Apart from the geopolitical issues and supply chain constraints, the chip industry has been challenged by high-interest rates, stubborn inflation, and softening demand in the end market. Although the long-term prospects of the chip industry look bright, not all chip stocks are expected to do well.
To that end, I believe it could be wise to avoid fundamentally weak chip stocks Wolfspeed, Inc. (WOLF) and Navitas Semiconductor Corporation (NVTS). Both stocks are amongst the worst-rated chip stocks in our POWR Ratings system.
In this piece, I have discussed several reasons why I am bearish on these stocks.
The chip industry has been growing rapidly due to its broad applicability. However, chip stocks have been under pressure since last year due to various macroeconomic and supply-related challenges. Despite the challenges, global semiconductor sales rose 3.3% year-over-year in 2022.
Its growing use across automotive, consumer electronics, aviation, defense, and others areas mean the industry has a long pathway for growth. The global semiconductor market is expected to exceed $1 trillion by 2030, growing at a CAGR of 7%. Investors’ interest in chip stocks can be gauged from VanEck Semiconductor ETF’s (SMH) 42.2% returns over the past six months.
Despite the industry’s bright prospects, not all chip stocks are expected to capitalize on the tailwinds. Amid this backdrop, it could be wise for investors to avoid fundamentally weak chip stocks WOLF and NVTS.
Let’s delve deeper into these stocks to see what makes them best avoided.
Wolfspeed, Inc. (WOLF)
WOLF operates as a powerhouse semiconductor company focused on silicon carbide and gallium nitride (GaN) technologies worldwide. It offers silicon carbide, GaN materials, and GaN epitaxial layers on silicon carbide wafers to manufacture products for RF, power, and other applications.
WOLF’s trailing-12-month EBIT margin of negative 16.95% compares to the 4.61% industry average. Its trailing-12-month levered FCF margin of negative 44.17% compares to the 6.08% industry average. Likewise, its net income margin of negative 17.30% compares to the industry average of 2.71%.
For the fiscal second quarter that ended December 25, 2022, WOLF’s non-GAAP operating loss narrowed 2.8% year-over-year to $24.70 million. The company’s non-GAAP net loss narrowed 23.7% year-over-year to $14.20 million. Its non-GAAP loss per share narrowed 31.3% year-over-year to $0.11.
WOLF’s EPS for the quarter ended March 2023 is expected to remain negative. Over the past year, the stock has fallen 43% to close the last trading session at $64.95.
WOLF’s grim prospects are reflected in its POWR Ratings. It has an overall rating of F, which equates to a Strong Sell. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #90 out of 91 stocks in the Semiconductor & Wireless Chip industry. In addition, it has an F grade for Quality and a D for Value and Stability. To see the other ratings of WOLF for Growth, Momentum, and Sentiment, click here.
Navitas Semiconductor Corporation (NVTS)
NVTS designs, develops, and markets gallium nitride (GaN) power integrated circuits used in power conversion and charging. It operates in the United States, Ireland, Germany, Italy, Belgium, China, Taiwan, and the Philippines.
NVTS’ trailing-12-month EBITDA margin of negative 291.21% compares to the 9.78% industry average. Its trailing-12-month Return on Total Capital of negative 30.76% compares to the 2.06% industry average. Likewise, its levered FCF margin of negative 7.43% compares to the industry average of 6.08%.
For the fiscal fourth quarter that ended December 31, 2022, NVTS’ non-GAAP operating expenses increased 67.2% year-over-year to $16.95 million. Its non-GAAP loss from operations widened 73.4% year-over-year to $11.94 million. Additionally, its non-GAAP net loss widened 38.8% year-over-year to $9.65 million, while its non-GAAP net loss per share came in at $0.06.
Analysts expect NVTS’ EPS for the quarter ended March 31, 2023, to remain negative. Over the past year, the stock has declined 28.9% to close the last trading session at $7.31.
NVTS’ bleak fundamentals are reflected in POWR Ratings. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system. It is ranked last in the same industry. It has an F grade for Growth and Stability and a D for Value and Quality.
We have also given NVTS grades for Momentum and Sentiment. Get all NVTS ratings here.
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WOLF shares were trading at $62.00 per share on Monday afternoon, down $2.95 (-4.54%). Year-to-date, WOLF has declined -10.20%, versus a 7.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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