Summary
- SkyWater Technology has pulled back into a great support level.
- SKYT stock is heavily shorted and has retraced about half of its rally.
- I like the risk/reward here for the bulls.
The semiconductors are some of the most volatile tech stocks in the market today. As a group, they are highly sensitive to economic conditions, tend to have huge swings in valuations, and generally offer a lot of trading opportunities. I think the group will be fine longer-term, but it’s been a huge struggle in 2022.
That goes for small cap semiconductor company SkyWater ( SKYT ), which has made enormous moves in both directions this year. However, after the most recent pullback, I think it’s a buy.
The stock closed on Friday at not only what should be price support – from a January relative low, as well as March and April relative highs – but also the rising 50-day simple moving average. This confluence of support is one of my favorite setups to trade because it greatly increases the odds support will hold. The 50-day SMA closed the week at 12.27 and that’s within pennies of the price support level I annotated. It’s also pennies away from where the stock closed, so it’s make-or-break time for SkyWater.
The indicators are also making me think the odds of the next move are higher, rather than a breakdown. The accumulation/distribution line continues to move higher over time, although it has pulled back during this selloff. The PPO was way overbought, but is now testing the centerline at the same time price support is being tested. This is exactly what you want to see from a stock that had a huge up move. It resets momentum for the bulls to make another push.
On the shorter-term side, the 5-day RSI is heavily oversold, and the 10-day rate of change finished Friday at -27% , another measure showing the stock is very oversold as it tests price support.
Finally, while the semis have been weak against the broader market, SkyWater has vastly outperformed its peers. At some point, the semis will attract big money from investors again, and when it does, you want to own the leaders. It’s hard to make a case SkyWater is not a leader in the space with that relative strength line.
Now, let’s take a look at the fundamental case to see if we’ve got support from the business itself for a longer period.
Growth on the horizon, but is it enough?
SkyWater is a little bit unique in the semiconductor space because it provides development and manufacturing services. The company engineers and develops processes in concert with customers, as well as manufacturing for silicon-based integrated circuits. SkyWater’s customers come from a wide variety of industries, and the company was spun off from Cypress Semiconductor, a company that was subsequently acquired by Infineon ( IFNNY ).
Since the spin-off, SkyWater has pushed its Technology-as-a-service, or TaaS , as a way to generate higher-margin revenue. The idea is that SkyWater uses its expertise to form teams with the customer, and together, more efficient, more cost-effective solutions can be found. The TaaS initiative has pushed the company’s Advanced Technology Services, or ATS, revenue from essentially nothing five years ago to about two-thirds of the total today.
In addition, it has greatly reduced the company’s reliance upon its former parent of Cypress (now Infineon), a reliance that continues to decline year after year. In other words, SkyWater is becoming its own company and making its own way, and based on the revenue numbers below, it looks like there’s more where that came from.
SkyWater’s revenue is cyclical in that it can see non-recurring bumps in the top line, such as from the big tool revenue number in Q1 of 2021. Over time, however, the important thing is that the dark green at the bottom – which is ATS revenue – continues to move higher.
Wafer Services revenue continues to roughly flat over time, and tool revenue is very lumpy but generally not a big factor. This is all about the company’s service business, and all indications are that SkyWater has found a winning formula. Of course, it needs strong customers and right now, the semiconductor business is reassessing demand after a massive boom in the past couple of years.
I still think longer-term the semiconductors are one of the most attractive groups in the market today, simply because demand continues to grow over time, and remember that massive customer groups like auto manufacturers continue to face shortages. Semiconductor results (and share prices) are volatile, and that certainly includes SkyWater. But if you’re bold enough, I think there’s a lot of value to be found.
Let’s now turn our attention to what analysts think, because I think there’s an improving story there as well.
We can see that revenue estimates came way down in 2021, but since this year began, we’ve actually seen them stabilize nicely. Now, I’d obviously love to see these moving higher, but stabilized is much better than declining. I’ll also point out that the gaps between the years are quite sizable, indicating still-strong year-over-year growth expectations. For an unprofitable company, sales growth is everything, and even after a rough year, the analyst community has plenty to be optimistic about with SkyWater’s prospects.
Other considerations
One thing you’ll need to keep in mind with SkyWater is that it’s really small; the company sports a market cap of just $512 million. That means that the stock can be illiquid at times, especially pre-market and after-hours. Unless you’re buying tens of thousands of shares, it should be fine, but you likely aren’t going to get particularly tight bid/ask spreads on this one.
Because it’s so small, and a semiconductor company, the share price is very volatile. You should be prepared for whipsaw and big moves in both directions, as a relatively small amount of buying or selling can move the price a bunch.
Third, short interest is very high, with Seeking Alpha reporting 24% of the float being short. That’s an extreme situation, which only amplifies the up and down moves in the stock. None of these are reasons for me not to want to own or trade SkyWater, but these are things you must be okay with if you’re going to take a position.
Let’s now turn to the valuation, which I think looks pretty compelling, all things considered. We have to use price-to-sales since SkyWater has no earnings, so we have that below for the past year and a half or so.
The stock peaked at 7X forward sales last year, but given the massive decline in growth stock valuations since that point, 7X sales isn’t a possibility anytime soon. However, the stock trades for 2.3X today, which is admittedly double what it was earlier this year, but still a long way off the rest of its trading since mid-2021. Where fair value may lie is in the eye of the beholder, but I’d venture to say it’s something like 3X to 3.5X forward sales, particularly if the company can find a way to get its revenue estimates moving higher again.
One final point I’ll make on the short interest is that given SkyWater is a very small semiconductor stock, and has almost a quarter of its float shorted, if we start to get a sizable up move, we could see a short squeeze. Remember the stock quadrupled over the summer, and while that’s certainly unlikely from here, the closer the stock gets to breaking out over the $20 mark, the more the shorts will panic. As with any other highly-shorted stock, this is NOT, I repeat NOT, a reason by itself to buy the stock. Short squeezes are very rare, but SkyWater at least has the setup in place, so I wanted to make sure it was covered.
I think overall, the risk/reward here looks great. We have a stock that made an enormous bull run but has pulled back sharply, and right into what should be great price support. It’s also oversold, so I see the risk as maybe 3% or 4% if you use stops below $12, but many times that in terms of upside potential.
For further details see:
SkyWater's Next Rally May Be About To Start