SkyWater – A Very Semi, Semi Play (NASDAQ:SKYT)

When SkyWater Technology (NASDAQ:SKYT) went public a year ago I had a lot of questions. The semiconductor play was positioned in an interesting manner amidst chip shortages being an issue already at the time, while the US status was set to bring some real advantages as well.

That positioning play has not played out, as SkyWater has been an utter disappointment with declining sales and increasing losses reported since the offering, in a very strong semiconductor market. With shares having come under great pressure, it is the low expectations and a reasonable guidance for growth in 2022 potentially creating an interesting set-up.

Former Take

SkyWater is a US owned and independent semiconductor company with a fabrication laboratory in Minnesota and packing services located in Florida. The company claims that it has a distinctive approach by focusing on technology which is co-developed together with customers, but that is not too uncommon within the industry. The ¨US¨ angle is important, actually a key factor to obtain a large contract from the Department of Defense.

The company originates from Cypress, after it divested these activities in 2017. The company went public at $14 per share, in April of last year, levels at which the company was awarded a half a billion enterprise valuation. This valuation was applied to a business which generated $137 million in sales in 2019 on which a GAAP operating loss of $9 million was posted, albeit that losses came in flat if we adjust for a contingent valuation consideration. Revenues were virtually unchanged at $140 million in 2020, with operating losses posted at $6 million.

While the company claims to cater high margins segments, its gross margins were stuck around 15%, not too convincing margins. Preliminary first quarter results for 2021 revealed a revenue number of $46 million, for a run rate of $184 million, as the question was what margins could look like. Even if I believed a $200 million run rate in terms of sales was possible on which margins of 5-10% could be achieved, earnings would be stuck at $0.25-$0.50 per share, too minimal to see appeal at $20, levels at which shares traded after the first day of trading.

As it turned out shares actually hit a high of $35 in October, which surprised me given the fundamental performance. This came after first quarter sales actually came in higher than expected at $48 million, yet sales fell to just $41 million in the second quarter, with sales actually down to $35 million in the third quarter. Moreover, this was accompanied by increasing net losses, not a great combination, even as shares fell back to $14 in January.

At those levels, shares of the company were awarded a half a billion enterprise valuation, at 3-4 times sales, but amidst dismal sales growth rates and poor margin trends. Further, these trends were particularly worrying as the sector at large was seeing great operating momentum, indicating a real underperformance.

Further Declines

Since January shares have fallen further, trading down from $14 to just $8 by now, a dramatic near 80% pullback from the highs. In February the company posted its fourth quarter results with revenues coming in at $38.5 million, marking a modest increase on a sequential basis. Worrisome is that adjusted EBITDA losses came in at $4.9 million, marking further declines on that metric. The losses made that net debt rose to $46 million, a worrisome trend given the losses.

On the bright side is the comment in the conference call that the company sees 2022 sales to increase by some 25%, likely boosting gross margins as well. With a diluted share count of nearly 40 million shares, the company is awarded a near $400 million enterprise valuation here, as the decline in the share price is in part offset by increasing debt levels. The guidance calls for 2022 sales at more than $200 million, yet the real question is what margins will do after adjusted gross margins for the year 2021 only totaled $6 million, by far not enough to cover the operating costs.

Needless to say is that valuation multiples keep shrinking at 2 times sales, yet the margin trends, or lack of improvement on that side is worrying. The 2022 guidance leaves room for some potential, but unfortunately the anticipated margin gains are not quantified, leaving investors in the dark and the company likely lossmaking for now.

While the shares have been an utter disappointment, I am still cautious, but the overall valuation multiples have narrowed in a big way at just 2 times sales while some upbeat trends are expected this year, although they first have to be delivered upon. Too early for me to go bottom fishing, but I have not entirely written down the stock just yet.