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SkyWater Technology, Inc. (NASDAQ:SKYT) is a growing technology company which is involved in the development of innovative semiconductor products. I expect the company’s long-term (five year) revenue will grow at a CAGR of around 6% driven by market share growth. Therefore, I am bullish on the company for the long term. I believe long-term investors can buy the company’s shares around the current price to maximize profit.
SkyWater is an independent and pure-play technology foundry which makes advanced semiconductor devices for its OEM customers. In the company’s technology-as-a-service model, its proprietary technology is used to co-develop process technology IP with its customers using its Advanced Technology Services (ATS) for a range of products, such as integrated circuits, or ICs, and related micro- and nanotechnology applications.
Growth Drivers
Analog and Mixed-Signal Based Technologies
The company’s primary growth driver is its S90 (90 nm gate), S130 (130 nm gate) and CMOS (greater than 130 nm) process flows. Using these process flows the company manufactures a number of devices at its fab for different markets, such as IoT, memory, automotive, consumer wearables, and vision systems. The company performs well in the competitive environment because its process flow technology helps ASIC designers produce a wide range of system-on-chip devices, or SoCs, (which is a difficult task) with embedded memory. The company’s unique IP technology, which it acquired from Cypress, generates additional demand from IoT customers. With the expansion of 5G networks globally, the demand for IoT devices leveraging 5G is increasing, which in turn is creating sustainable market share growth for the company’s process flows and IP products. These are the reasons why the company’s revenue is expected to grow at a significant rate in the long term.
Rad-Hard Product Family
The company’s Rad-Hard product family is its another growth driver, which is used extensively in microelectronics and mission-critical applications. The products are used primarily in aerospace and defense, and bio-health end markets. The company’s Rad-Hard products beat competitor products by a wide margin since they offer low-power device-making capabilities, and faster time-to-market facility. In 2019, the company was awarded a rad-hard program by the DoD of up to $170 million to fund its facility expansion. This was done to manufacture 90 nm mixed-signal CMOS, for which production has started earlier this year. I expect this will boost the company’s revenue growth to a significant extent.
Competition
SkyWater operates its business in an extremely high competitive environment. Its competitors include Taiwan Semiconductor Manufacturing Company Limited (TSM), United Microelectronics Corporation (UMC), Intel Corporation (INTC), Vanguard International Semiconductor Corporation, Tower Semiconductor Ltd. (TSEM), X-FAB Silicon Foundries SE (OTCPK:XFABF), ON Semiconductor Corporation (ON), Global Foundries Inc, and MIT Lincoln Labs. The company competes on the basis of quality of products, breadth of products offered, and price.
The company’s primary competitive advantage is that its pure-play technology foundry model combines integrated process technology development services and expertise needed to address the high levels of customization, which could generate significant revenue growth for the company in the longer term. The company’s another competitive advantage is that it offers synergistic products ensuring rising demand for the products to its customers. As a result, demand for the company’s products is increasing, which will be conducive for the company’s long-term revenue growth.
Third Quarter 2022 Results
The company’s third quarter 2022 total revenue came in at $52.3 million, up 49% year-over-year. GAAP net loss came in at $6.9 million, or $(0.13) per share, compared to a net loss of $13.9 million, or $(0.36) per share, in the year-ago period. Adjusted EBITDA was $3.8 million or 7.3% of revenue, compared to $(2.7) million, or (7.7)% of revenue in the year-ago period.
The company’s third quarter 2022 financial result was in line with expectations and moderately good. Top-line increased driven by strong momentum generated by the company’s ATS programs and partnerships. This was helped by increased factory efficiencies and significant improvements in gross margin. The company believes that its business is gaining momentum due to its unique business model, in which R&D programs and strategic long-term investments are driving the majority of its revenues.
The company is benefitting from its increased level of investments in the domestic semiconductor ecosystem, which I believe will gather steam in the next three to five years. The company has a strong pipeline of innovative semiconductor devices, which is expected to drive its long-term revenue growth at an impressive rate.
Valuation
SkyWater’s peer group companies include Valens Semiconductor (VLN), Transphorm (TGAN), Magnachip Semiconductor Corporation (MX), Sequans Communications S.A. (SQNS), Rigetti Computing (RGTI).
|
SKYT |
VLN |
TGAN |
MX |
SQNS |
RGTI |
|
|
Price/Sales (TTM) |
1.98 |
4.71 |
19.15 |
1.15 |
2.81 |
11.78 |
|
EV/Sales (TTM) |
2.54 |
3.11 |
19.34 |
0.48 |
3.94 |
4.48 |
|
Price to Book (TTM) |
10.48 |
2.43 |
10.27 |
1.05 |
37.27 |
1.04 |
(Data Source: Seeking Alpha)
SkyWater is available at a cheap valuation compared to its peer group companies. The company’s balance sheet comprises of cash and equivalents of $9.3 million, and total debt of $73.7 million. The company is cheap because its potential is underestimated by the market, and it is indebted. The company’s process flow technology has immense potential for commercial success, which could drive the company’s market share growth to a significant extent. I believe the technology will gradually be widely adopted going forward driven by its unique competitive features. As a result, I expect the company’s revenue will grow at a CAGR of around 6% in the next three to five years. This will boost the company’s share price growth meaningfully in the long term.
Assuming the company’s revenue will grow at a CAGR of 6% in the next five years, I will find out the company’s long-term share price. The company’s trailing 12-month revenue is $186.40 million, and at a CAGR of 6% the company’s end-2027 revenue will be $249.50 million, or $5.99 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 1.25x and 8x. I expect the company’s price to sales multiple will touch a high of around 5x in the next five years driven by the company’s innovative technology which creates unique products leading to market share growth. Applying a price to sales multiple of 5x on the company’s end-2027 revenue per share, I get the company’s end-2027 share price as $29.95.
Risks
SkyWater’s customers do not offer any long-term sale commitments, and they can cancel orders any time. Customers may involve in delays in delivering orders. Customers’ cancellations and delays may negatively affect SkyWater’s revenue growth and operating performance.
Evolving technologies seek integration of functionalities of several microchip components onto a single chip at an increasing rate. If SkyWater’s customers’ requirement of integrated solutions is not met by the company, the demand for its solutions could slow down, which could result in deterioration in the company’s operating results and revenue growth.
Conclusion
SkyWater Technology’s revenue growth opportunities come from its differentiated semiconductor solutions. The solutions are sold to different markets, such as IoT, memory, automotive, and consumer wearables. Since the company’s semiconductor solutions have significant acceptance in the marketplace, the company’s revenue growth is expected to expand in the long term. Long-term investors can buy SkyWater Technology, Inc.’s shares around the current price.
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