SkyWater Technology: A Small Chipmaker with Exciting Growth Potential

jun | March 28, 2024

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The past few years have been full of change for SkyWater Technology (NASDAQ: SKYT). Since its IPO in 2021 during the global semiconductor shortage, a new wave of innovation in artificial intelligence has completely altered the market. While the chip shortage may be over for the industrial sectors that SkyWater serves, fresh demand is on the horizon, and U.S. initiatives like the CHIPS Act could significantly bolster this small but promising manufacturer.

A Unique Model and Investor Optimism

SkyWater boasts a unique business model, essentially serving as an incubator for new tech ventures. Their collaborative advanced technology services (ATS) involve joint research and development (R&D). Customers invest alongside SkyWater in the manufacturing tools and processes. This model has many analysts excited about SkyWater’s growth potential.

Currently, ATS accounts for about 80% of the company’s revenue. However, the real profitability lies in the long-term transition of ATS customers into wafer purchasers, a move that would dramatically increase silicon sales volume for SkyWater.

Government Partnerships Fueling Growth

The U.S. Department of Defense (DoD) is by far SkyWater’s most significant customer. This partnership goes back years and focuses on radiation-hardened chips for use in the challenging conditions of space and next-generation radar technologies.

The DoD has recently extended up to $190 million in funding over several years for SkyWater’s new Florida facility specializing in packaging chips for advanced computing systems. The company has also submitted applications for significant CHIPS Act funding aimed at expanding their primary silicon wafer manufacturing base in Minnesota.

One of our analysts believes that SkyWater can leverage these joint R&D efforts with the DoD to attract new customers, especially those in the burgeoning aerospace, automotive, and healthcare industries. However, for now, SkyWater remains very much in its growth phase, developing capacity and expertise as its long-term strategy unfolds.

Positive Financial Outlook

Despite its small size, SkyWater has displayed resilience, outperforming larger chipmakers who have struggled in the recent market downturn. The company’s Q4 2023 revenue was up an impressive 22% year-over-year, reaching $79 million. Management projects modest but continued growth throughout 2024, forecasting Q1 sales around $80 million, another increase of approximately 21% compared to the prior year.

Time Will Tell

SkyWater’s stock has certainly seen a rebound since last summer. While SkyWater remains unprofitable, there have been strides toward breaking even, partially thanks to customers investing in manufacturing equipment alongside them. In the past year, SkyWater has improved its operating margin to negative 5%, and management is optimistic about profitability within the next few years.

One of our analysts points out that the key to SkyWater’s success lies in converting ATS customers into full-fledged wafer buyers. The company seems confident in this outcome as they continue to invest in manufacturing capacity.

While the business model is still in its early stages, SkyWater remains a small-cap company worth watching. The current momentum, positive financials, and the promise of increased demand in industrial sectors all bode well for the company’s future. While it’s certainly premature to proclaim SkyWater as a top semiconductor stock, investors would be wise to keep a close eye on this unique and potentially game-changing chipmaker.