2023-05-15 05:40:54 ET
Summary
- SkyWater Technology's Q1 2023 top line and bottom line both came in above expectations, and SKYT has guided for strong revenue expansion and gross margin improvement in FY 2023.
- I deem SkyWater Technology's shares to be undervalued based on a comparison of SKYT's current Enterprise Value-to-Revenue multiple with its short-term and long-term financial outlook.
- I assign a Buy rating to SKYT on the basis that the stock warrants a positive valuation re-rating.
Elevator Pitch
I have a Buy investment rating for SkyWater Technology, Inc.'s ( SKYT ) stock. SKYT's first quarter financial performance was better than what the analysts had forecasted, and its 2023 guidance implies that the company's financial results for the full year will remain reasonably good. SkyWater Technology is trading at a meaningful discount to its peers based on the Enterprise Value-to-Revenue metric, and I expect the valuation gap between SKYT and its peers to be narrowed over time. Given the mismatch between SkyWater Technology's current valuations and its financial outlook, I assign a Buy rating to SKYT's shares.
Business Overview
In its fiscal 2022 10-K filing , SkyWater Technology calls itself as an "independent, pure-play technology foundry that offers advanced semiconductor development and manufacturing services from our fabrication facilities" in the US.
How SkyWater Technology Is Different From Other Foundries
A Brief Description Of SkyWater Technology's Two Types Of Services
SKYT derived 66% and 34% of the company's FY 2022 revenue from Advanced Technology Services and Wafer Services (as described in the chart above), respectively as disclosed in its 10-K filing.
SKYT Delivered Above Expectations Q1 Results
SkyWater Technology revealed its financial performance for the first quarter of 2023 last Monday. The company achieved faster than expected revenue growth and a narrower than expected loss for the most recent quarter.
Top line for SKYT increased significantly by +37% YoY from $48.1 million for Q1 2022 to $66.1 million in Q1 2023. Prior to the company's recent quarterly results announcement, Wall Street had predicted that SkyWater Technology's revenue will grow by +26% to $60.8 million as per consensus estimates. At its Q1 2023 results call , SkyWater Technology highlighted that the +9% top line beat for Q1 2023 was largely driven by the "extensions and expansions of several existing contract awards" for the company.
SKYT's normalized net loss per share narrowed meaningfully from -$0.33 in the first quarter of 2022 to -$0.06 for the most recent quarter. The company's actual non-GAAP adjusted net loss turned out to be way better than the sell-side analysts' consensus bottom line forecast of -$0.12 per share. SkyWater Technology indicated in its Q1 2023 results presentation slides that the company had achieved "strong progress" relating to "cost reduction efforts as well as overall fab efficiency gains", which allowed it to deliver above expectations bottom line for Q1.
Favorable 2023 Financial Outlook For SkyWater Technology
SKYT guided at the company's recent first quarter results briefing that it will continue to maintain a reasonably fast pace of top line expansion and work on profitability improvement in the current year.
In terms of the top line, SkyWater Technology sees itself registering a revenue growth rate of 25% for 2023, which is the same as its top line CAGR goal in the long run. At its most recent quarterly results call, SKYT stressed that it has "multiple DoD (Department of Defense) programs ramping with increased scale and scope" with funding "committed." This explains why SKYT should have no issues meeting its +25% top line growth guidance for this year.
With respect to profitability, SKYT revised the company's FY 2023 gross profit margin guidance from 15%-20% previously to the high teens to low twenties percentage range. As a reference, the company's gross profit margin for FY 2022 was much lower at 13.7%. Positive operating leverage will be the major factor supporting SkyWater Technology's gross profit margin expansion in 2023. SKYT specifically mentioned about its expectations that "higher revenue levels will lead to increased absorption of our fixed costs" in FY 2023.
SKYT's Valuations
SkyWater Technology's shares are undervalued in my opinion, based on a review of the company's growth prospects and its peers' valuations.
The market currently values SKYT at a consensus forward next twelve months' Enterprise Value-to-Revenue multiple of 1.85 times based on S&P Capital IQ valuation data.
SkyWater Technology's long-term top line CAGR target is 25%, while the consensus FY 2023-2026 revenue CAGR projection for SKYT is +21.6%. Separately, SKYT is expecting substantial gross profit margin improvement in the short term. In the preceding section, I touched on SkyWater Technology's expectations of the company's gross margin increasing from 13.7% in FY 2022 to the high teens to low twenties percentage level for the current year. SKYT is targeting to further improve its gross margin to the high twenties to low thirties range by FY 2024 as per management commentary at its Q1 results call.
Taking into account SKYT's revenue growth and gross profit margin improvement expectations, it will be reasonable for SkyWater Technology to command an Enterprise Value-to-Revenue valuation multiple of 2.5 times or higher just like its peers. SKYT's peers, Tower Semiconductor ( TSEM ), ON Semiconductor Corporation ( ON ), and Taiwan Semiconductor Manufacturing Company ( TSM ), are currently trading at consensus forward Enterprise Value-to-Revenue multiples of 2.5 times, 4.4 times, and 5.4 times (source: S&P Capital IQ ), respectively.
In summary, the market hasn't given SkyWater Technology sufficient credit for its positive top line growth outlook and profitability improvement potential, so SKYT deserves to trade at a higher valuation multiple and narrow the valuation gap with its peers.
Concluding Thoughts
Only a minority of companies are able to remain resilient and deliver decent financial results in a weak economic environment, and SkyWater Technology is one of those that fits the bill. SKYT has demonstrated its resilience in tough times (thanks to having exposure to the non-cyclical defense sector) as evidenced by its recent Q1 2023 results and its FY 2023 guidance. Furthermore, SkyWater Technology's shares are inexpensive considering its consensus forward Enterprise Value-to-Revenue multiple of below 2 times. This explains why I have decided to award SKYT with a Buy rating.
For further details see:
SkyWater Technology: Favorable Outlook Supports A Higher Multiple