2023-07-25 13:31:19 ET
Summary
- I think that SkyWater Technology's actual Q2 2023 revenue and bottom line will exceed the sell-side analysts' expectations.
- I am of the opinion that the above-expectations second quarter results for SKYT will be the re-rating catalyst for the stock.
- My Buy rating for SKYT stays unchanged, as I think SkyWater Technology's shares are likely to trade higher after its Q2 earnings announcement in early August.
Elevator Pitch
I continue to assign a Buy rating to SkyWater Technology, Inc. (SKYT) shares. I previously published an initiation article for SKYT on May 15, 2023, reviewing the company's results for the first quarter of this year.
My attention turns to the preview of SkyWater Technology's Q2 2023 earnings. I predict that SKYT's second quarter results will come in above expectations, after reviewing the current consensus financial numbers for the company and the management's forward-looking commentary. I stick to a Buy rating for SKYT, as a Q2 2023 results beat should drive the company's share price up in my view.
SkyWater Technology's Second Quarter Results Release Date
Last week, SKYT issued a press release noting that the company will be revealing its Q2 2023 results on August 7 after trading hours.
I detail the sell-side's expectations of SkyWater Technology's financial performance in the second quarter of the current year in the next section.
The Market Expects SKYT To Deliver Slower Revenue Growth And Wider Losses For Q2
Analysts are of the view that SkyWater Technology's second quarter financial results will be inferior to that of what SKYT achieved in Q1 2023.
SKYT's top line is forecasted to increase by +34.6% YoY from $47.4 million for Q2 2022 to $63.8 million in Q2 2023 based on consensus financial figures sourced from S&P Capital IQ . SkyWater Technology's expected revenue growth for the second quarter is pretty good in absolute terms, but the company registered a relatively faster pace of top line expansion at +37.3% YoY for Q1 2023.
Also, the market sees SkyWater Technology reporting wider losses in Q2 2023. The sell-side's consensus financial estimates point to SKYT's non-GAAP adjusted net loss per share widening from -$0.03 in Q4 2022 and -$0.06 in Q1 2023 to -$0.11 for Q2 2023.
In the subsequent section, I determine whether SKYT will surprise the sell-side analysts and buy-side investors in a positive or negative manner when the company discloses its second quarter financial performance in early August.
My Bet Is On Above-Expectations Second Quarter Results For SkyWater
I hold the view that SkyWater Technology will have achieved a better than expected set of financial results for the second quarter of 2023.
With regards to expectations of future revenue growth, SKYT stressed at its first quarter results briefing that "in the commercial space, customer R&D investments continue", and emphasized that there has been an "acceleration of customer demand on certain aerospace and defense programs."
In an earlier media release published on May 2, 2023, SkyWater Technology disclosed that one of its key commercial clients in the quantum computing space, PsiQuantum, "has expanded its development agreement with" SKYT. This provide support for SKYT's bullish opinion that its commercial customers haven't pulled back on research & development spend.
Separately, SKYT's revenue derived from defense and aerospace programs is most likely going to remain resilient, as the US government needs to maintain such spending for such programs at elevated levels in light of geopolitical tensions and conflicts.
In that respect, I think that SkyWater Technology's YoY top line expansion for Q2 2023 will be on par with that of Q1 2023, which will surpass the market's expectations of a moderate pace of revenue growth for SKYT in the second quarter.
When it comes to SkyWater Technology's future profit margins, a faster than expected rate of revenue expansion for Q2 2023 (as detailed above) will contribute to above-expectations profitability for SKYT in the quarter thanks to the favorable effects of operating leverage.
Also, SKYT's Wafer Services business has room for margin expansion, which might not have been fully factored into the current consensus Q2 bottom line forecast for the company. With my mid-May 2023 initiation article, I highlighted that SkyWater Technology's Wafer Services and Advanced Technology Services business segments contributed around one-third and two-thirds of the company's top line for the most recent fiscal year, respectively.
It is worthy of note that SkyWater Technology indicated at its Q1 2023 results call that its Wafer Services segment has the potential to raise prices and cut costs by improving operating efficiency. As such, I believe that higher-than-expected margins for the Wafer Services business could be another factor driving a second quarter bottom line beat for SKYT, apart from above-expectations top line growth.
Q2 2023 Earnings Beat To Drive Valuation Multiple Expansion
SkyWater Technology trades at consensus forward fiscal 2024 Enterprise Value-to-Sales and EV/EBITDA valuation metrics of 1.2 times and 9.2 times (source: S&P Capital IQ ), respectively.
SKYT's Enterprise Value-to-Sales multiple of slightly above 1 times and its EV/EBITDA ratio at the high single digit level seem to be inconsistent with the company's growth outlook. As a comparison, the Wall Street's consensus FY 2022-2026 revenue CAGR for SkyWater Technology is +21.6%.
In my view, above-expectations top line and bottom line for SKYT in Q2 2023 will be the catalyst required to re-rate SkyWater Technology's shares, as investors could gain confidence in SKYT's medium-to-long term prospects following its potential second quarter earnings beat.
Closing Thoughts
SKYT's valuations are still pretty attractive, considering its single-digit EV/EBITDA multiple and its Enterprise Value-to-Sales ratio of just 1.2 times. I expect a positive re-rating of SkyWater Technology's valuations to be realized if/when SKYT reports better than expected results for Q2 2023 next month. This justifies my Buy rating for SkyWater Technology.
For further details see:
SkyWater Technology: Expecting A Q2 Results Beat