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Why Wolfspeed Was a Howler of a Stock Today

What happened

Shares of Wolfspeed (NYSE: WOLF) ascended quickly skyward on Friday, closing the day more than 13% higher. It was little wonder; a famous investment bank upgraded the company's stock on the back of vastly improved profitability estimates.

So what

After market hours on Thursday, Brian Lee from "white-shoe" investment bank Goldman Sachs (NYSE: GS) cranked his recommendation on Wolfspeed stock one peg higher to buy, from the previous neutral. He also adjusted his price target upward, to $108 per share.

Lee is encouraged by what he feels are notable improvements in Wolfspeed's production capacity and its execution. He believes these give the company scope to beat on both revenue projections and expected profit margins. Meanwhile, since Wolfspeed has been affected by the recent investor bearishness around tech companies in addition to its own struggles, it is now more attractively priced on a forward price-to-earnings (P/E) basis than previously.

As a producer of specialty semiconductors used in products like electric vehicle (EV) battery systems, Wolfspeed is particularly well poised for growth.

Now what

Although Wolfspeed has ramped up its capital expenditures to widen its business, Lee writes that

our analysis suggests ROI on incremental capex is attractive and we believe any increase in capex would be accompanied by increased growth and/or long-term financial targets, another potential positive catalyst.

Investors obviously took this argument to heart on Friday, although we should also bear in mind that the overall sentiment on tech and tech-adjacent stocks was very good that day. Regardless, the Goldman Sachs analyst's note enumerates several positive catalysts for Wolfspeed stock, so perhaps it'll continue to rally.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs and Wolfspeed, Inc. The Motley Fool has a disclosure policy.


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