Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Wolfspeed Inc (WOLF, Financial). The stock, which is currently priced at 40.23, recorded a gain of 5.54% in a day and a 3-month decrease of 18.7%. The stock's fair valuation is $132.64, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Uncovering the Risks
Despite its seemingly attractive valuation, certain risk factors associated with Wolfspeed should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.68, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Wolfspeed a hidden gem or a value trap? These indicators suggest that Wolfspeed, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Altman Z-score: A Predictor of Financial Distress
Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Wolfspeed Inc (WOLF, Financial)
Wolfspeed Inc is involved in the manufacturing of wide bandgap semiconductors. It is focused on silicon carbide and gallium nitride materials and devices for power and radio-frequency (RF) applications. The company serves applications such as transportation, power supplies, inverters, and wireless systems. Geographically, it derives a majority of revenue from Europe and also has a presence in the United States; China; Japan; South Korea, and other countries.
Wolfspeed's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Wolfspeed's Altman Z-score reveals Wolfspeed's financial health may be weak, suggesting possible financial distress:
Operational Efficiency and Asset Turnover
When it comes to operational efficiency, a vital indicator for Wolfspeed is its asset turnover. The data from the past three years suggests a decreasing trend in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Wolfspeed's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
The Bearish Signs: Declining Revenues and Earnings
One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Wolfspeed, both the revenue per share and the 5-year revenue growth rate have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Wolfspeed's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.
The Red Flag: Sluggish Earnings Growth
The company's earnings picture does not look much brighter. The 3-year EPS without NRI growth rate is sluggish, and the future 3 to 5-year EPS growth estimate does not show a promising uptick. These indicators could suggest the company is struggling to translate sales into profits effectively, a critical element of a successful business model.
Despite its low price-to-fair-value ratio, Wolfspeed's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Wolfspeed's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Conclusion
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity. Therefore, despite the initial allure of Wolfspeed's apparent undervaluation, it's prudent for investors to tread carefully and conduct thorough due diligence before making an investment decision.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen . Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
