A Look At Cree’s Wolfspeed Segment And What To Expect Over The Next 3 Years

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Cree’s (NASDAQ: CREE) Wolfspeed Segment offers the following products:

  • Silicon Carbide (SiC) products used by customers to manufacture products for RF, power switching, gemstones, and other applications, such as research and development directed at RF and power devices.
  • SiC Power devices which provide increased efficiency, faster switching speeds, and reduced system size and weight over comparable silicon-based power devices. These are sold primarily to customers and distributors for use in electric vehicles, including charging infrastructure, server power supplies, solar inverters, uninterruptible power supplies, industrial power supplies, and other applications.
  • Radio Frequency (RF) devices that provide improved efficiency, bandwidths, and frequency of operation and are used in next generation telecommunications infrastructure, military, and other commercial applications.

A] Wolfspeed’s Revenue Trend

  • Cree’s Wolfspeed division has more than doubled its revenue from FY’17 to FY’19 (FY ends June) , due to increasing demand from the electric vehicle (EV) space, and a general preference for Wolfspeed’s products due to their improved efficiency and smaller unit size.
  • The global electric car fleet grew to over 5.1 million in 2018 from 3.2 million in 2017, and we expect this growth to continue going forward.
  • Globally, automotive manufacturing giants have committed $300 billion to EV investments, from the start of 2018.
  • We expect revenue to grow at a constant 40-45% rate through FY’ 22.

View our interactive dashboard analysis – How can Cree’s Wolfspeed Segment grow over the next 3 years?. You can alter the assumptions to arrive at your own estimate for the segment’s and company’s revenues.

B] Wolfspeed has seen a continuous rise of its share in Cree’s total revenue, with the trend expected to continue

  • As of FY’ 19, Wolfspeed contributes around 35% of Cree’s revenue.
  • This number is set to jump significantly on the back of Cree’s divestment of its lighting business, which has now been sold to IDEAL Industries.
  • Added investment and research activities are also set to contribute to this factor.

C] Wolfspeed’s gross margins have been significantly higher than that of Cree as a whole.

  • Wolfspeed’s gross margin has consistently been about 1.5x that of Cree’s overall gross margin, and we expect this trend to continue going forward.
  • We expect the segment to improve its margin to 56% by the end of 2022.
  • Higher margins are expected to be driven by high revenue growth and the company’s efforts to cut manufacturing costs in the long run.

D] Recent Initiatives and Strategies adopted by Cree that will help boost Wolfspeed revenue

  • In May 2019, the company announced a $1 billion expansion plan, aimed at increasing Silicon Carbide and GaN (Gallium Nitride) manufacturing capacity, which by company estimates, would lead to a 30x increase in manufacturing capacity by 2024.
  • Cree’s divestment of its lighting business, which had been seeing decreasing margins due to high competition and falling demand, now means that the company can focus more on Wolfspeed (the power and RF segment), to capitalize on EV growth and the expected launch of 5G.
  • The company’s aim by 2024, is to reduce the cost of Silcon Carbide for customers, and help drive its mass adoption, hence accelerating the market.

Conclusion

  • We expect a temporary drop in revenue for 2020, due to the divestment of the lighting business.
  • However, the accelerated growth in Wolfspeed is set to drive total revenue in 2021, above 2019 levels.
  • FY ’20 onward, we expect Wolfspeed to make up more than 65% of Cree’s total revenue.

 

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