Wolfspeed (US:WOLF) has grabbed headlines across the globe this week after the company inked a historic long-term supply agreement (LTSA) with Renesas Electronics (JP:6723). This 10-year, $2 billion agreement marks a significant shift in the power semiconductor industry and has set the bar for future collaborations between industry leaders.

WOLF shares spiked 20% higher at the open before traders took profits, driving gains down to 11%. Renesas’ gains made on the announcement were short lived,  although the stock is still trading more than 135% higher in 2023.

Renesas is set to re-enter the power semiconductor business and in doing so, is banking on Wolfspeed’s prowess in silicon carbide (SiC) wafers. Those are used in electronic devices like power diodes, high-power microwave devices, and RF transistors, enabling efficient energy conversion and power management.

The $2 billion contract is Wolfspeed’s biggest-to-date supply agreement, dwarfing its previous $300 million deal with STMicroelectronics (US:STM).

This unprecedented deal not only signals Renesas’s confidence in Wolfspeed’s capabilities but also provides much-needed financial support for the latter’s ambitious $6.6 billion capacity expansion plans.

The pre-paid LTSA will funnel an additional $2 billion into Wolfspeed’s capital, facilitating its comprehensive spending plans which include expansions in Durham, build-out of the JP materials plant in Siler City, North Carolina, and the possibility of wafer processing operations in Germany.

With Renesas’s prepayment and recent financing led by Apollo Global Management (US:APO), Wolfspeed now has access to a sizable cash pot of around $5.5 billion. Additional capital sources include possible sale-lease-backs and more LTSA pre-payments. This additional capital is a major boost for Wolfspeed, assuaging any financial uncertainties for the near future.

This deal, however, is not without strings attached. According to Wolfspeed’s 8-K, the agreement includes a set of stipulations tied to the Renesas pre-payment, such as change-of-control provisions, a pre-payment penalty, and debt/lien limitations that Wolfspeed may incur.

Renesas, on its part, has ambitious plans for the SiC wafers. The company announced in May that it will begin producing next-generation power semiconductors made of SiC in 2025. These will be manufactured at a plant in Takasaki, northwest of Tokyo, and Wolfspeed will supply the wide-bandgap semiconductor materials.

Institutions Crowd in Renesas Trade

The enormous rally for Renesas has been driven by strong support from institutions in recent quarters. Fintel’s institutional analysis for JP:6723 highlighted that the number of institutions on the register grew by 8.3% during the most recent quarter to 351.

The average portfolio allocation sharply rose by 37.3% also during this time, driven mainly by the appreciating share price. Fintel’s Fund Quant Sentiment Score of 90.40 is a bullish indicator that incorporates this data and ranks the stock against 36,733 other global securities. The score ranks Renesas in 711th place or in the top 2% of out of screened stocks on our leaderboard.

The supply agreement, will start with 150mm wafers in 2025 and include 200mm a few years later, not only secures a stable SiC substrate supply for Renesas but also benefits Wolfspeed by securing a long-term customer and providing additional capital funding at an attractive rate.

Analyst Observations

Canaccord Genuity analyst George Gianarkas believes the strategic value for Wolfspeed has risen this week and thinks there is the potential for the company to gain market share with its relative surety of supply for gallium, which is reportedly being newly restricted by China’s Ministry of Commerce based on new restrictions. Canaccord has a ‘buy’ call on the stock with an unchanged $72 target price.

Fintel’s consensus target price of $66.48 suggests the market thinks WOLF is trading close to its fair value. This target could well be raised higher in the coming weeks as firms update expectations for the company.

By comparison, Fintel’s consensus target for Renesas is JPY ‎2,480 suggesting the market thinks the stock is around 12% over valued after its significant rally this year. The shares closed down 4.2% to JPY 2,717 on Thursday afternoon in Tokyo.

It’s a win-win situation for both parties involved, marking a significant evolution in the power semiconductor industry. The announcement has already had a positive impact on Wolfspeed’s stock, trading up 15% in premarket trading.

With this historic agreement, both companies have aligned their commitments toward each other’s growth strategies that should set the stage for a promising future in the semiconductor industry.

This article originally appeared on Fintel

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