Government Support for Tech Industry Could Benefit SKYT Stock

Semiconductor stocks were under pressure for most of 2022, but they've been rallying since their October 2022 low. The Nasdaq went up by about nine percent in January of this year. While there continue to be macroeconomic uncertainties for tech stocks, the long-term view is positive.

In particular, the signing of the CHIPS and Science Act of 2022 is expected to improve the competitiveness of the U.S. tech industry and boost the value of semiconductor-related stocks. President Joe Biden has earmarked tens of billions of federal dollars for driving up the domestic production of microchips.

To play this government strategy, investors might want to consider SkyWater Technology Inc (NASDAQ:SKYT), a provider of semiconductor development and manufacturing services. 

In April 2021, SkyWater stock debuted on the market at $15.50. In September 2021, SKYT stock mounted a strong rise to $36.80. In 2022, technology stocks dove, and SkyWater stock fell by 88% to $4.43 in May 2022.

Shares of SkyWater Technology Inc rallied by about 55% in January 2023, and I think there are more gains to come.

Chart courtesy of StockCharts.com

SkyWater Technology Inc Presents a Contrarian Opportunity

Like many small semiconductor companies, SkyWater has been facing numerous challenges as it grows its operations.

The company's financial growth was slow until its revenues surged by 16% to their record $162.9 million in 2021. SkyWater Technology Inc's revenues then rose to $186.4 million in the 12 months to September 2022.

Analysts estimate that the company will report revenues of $202.9 million for 2022. They expect that SkyWater's revenues will then grow by 22.3% to $248.2 million in 2023. (Source: “SkyWater Technology, Inc. (SKYT),” Yahoo! Finance, last accessed February 2, 2023.)

This implies that the company currently has a reasonable valuation of 1.9 times its 2023 consensus revenue estimate.

(Source: “SkyWater Technology Inc.” MarketWatch, last accessed February 2, 2023.)

SkyWater generated positive earnings before interest, taxes, depreciation, and amortization (EBITDA) from 2018 to 2020, prior to delivering a negative EBITDA result in 2021. The company is on track to report negative EBITDA for full-year 2022, but it had $2.0 million in EBITDA in the third quarter.

(Source: Ibid.)

The bottom line has proven to be difficult for SkyWater Technology Inc. It has reported two straight years of bigger generally accepted accounting principles (GAAP) diluted earnings-per-share (EPS) losses.

I'd like to see the company get a grip on its cost side and begin to reduce its losses. Analysts estimate that SkyWater Technology Inc narrowed its adjusted loss to $0.82 per diluted share in 2022 and that it will reduce that further to $0.32 in 2023. (Source: Yahoo! Finance, op. cit.)

(Source: MarketWatch, op. cit.)

SkyWater Technology Inc produced positive free cash flow (FCF) in three straight years before having a major decline in 2021. Analysts estimate that the company's FCF continued to be negative in 2022, but SkyWater reported $2.0 million in positive FCF for the third quarter.

(Source: MarketWatch, op. cit.)

Analyst Take

SkyWater stock is a high-risk semiconductor play.

SkyWater Technology Inc needs to stop draining cash and to continue narrowing its financial losses. Investors hope that the U.S. government's support for domestic microchip production will help SKYT stock, but the company still needs to improve its financials.