SkyWater Technology: Quality Niche Semiconductor Foundry

PhonlamaiPhoto Overview SkyWater Technology (NASDAQ: SKYT ) is a semiconductor manufacturing company headquartered in Minnesota. Working at the production level of the supply chain, SkyWater can be considered a ‘pure play’ foundry in that they focus exclusively on manufacturing chips instead of designing them. The firm’s facilities operate exclusively out of the USA. This company is fairly new, being founded in 2017 via a private equity acquisition of Cypress Foundry Solutions. SkyWater then proceeded to conduct an initial public offering in Q2 2021. Since then, it has trailed both the NASDAQ Composite as well as the iShares Semiconductor ETF ( SOXX ) in terms of price performance. SeekingAlpha.com SKYT 2.20.23 While a niche firm, SkyWater came to my attention as it was the company that had produced the wafer held up by President Biden during his signing of the CHIPS Act. The firm stands to benefit from the investment within the bill as well as the secular trends affecting reshoring of the semiconductor supply chain more generally. This article will review the company’s business & financial performance to see where it’s headed. npr.org 2.20.23 Business Highlights The main highlight of SkyWater’s business is that they are an active contractor for the US Department of Defense. This positions them well given the current reconfiguration of the semiconductor supply chain. For the DoD, the firm is focused on producing a very specific and strategic kind of computer chip: radiation-hardened. This means that these chips are able to withstand levels of radiation far beyond that of regular computer chips while continuing to operate normally. This kind of chip is designed to work in outer space, as well as other contexts wherein high levels of radiation could occur. The company had received an initial commitment of $170M for the development and production of these chips in Q4 2019, with $80M up front. In Q4 2022, the firm announced that the first step of the project had been deemed a success, and the remaining portion of the capital is now set to be paid out. Overall, this bodes well for the company going forward, although this contract is still in its early stages. The firm also has commercial clients, with the main one being the company that had originally spun out the fabrication facility that became SkyWater: Cypress Semiconductor (now Infineon). Financials SkyWater’s latest earnings report came in positively, with a beat against consensus on both EPS as well as revenues. This has also occurred against a backdrop of rising revenues in general, with YoY growth continuing to pick up with the latest report. Over the last two years, the firm has yielded healthy double-digit growth in its top line. SeekingAlpha.com SKYT 2.20.23 SeekingAlpha.com SKYT 2.20.23 Nonetheless, SkyWater is still not profitable and has posted 5 straight years of negative net income. SeekingAlpha.com SKYT 2.20.23 This has resulted in an accumulated deficit of $94.1M as of the last report, 44.2% of its fiscal year 2022 revenues. While this figure indicates that the company will need to generate sustained profits in order to achieve a positive fundamental valuation, it is offset in my view by the increasingly positive EBITDA picture. While the unadjusted figure is still marginally negative, management made clear on the latest earnings call that the adjusted figure was $10.3M. This is an important stepping stone to have achieved for generating positive net income in the near-term, and the company expects EBITDA to continue to improve throughout the upcoming year. SeekingAlpha.com SKYT 2.20.23 SeekingAlpha.com SKYT 2.20.23 Along with this profitability trend line, the company showed positive cash flow during the last fiscal year. While debt service did impact its FCF picture, it was still positive on a levered basis – another sign that things are headed in the right direction. SeekingAlpha.com SKYT 2.20.23 Overall, it is good to see the accelerating revenue growth, positive EBITDA, and positive cash flow that the company was able to generate last year. Having hit important inflection points across profitability and cash flow, the firm appears well-positioned to have this performance flow through to the bottom line in the not-too-distant future. Conclusion There is a lot to like about this stock in my perspective. As mentioned, the company is directly benefitting from the secular semiconductor trends that we are seeing. Being a pure US-based fabrication facility, it should continue to do so. Additionally, the niche that it is actively developing for building radiation resistant chips is an interesting one. The use cases for this include hardware put into […]

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