Summary
- The Q4 report reaffirmed the steady progress taking place at SkyWater Technology, helping the stock more than double in value YTD.
- SKYT has a number of tailwinds in its favor that have allowed it to negate the headwinds that have given other foundries problems.
- There are a number of other factors to take into consideration, which may cause some to think twice about getting in on SKYT.
- There is an argument to be made in favor of long SKYT, but there is also an argument to be made against it.
Semiconductor foundries don't have it so easy right now, unlike previous years when there was more demand than they could handle and foundries were very much in the driver's seat. However, not all are in the same boat. While most have seen their revenue fall flat or in outright decline, a few are still very much in growth mode. SkyWater Technology ( SKYT ) is one of them. Why will be covered next.
Strong gains at SKYT
Many foundries have fallen short of expectations in their most recent quarterly reports, but SKYT was able to easily surpass expectations, which was looking for Q4 revenue of $55.6M and a non-GAAP loss of $0.11 per share. Instead, Q4 revenue did better with an increase of 68.9% YoY to $65.1M, a record high.
SKYT still finished with a GAAP loss of $3M or $0.07 per share and a non-GAAP loss of $1.46M or $0.03 per share , but that's much less than before. The GAAP weighted-average of shares outstanding did rise to 42.6M in Q4 FY2022, up from 39.3M in Q4 FY2021. Adjusted EBITDA soared to a record $10.3M in Q4 FY2022, up from $3.8M in Q3 FY2022 and negative $4.7M in Q4 FY2021.
Operating income got out of the red with $1.3M. Non-GAAP gross margin reached a record 26.2%. On the flip side, SKYT still has to deal with total debt of $92.M on the balance sheet, partially offset by $30M in cash and cash equivalents. The table below shows how the numbers have gotten significantly better at SKYT. While there is a lot of work left to do, the trend looks very favorable.
It's also worth mentioning that one-time factors affected the headline numbers. SKYT recognized $4.7M of deferred revenue in Q4 with the associated multiyear government program concluding earlier than scheduled. If not for this one-time event, Q4 revenue would have been closer to $60M, which SKYT considers to be its baseline revenue.
(Unit: $1000, except EPS) | |||||
(GAAP) | Q4 FY2022 | Q3 FY2022 | Q4 FY2021 | QoQ | YoY |
Revenue | 65,087 | 52,326 | 38,533 | 24.39% | 68.91% |
Gross margin | 25.4% | 15.8% | (43.1%) | 960bps | 6850bps |
Operating income (loss) | 1,303 | (5,081) | (27,648) | - | - |
Net income (loss) | (3,041) | (6,939) | (27,036) | - | - |
EPS | (0.07) | (0.17) | (0.69) | - | - |
(Non-GAAP) | |||||
Gross margin | 26.2% | 16.8% | (6.1%) | 940bps | 3230bps |
Adjusted EBITDA | 10,339 | 3,815 | (4,748) | 171.00% | - |
Net income (loss) | (1,456) | (5,126) | (11,204) | - | - |
EPS | (0.03) | (0.13) | (0.28) | - | - |
Source: SKYT Form 8-K
If the Q4 numbers are out, then so too are the numbers for all of FY2022. FY2022 revenue increased by 30.8% YoY to $212.9M. SKYT ended FY2022 with a GAAP loss of $39.6M or $0.97 per share and a non-GAAP loss of $30.3M or $0.74 per share, both better than in FY2021. The table below shows how SKYT can look back at FY2022 as a year in which much was achieved.
(Unit: $1000, except EPS) | |||
(GAAP) | FY2022 | FY2021 | YoY |
Revenue | 212,941 | 162,848 | 30.76% |
Gross margin | 12.2% | (4.6%) | 1680bps |
Operating income (loss) | (29,767) | (57,104) | - |
Net income (loss) | (39,593) | (50,696) | - |
EPS | (0.97) | (1.76) | - |
(Non-GAAP) | |||
Gross margin | 13.7% | 2.0% | 1170bps |
Adjusted EBITDA | 7,717 | (2,629) | - |
Net income (loss) | (30,301) | (30,042) | - |
EPS | (0.74) | (1.05) | - |
The outlook sees FY2023 revenue growing by about 25% YoY. Note that such a growth rate is much higher than what other foundries believe is achievable this year. For instance, TSMC ( TSM ) expects its FY2023 revenue to remain flat to slightly up and United Microelectronics ( UMC ) sees revenue declining in the lows teens in FY2023. From the Q4 earnings call:
our quarterly revenue growth in 2023 and the resulting gross margin performance will depend on a number of factors, most notably on our mix of ATS programs, customers and tool derived revenues. Yet one aspect unique to SkyWater in a challenging macro environment is that our expected growth this year will be derived from established, funded and relatively secure ATS and Wafer Services programs. As a result, we expect to achieve revenue growth in 2023 that approaches our long-term objective of 25% annually."
A transcript of the Q4 FY2022 earnings call can be found here .
SKYT sees Q1 revenue at around $60M. While this does represent a slight decline QoQ, it's actually much better than what other foundries expect to achieve in today's market where demand for foundry services is struggling.
As we look to the first quarter, with revenues expected to be at or above the new baseline $60 million level we expect gross margins within the range of the 15% to 20%, similar to the normalized levels achieved in the second half of 2022."
Consensus estimates expect a GAAP loss of $0.18 per share and a non-GAAP loss of $0.12 per share on revenue of $60.8M in Q1. For the whole year, estimates predict a non-GAAP loss of $0.28-0.44 on revenue of $255-267M in FY2023. These numbers are projected to improve to a profit of $0.18-0.45 on revenue of $290-342M in FY2024.
Why SKYT is able to keep going when others are not
SKYT seems to be doing much better compared to other foundries. There is a reason for this. While SKYT is technically a foundry, it targets a niche part of the market. Unlike other foundries, SKYT is U.S.-based and a significant part of its business comes from defense and other U.S. government contracts, which tend to be less susceptible to downturns.
The Rad-Hard technology platform, for instance, is targeted at strategic defense systems, a market niche that cannot depend on foreign companies and thus goes to SKYT by default. This advantage is set to increase with the U.S. Chips and Science Act, which seeks to increase semiconductor manufacturing within the U.S. There are plans, for example, to build a $1.8B fab in Indiana with government assistance. This will help SKYT achieve its long-term target of $1B in revenue before the end of the decade in 2030.
Valuations might be an issue for some
However, SKYT is not perfect. Valuations, for instance, might not be so appealing for everyone. The table below shows some of the multiples for SKYT. EBITDA has only recently turned positive, but, on a forward basis, enterprise value of $718.7M is equal to 30.45 times EBITDA. In comparison, the sector median is 13x. Multiples tend to be on the high side, even if they are expected to come down as the quarterly numbers continue to get better.
SKYT | |
Market cap | $655.57M |
Enterprise value | $718.71M |
Revenue ('ttm") | $212.9M |
EBITDA | ($1.6M) |
Trailing GAAP P/E | N/A |
Forward GAAP P/E | N/A |
PEG GAAP | N/A |
P/S | 2.88 |
P/B | 12.22 |
EV/sales | 3.38 |
Trailing EV/EBITDA | N/A |
Forward EV/EBITDA | 30.45 |
Source: Seeking Alpha
The charts suggest it is time to be careful
Some may also want to think twice about SKYT with one look at the charts. The chart below shows how the stock has soared higher in 2023. In fact, SKYT is up 111% YTD, which means SKYT has outperformed all but a handful of stocks out there. In comparison, the iShares PHLX Semiconductor ETF ( SOXX ) has gained 19.5% YTD. The stock is likely due for some sort of correction after the move it made in this short amount of time. Note that short interest is elevated with the short float at 10.2%.
It doesn't help that insiders have been selling SKYT stock. While the selling does not necessarily imply anything in particular, it is likely to put doubts in some people's minds that it might not be such a wise move to buy a stock that has already more than doubled in price in less than two months. If anything, locking in profits by selling some if not all shares is likely to be on people's minds. The table below shows some of the high-ranking executives that have decided to sell shares.
Name | Title | Shares sold | Source |
Sonderman, Thomas | President & CEO | 10,000 | |
Litecky, Mark | Chief Revenue Officer | 10,000 |
Investor takeaways
There are a number of things to like about SKYT. The stock has clearly been a big winner thus far in 2023, having more than doubled in price. It's true most semis have done well and they have outperformed versus other stocks, but not all stocks get to more than double in value in less than two months like SKYT has done.
SKYT should have some sort of build-in resilience against the downturn that is currently sweeping through the semiconductor industry. Indeed, the latest quarterly numbers and outlook show that SKYT remains relatively unaffected by the downturn that has caused the numbers to decline at other foundries.
The quarterly numbers show a clear progression is taking place. SKYT is well on its way towards achieving a number of its targets, including gross margins in the high twenties to low thirties by the end of FY2024. While SKYT is not yet profitable in terms of GAAP or non-GAAP, it should get there in terms of the latter in FY2024 if the current trend is any indication. Operating income and EBITDA have turned positive. In short, a lot has been accomplished and things are looking up for SKYT. SKYT is a company on the move.
However, a lot is already priced into SKYT with multiples where they are. SKYT trades at much higher valuations that other companies in the sector. Most of them are also already profitable, something SKYT has yet to truly achieve. SKYT may be relatively safe from some of the headwinds causing problems, but if value is what you are looking for, then SKYT is probably not it.
The stock has already more than doubled in price this year, even though we are barely two months into 2023. It's not impossible for the stock to move higher, but the odds favor a move lower rather than a move higher. Elevated short interest indicates that there is a whole bunch of people out there who are betting on exactly this. While insiders have many legitimate reasons to sell some of their holdings, especially after the recent run-up in price, the fact that they are selling is unlike to inspire taking the risk in SKYT.
I am therefore neutral on SKYT for the reasons above. An argument can be made in favor of long SKYT, but there is also an argument to be made against it. In the end, different people are likely to come to different conclusions as there is no one size fits all regarding SKYT. To most, staying in the middle and keeping your options open looks best.
For further details see:
SkyWater Technology: The Semiconductor Foundry Bucking The Trend