Comparing Wolfspeed and IonQ: Which AI-Adjacent Stock is a Better Investment?

Wolfspeed (WOLF -3.91%) and IonQ (IONQ -16.77%) may not be typical choices when it comes to investment in artificial intelligence (AI), but their technologies play significant roles in the expanding AI ecosystem. Wolfspeed specializes in silicon carbide (SiC) chips, commonly utilized in electric vehicle (EV) powertrains, while IonQ focuses on developing quantum computing systems offered through cloud services.

Both companies are positioned to benefit from the growth of the AI market. Wolfspeed's SiC chips are used in the power supply units (PSUs) for AI servers and have various advantages over traditional silicon chips, including higher voltage, temperature, and frequency handling. On the other hand, IonQ's quantum computers can process data much more quickly than standard binary computers, showing potential for advanced AI applications as they evolve to become more efficient and reliable.

Despite these connections to AI, the performance of their stocks diverged significantly over the past year, with Wolfspeed's shares dropping around 70%, while IonQ's stock value nearly tripled. This raises the question of whether IonQ will continue to be the better choice as the AI market grows.

Challenges Facing Wolfspeed

Wolfspeed generates most of its revenue from the EV market, where it saw impressive growth in fiscal 2022, with a 42% revenue increase. Fiscal 2023 also showed strong performance, with revenue rising another 24%. However, the fiscal 2024 outlook paints a different picture: revenue growth fell to just 6% as interest in EVs cooled, impacting the demand for SiC chips as companies shifted their focus towards AI GPUs. Additionally, geopolitical factors made matters worse, as China restricted exports of gallium and germanium, crucial materials in SiC chip production.

The situation is compounded by statements from Tesla CEO Elon Musk, who indicated that future Tesla EV powertrains would utilize fewer SiC chips. As Wolfspeed's growth slowed, the company continued investing in new foundries in New York and North Carolina, leading to increased operational costs. The departure of its CEO, Gregg Lowe, further unsettled investor confidence. Analysts predict that for fiscal 2025, Wolfspeed's revenue could decline by 6% to $757 million, with net losses expected to widen significantly. This challenging outlook has contributed to its stock's downward trend.

IonQ's Success in Quantum Computing

In contrast, IonQ's business is thriving. The company offers a range of quantum computers, including their advanced Aria system and the commercial Forte system. Their client base includes government agencies and major universities, which enhances their credibility. In 2023, IonQ anticipates a staggering 75% to 93% revenue growth, following a remarkable 98% increase in 2023 after a staggering 430% surge in 2022.

Although IonQ's technology still faces challenges—such as high costs, excessive power consumption, and error rates—the potential for quantum computers to revolutionize AI processing remains substantial. Investors may be willing to pay a premium for IonQ’s stock based on future expectations of rapid growth as the quantum computing sector expands.

Conclusion: Choosing the Better Stock

Wolfspeed has an enterprise value of $6.5 billion but trades at nine times its forecasted fiscal 2025 revenue. Without immediate catalysts for improvement, its stock may remain under pressure. In comparison, although IonQ’s valuation appears steep at 78 times this year's projected revenue, investors might justify this by considering its potential for explosive growth in a developing market.

While neither stock may be a sound purchase at this moment, IonQ stands out as a potentially better investment due to its faster growth and first-mover advantage in a promising market. Wolfspeed, on the other hand, could struggle to maintain relevance in an increasingly competitive landscape, especially as more versatile chip manufacturers enter the SiC sector. Investors looking for exposure to AI should carefully weigh the merits of IonQ compared to Wolfspeed in their decision-making process.

AI, Stocks, Investment