfspeed forecast that its fiscal Q3 revenue would come in between $140 million and $160 million. That's down from $185 million last year and $201 million two years ago. It expects some sequential gross margin improvement.
Image source: Getty Images.
Should investors buy the dip?
Even with an improved balance sheet, Wolfspeed is still a mess of a company at this point. Revenue is declining as its core EV market struggles, while it is still dealing with a negative gross margin as it struggles with plant underutilization.
If the company can successfully pivot to other power markets like AI data centers and the defense and aerospace industry, it still has potential upside, but right now it remains a very speculative stock. I'd stay on the sidelines.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.