The embattled chipmaker’s stock jumped this week after the company announced that its reorganization plan received bankruptcy court approval.
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Wolfspeed announced early in the week that it plans to exit Chapter 11 protection “in the next several weeks.” The court approval paves the way for Wolfspeed to slash its debt burden by a massive 70%.
The bankruptcy process began in June when Wolfspeed disclosed a restructuring agreement to eliminate about $4.6 billion in debt and cut interest payments by 60%. The company formally filed for Chapter 11 on June 30.
Image source: Getty Images.
The fact that the company is not only on track but has also been able to reduce its debt by more than its original target sent shares flying.
While the debt reduction is substantial, Wolfspeed’s fundamental business challenges remain largely intact. The company has struggled with execution issues, and the primary market for its specialty chips, the electric vehicle (EV) market, is experiencing its own difficulties.
With the debt in a much more manageable position, Wolfspeed has a chance to execute on a turnaround, and for investors with a high risk tolerance, this could be an interesting turnaround play. I am still skeptical that the company can gain and protect meaningful market share, and I’m not confident that it will be able to turn the ship; a bankruptcy emergence doesn’t guarantee a turnaround.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.
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