Jana Partners calls for a strategic review at Wolfspeed. Here's how it may unfold.

Company: Wolfspeed (WOLF)

The company is a semiconductor business that specializes in silicon carbide technologies. Its focus is on providing energy-efficient solutions for a sustainable future. Its product offerings include silicon carbide materials and power devices designed for various applications, including electric vehicles, fast charging, renewable energy, and storage.

Stock Market Value: $3.3B ($26.25 per share)

Activist: Jana Partners

Percentage Ownership: n/a

Average Cost: n/a

Jana, founded in 2001 by Barry Rosenstein, is a highly experienced activist investor known for its well-researched positions and long-term value plans. Rosenstein's activist strategy, dubbed "V cubed," focused on three key elements: value, votes, and variety of ways to win. Since 2008, the firm has shifted its approach to a strategy characterized by the three "Ss": stock price, strategic activism, and star advisors/nominees.

What's happening

Jana wrote a letter to Wolfspeed on April 22, advocating for a thorough examination of strategic options, including the possibility of selling the company.

Behind the Scenes

Wolfspeed is the world's leading producer of silicon carbide (SiC) and manufacturer of SiC applications. SiC is a challenging and expensive substrate to produce, requiring growing epitaxial layers, baking at up to 4,532 degrees Fahrenheit, and ion implantation. This gives Wolfspeed a competitive advantage as the market leader. As a first mover, the company has dominated the global market for SiC, having produced over 90% of the material to date. Due to the increased demand for their materials and power devices in electric vehicles (EVs), motor drives, power supplies, solar, and transportation applications, the company sold its LED business in 2021 and its radio frequency business in 2023 to fund an increase in manufacturing capacity of SiC and vertically integrated manufacturing. The company is currently ramping up two major manufacturing facilities simultaneously in Siler City, N.C., and Marcy, N.Y. The John Palmour Manufacturing Center for Silicon Carbide in North Carolina is dedicated to producing SiC wafers, while the Mohawk Valley project in New York will produce advanced SiC devices like metal oxide semicondu

Despite having a negative total shareholder return over the past one-, three-, five- and 10-year periods, Wolfspeed has outperformed its peers in terms of demand. The company has a substantial moat in SiC and has a robust demand for its products. In fact, in 2023, Renesas made a customer deposit of $2 billion to Wolfspeed to secure a 10-year supply agreement for SiC wafers. Additionally, Wolfspeed's expansion plan supports a $20 billion market opportunity by 2030, and even in the event of an EV slowdown, the company could easily reach capacity on its facilities.

The Mohawk Valley plant of Wolfspeed is facing a supply and ambition problem. The company's two new facilities have been delayed, and it only projects 20% utilization for the Mohawk Valley plant by the end of fiscal 2024. Moreover, the company announced plans to construct the world's largest and most advanced SiC device manufacturing facility in Germany, which has scared the market due to the stock's poor performance. Jana suggests that Wolfspeed prioritize execution at Mohawk Valley and Siler City, earn an acceptable return on capital, set realistic targets, and outline a clear plan for capital expenditures to avoid dilutive capital raises. If the company can create a credible forward-looking plan to earn an acceptable return on capital and set realistic targets, the market will regain confidence, and the stock should rebound from its current depressed levels.

Jana recommends that the board review strategic alternatives, including a possible sale of the company. However, with a stock price of $25 per share, a sale at an acceptable premium is unlikely. The more likely outcome is for management to fix the company's problems and potentially pursue a future sale or look for an investment from a strategic investor willing to invest at a high multiple to shore up supply. Jana notes that Denso and Mitsubishi Electric recently made a minority investment in Coherent at a multiple of 10 times revenue, while Wolfspeed trades at less than six times revenue.

Jana identified supply shortages and difficulty rolling out U.S. manufacturing operations at Freshpet when the firm invested there. Jana also made operational and capital allocation recommendations and received board representation. Freshpet's stock closed at $106.36 on Friday, up from $45.37 in September 2022. Jana launched its activist campaign with a team of experienced industry executives ready to be board nominees, if necessary. The director nomination window does not open until June 25 and closes on July 25, at which time we will have more clarity on which road this campaign will take.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.