One of Wall Street's biggest movers of the day is Wolfspeed, a North Carolina based semiconductors company whose shares have climbed 29.9% to a price of $111.28 -- 8.92% above its average analyst target price of $102.17. The shares surged after the company beat analyst expectations by announcing increased revenues and reduced losses. The average analyst rating for the stock is buy. WOLF outperformed the S&P 500 index by 29.8% as of today's afternoon session, and by 10.5% over the last year with a return of 7.5%.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US technology companies is 20.64, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Wolfspeed does not release its trailing 12 month P/E ratio since its earnings per share of $-3.25 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for WOLF of -34.3. Based on the company's positive earnings guidance of $1.61, the stock has a forward P/E ratio of 69.1.
In contrast to earnings, gross profits margins are caclulated on the basis of the company's cost of goods sold (i.e. cost of labor and materials only) subtracted from sales revenues. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products.
A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In WOLF's case, the gross profit margins are 32.3%, from which we can infer that its competitive advantage is probaly not absolute, and is facing some pricing pressure from other companies within the same market.
The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently form their core business: the cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the copany's levered free cash flow, which for Wolfspeed is $-951,887,488.
If it weren't negative, the unlevered free cashf low would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cashflow for one or two quarters is not a sign of financial troubles for WOLF, a long term trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if sold all of its assets and payed off all debts.
Wolfspeed's P/B ratio of 5.8 indicates that the market value of the company exceeds its book value by a factor of 5, and is basically consistent with the average P/B ratio of the technology sector, which stood at 5.39 as of the second quarter of 2022.
All this leads us to conclude that, as of the second quarter of 2022, Wolfspeed is likely an overvalued stock since it has a negative P/E ratio, a respectable P/B ratio, and negative cash flows that are offset by decent profit margins and an analyst consensus of some upside potential. We hope this preliminary analysis will encourage you to do your own research into WOLF's fundamentals -- especially their trends over time. For more updates on the stocks that are moving markets, subscribe to our free newsletter today!
