Why Is Wolfspeed Stock Jumping Today?

Key Points

• Last week, news that Wolfspeed would be exiting its Chapter 11 bankruptcy soon sent shares of the chipmaker flying.

• The plan includes clearing $4.6 billion in burdensome debt.

• 10 stocks we like better than Wolfspeed ›

Shares of Wolfspeed (NYSE: WOLF) are jumping on Tuesday, up 5.8% as of 3:06 p.m. ET. The spike comes as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) lost 0.4% and 0.6%, respectively.

After a brief correction yesterday, the chipmaker's stock is moving up once again amid a weeklong 115% surge, spurred by news that the company is close to exiting Chapter 11 bankruptcy.

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Wolfspeed is slashing its debt

Last week, a bankruptcy court said that it was satisfied with Wolfspeed's plan to eliminate $4.6 billion in debt, paving the way for the embattled chipmaker to exit bankruptcy. The plan will result in a 70% reduction in the company's total debt and a 60% decrease in annual interest expenses. Wolfspeed officially filed for Chapter 11 bankruptcy on June 30 due to mounting debt that made it impossible to operate normally.

With over 97% support from senior note holders and two-thirds of convertible note holders, the company expects to emerge from bankruptcy in just weeks.

Image source: Getty Images.

Fixing the balance sheet is just one step

Reducing its debt by this much is fantastic for Wolfspeed, but the company will continue to face issues in its target market: electric vehicles (EVs). Its chips are well suited for the power requirements of EVs. When EVs were exploding in popularity, that was a great niche to fill. Now, EV sales are slowing.

After three days of euphoria following the approval, it's clear investors are realizing there are still massive hurdles to clear, leading to today's decline.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool recommends Wolfspeed. The Motley Fool has a disclosure policy.