Key Points

• Wolfspeed stock jumped in a daily session that saw big positive momentum for semiconductor stocks.

• The silicon-carbide specialist's volatile stock may have gotten a boost from some big news regarding Nvidia, but its outlook is risky for investors.

• Wolfspeed is going through a bankruptcy and restructuring process, and investors should be very careful with the stock right now.

• 10 stocks we like better than Wolfspeed ›

Wolfspeed (NYSE: WOLF) stock posted substantial gains in Tuesday's trading. There wasn't any new, business-specific news pushing the silicon-carbide specialist's valuation higher, but its share price gained 8.4% today thanks to speculative momentum, chip industry news, and investors gambling on the company's bankruptcy proceedings. The stock had been up as much as 22.9% early in the day's trading.

Wolfspeed announced at the end of June that it had submitted filings for restructuring under a Chapter 11 bankruptcy. Despite a very risky outlook for the company's stock, its share price is up 273% since its bankruptcy announcement.

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Is Wolfspeed stock a buy?

Wolfspeed stock has been incredibly volatile in recent trading, and it's been prone to large moves on little or no business-specific news. Tech stocks saw bullish momentum today after Nvidia announced that it had received assurances that the U.S. government would greenlight licensing approval needed to sell the company's H20 processors in China. Gains for Nvidia and other AI chip stocks following news about licensing approval for the H20 processors don't suggest any meaningful shift in Wolfspeed's prospects as an investment.

Wolfspeed is a company that's in the early stages of moving through bankruptcy proceedings. Companies that are starting bankruptcy procedures can sometimes see huge valuation moves even in the absence of relevant developments, but the likely outcome is generally unfavorable for investors trying to make ultra-short-term plays at this stage.

Wolfspeed's bankruptcy and restructuring makes it likely that the stock will be delisted from the New York Stock Exchange, and investors who hold on to shares through the restructuring process will receive only between 3% and 5% of the value of the new company. With these risks in mind, Wolfspeed stock is too shaky to be a good investment right now.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Wolfspeed. The Motley Fool has a disclosure policy.

Shares of silicon carbide chipmaker Wolfspeed (NYSE: WOLF) rocketed 26.9% on Monday. The move follows on a big up day last Wednesday as well.

Wolfspeed doesn't report earnings until May 8, and there wasn't any especially relevant company-specific news today. However, the beginning of earnings season has spurred some cautious optimism that Wolfspeed's end markets might be recovering.

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With such a sky-high short interest of 41% of shares outstanding and 64% of Wolfspeed's float as of April 15, it appears as though many short sellers have decided -- or have been forced -- to close out their positions, leading to a "short squeeze."

Texas Instruments sees an industrial and auto chip recovery

Wolfspeed has spent billions of dollars and taken on significant debt in order to build out silicon carbide (SiC) manufacturing capacity in the U.S. SiC is a difficult material to work with, but it also makes for a more conductive chip, which is especially useful in high-voltage, high-temperature applications like electric vehicles (EV) and other industrial infrastructure.

While a strong industrial and auto market seems far-fetched in light of the administration's tariff policies, industrial and auto chips have actually already been in a protracted downturn ever since interest rates shot up at the end of 2022 and into 2023. Starting in 2023, the industrial chip market saw seven straight quarters of declines. Over that time, Wolfspeed's stock has cratered under the weight of its ambitious investments and tepid demand. The stock cratered another 47% in March after it was suspected the company might not receive its expected $750 million in CHIPS Act money.

However, last week on April 23, chip giant Texas Instruments (NASDAQ: TXN), which also has a high concentration in auto and industrial markets, noted it was seeing a "broad recovery across sectors and geographies," with low inventories across all end markets. Also encouraging was that TI executive Haviv Ilan said he believed the recovery was real and not just a pull-in to get ahead of impending tariffs.

While Texas Instruments doesn't make SiC chips as Wolfspeed does, it is known as somewhat of a bellwether in the industrial and auto chip markets. Thus, Wolfspeed's stock took off the next day on Wednesday of last week, and the rally held up through Friday.

So why the spike today? It's hard to say, but there's the potential that some hedge funds may have received margin calls over the weekend from banks and were therefore forced to close out more of their short positions by buying the stock back today.

The beginning of a massive recovery? Not so fast

Despite the past week's massive short squeeze that has lifted Wolfspeed's shares some 65% off of their lows to begin last week, investors should not take this as an "all clear." Wolfspeed is still heavily indebted, and it may not receive the promised CHIPS Act money, which could stress the company despite signs of an end-market recovery. Moreover, Wolfspeed has appointed a new CEO, who will begin his tenure this week on May 1. A new company head adds even more uncertainty.

There are other automotive/industrial chip plays with much less risk than Wolfspeed at the moment and which should also see a big upside if a recovery materializes. Investors would take much less risk with one of Wolfspeed's profitable rivals, rather than this loss-making meme stock, which is more like a lottery ticket at this point.

Should you invest $1,000 in Wolfspeed right now?

Before you buy stock in Wolfspeed, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Wolfspeed wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $594,046!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $680,390!*

Now, it’s worth noting Stock Advisor’s total average return is 872% — a market-crushing outperformance compared to 160% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

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Billy Duberstein and/or his clients have positions in Texas Instruments. The Motley Fool has positions in and recommends Texas Instruments and Wolfspeed. The Motley Fool has a disclosure policy.