The embattled chipmaker avoids catastrophe for now.
Shares of Wolfspeed (WOLF 24.20%) skyrocketed this week, finishing up 86.4%. The rise comes as the S&P 500 and Nasdaq-100 gained 1.6% and 1.9%, respectively.
The embattled chipmaker’s stock jumped this week after the company announced that its reorganization plan received bankruptcy court approval.
Court approval clears path to exit Chapter 11
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.
Lighter debt but heavy execution risk
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.