Could $1,000 on Wolfspeed have really exploded to $18,000 in 3 days? Here's a reality check

Wolfspeed Stock Price: Shares of semiconductor company Wolfspeed Inc. (NYSE: WOLF) have witnessed an explosive rally in the last few days, with the stock price surging from $1.21 at the close on 26 September, to $22.10 by 29 September. On the surface, it looks like, if someone had invested $1,000 in Wolfspeed stock a few days back, it would have grown to about $18,263 by 29 September - a gain of over 1,800% in just 3 days. But that’s not what really happened.

Due to the mechanics of the share cancellation and issuance of new stock, the headline percentage gains may not reflect actual investor profits of the shareholders.

What's fueling the rally?

The dramatic surge in the shares of Wolfspeed Inc. is due to a major corporate restructuring. On 29 September, Wolfspeed cancelled all existing shares and issued new stock as part of a Chapter 11 reorganisation. This action was part of the company’s bankruptcy exit process, which fundamentally altered the share structure and resulted in a new float for Wolfspeed stock.

The dramatic surge in Wolfspeed’s share price is being described as a “monster rally”, but these gains are largely a function of the reverse split and restructuring process.

What's the share exchange ratio?

The company mentioned in a Form 8-K filed with the Securities and Exchange Commission that existing shareholders received their pro rata share of 1.3 million shares of common stock at an exchange ratio of 0.008352.

The company has canceled all legacy shares in its bankruptcy restructuring. This reduces prior shareholders' stake since the bulk of the new equity goes to creditors and backstop investors, leaving legacy holders with a very small stake.

So, effectively - If you had 1,000 old shares, you now only get about 8 new shares. Therefore, while the new stock’s price looks high, most old shareholders actually own far fewer shares now.

Owing to analysts' expectations of continued losses at Wolfspeed, the company carries a negative multiple, a Reuters report mentioned. That compares with the 12-month-forward price-to-earnings ratio of 17.9 for Onsemi and 16.7 for NXP, it added quoting data compiled by LSEG.

What's Chapter 11 Bankruptcy?

Wolfspeed filed for Chapter 11 Bankruptcy in June. The company reportedly faced economic uncertainties induced by changing US trade policies and weakening demand.

Chapter 11 of the Bankruptcy Code usually allows corporations or partnership firms to undergo reorganisation instead of shutting down. A Chapter 11 debtor usually proposes a plan of reorganisation to keep its business alive and pay creditors over time.

The chipmaker on Monday announced that it has exited Chapter 11 bankruptcy after cutting its total debt by nearly 70% and lowering annual cash interest expense by approximately 60%.

(With agency inputs)