SkyWater Technology Inc: Why the Market Has it Wrong on This Chip Foundry Stock

SkyWater Technology Inc: Why the Market Has it Wrong on This Chip Foundry

SKYT Stock Sell-Off Presents Aggressive Opportunity

Newly issued stocks have taken a beating this year. The Renaissance IPO ETF (NYSEARCA:IPO) has fallen by 16% over the past three months, while the S&P 500 has advanced five percent. While the initial public offering (IPO) segment tends to be riskier because the companies tend to be less established, IPOs shouldn’t be avoided.

In the U.S. semiconductor space, which will be a major growth area as the government gets involved, there are numerous opportunities. President Joe Biden has earmarked tens of billions of dollars to drive domestic chipmaking.

To play the domestic computer chip strategy, I like SkyWater Technology Inc (NASDAQ:SKYT). The chip foundry’s stock debuted at $15.50 in April, jumped to $34.43 in September, and has since fallen back to just above its IPO price.

In my view, the stock market is underestimating SkyWater stock’s potential. SKYT stock provides a compelling contrarian opportunity for patient investors.

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Chart courtesy of StockCharts.com

SkyWater Stock Battered by Weakening Fundamentals

SkyWater Technology Inc has been going through some pains that have led to its top-line and bottom-line estimates to fall. That triggered the selling of SKYT stock, but for contrarian investors who are willing to ride out the bumps, I see a high risk/reward situation with SkyWater stock.

The company’s revenues in its last three reported years were lackluster, but things are expected to improve.

While the consensus analyst estimate for SkyWater Technology has declined, the company is expected to grow its revenues to $158.9 million in full-year 2021 and to $190.8 million in 2022. (Source: “SkyWater Technology, Inc. (SKYT),” Yahoo! Finance, last accessed December 13, 2021.)

The company’s trailing 12-month rolling revenues of $164.1 million point to an improvement.

Fiscal YearRevenues (Millions)Growth
2018$132.2N/A
2019$136.73.5%
2020$140.42.7%

(Source: “SkyWater Technology Inc.” MarketWatch, last accessed December 13, 2021.)

What I also like about SKYT stock is the company’s ability to generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA), albeit there was weakness in the last two reported years.

Fiscal YearEBITDA (Millions)Growth
2018$29.0N/A
2019$16.9-41.6%
2020$12.3-27.4%

(Source: MarketWatch, op. cit.)

SkyWater Technology Inc’s bottom line has been shaky. Its generally accepted accounting principles (GAAP) earnings-per-share (EPS) losses and its adjusted EPS losses are expected to continue.

Previous estimates had the company potentially delivering adjusted profitability in 2022, but that forecast has been revised downward.

The current consensus has SkyWater Technology Inc reporting an adjusted loss of $0.90 per diluted share for this year and a loss of $0.59 per diluted share for 2022. (Source: Yahoo! Finance, op. cit.)

The company will need to get a grip on its expense side and progress toward profitability and higher EBITDA.

Fiscal YearGAAP Diluted EPSGrowth
2018$0.00N/A
2019-$0.42-24,629%
2020-$0.53-26.6%

(Source: MarketWatch, op. cit.)

In the meantime, SkyWater Technology Inc has produced positive free cash flow, despite its losses.

Fiscal YearFree Cash Flow (Millions)Growth
2018$7.1N/A
2019$2.5-65.3%
2020$10.4322.5%

(Source: MarketWatch, op. cit.)

Analyst Take

SkyWater Technology Inc is a work in progress that could deliver price appreciation to its shareholders.

The broad support for domestic computer chip production should provide strong tailwinds for SkyWater stock. It will be a matter of execution, and could take some time.

While SKYT stock faces hurdles, I like its risk/reward ratio after the selling, especially if the company can sort things out, financially.