MirageC/Moment via Getty Images
MirageC/Moment via Getty Images
SkyWater Technology (NASDAQ:SKYT) rallied into 2024 and by doing so negated the big drop the stock suffered in H2 2023. While SKYT has yet to release the final report for FY2023, the year 2023 can already be said to have been a productive one for SKYT with both the company and the stock recording gains. In fact, SKYT can be said to have outperformed most other foundries in what was a down year for the industry. However, the stock has stalled in 2024 and there may be a reason for this. Why will be covered next.
A previous article from May 2023 rated SKYT a buy after concluding that there are a number of tailwinds favoring SKYT in the next few years. For instance, the ongoing efforts by the U.S. government to bring back chip manufacturing should work in favor of a local foundry like SKYT. The U.S. government has made various financial incentives available through initiatives like the U.S. Chips and Science Act, which SKYT has benefited from. The latest example being a $120M award from the U.S. Department of Defense in January 2024.
SKYT rose initially, but it suffered a major setback in H2 2023 when the stock collapsed after disappointing quarterly results in early August. The stock declined for months, but it recovered when the following report came in better than expected, which helped SKYT recoup the previous losses. The stock rallied into 2024, but the stock has stalled recently by basically going sideways as shown in the chart below.
Source: Thinkorswim app
Notice how the stock has pivoted around $9 or so in recent weeks, which also happens to be a price level where the stock has spent a lot of time in the past. For instance, the chart shows how the stock spent a lot of time around this price level from April through July of last year. This may not be by accident. Recall how the November 2023 and 52-weeks low of $4.73 was preceded by a gradual decline that started with the February 2023 high and 52-weeks high of $15.99.
The 38.2% Fibonacci retracement of this downtrend is $9.03, which is very close to where the stock closed at on February 7 at $8.89. This could help explain why the stock has repeatedly crossed the $9 price level numerous times in both directions. Fibonacci levels are seen as support/resistance levels and both the bulls and bears seem to be battling it out at this point.
It’s worth mentioning that SKYT has seen an increase in short interest. According to the most recent data available from the Nasdaq, short interest stood at 1,606K as of January 12 for a short float of 10.3%. It stood at 1,388K on October 31, the day before the stock bottomed and SKYT proceeded to rally. This suggests the shorts are not convinced the rally off of the November 1 lows will be sustained.
The last two earnings report were very consequential for SKYT. The last one send the stock on a huge rally after the preceding one caused the stock to collapse. It’s thus worth mentioning that SKYT is scheduled to release its Q4 report on February 26. The consensus estimate is that SKYT will report a non-GAAP loss of $0.12 per share on revenue of $74.8M based on guidance from SKYT calling for a sequential increase in revenue, on top of a sequential decline in gross margin. From the Q3 earnings call:
“we expect Q4 revenue levels in the mid $70 million range, this reflects our assumption of a 15% to 20% sequential decline in wafer services revenue, a similar level of core ATS revenues, and a significant increase in tool sales, which could grow to as much as $10 million.
Given the changes in the wafer services outlook and the expected revenue profile for Q4, we expect non-GAAP gross margin will decline sequentially to between 14% and 15%.”
Source: SKYT earnings call
In comparison, the table below shows the numbers in the preceding quarters. Note that Q3 FY2023 set a new record for quarterly revenue, which is expected to be surpassed by Q4 FY2024. SKYT has $37.7M of long-term debt on the balance sheet, partially offset by cash and cash equivalents of $17.3M. Note also the increase in the number of outstanding shares. SKYT is investing in new products and facilities to facilitate future growth and this requires funding, which is partially met by issuing new shares.
(Unit: $1000, except for EPS) | |||||
(GAAP) | Q3 FY2023 | Q2 FY2023 | Q3 FY2022 | QoQ | YoY |
Revenue | 71,624 | 69,811 | 52,326 | 2.60% | 36.88% |
Gross margin | 19.8% | 23.9% | 15.8% | (410bps) | 400bps |
Operating income (loss) | (4,191) | (3,549) | (5,081) | - | - |
Net income (loss) attributable to SkyWater | (7,568) | (8,590) | (6,939) | - | - |
EPS | (0.16) | (0.19) | (0.17) | - | - |
Weighted average shares outstanding | 46,445K | 44,743K | 40,669K | 3.80% | 14.20% |
(Non-GAAP) | |||||
Gross margin | 20.4% | 25.3% | 16.9% | (490bps) | 350bps |
Adjusted EBITDA | 8,276 | 10,280 | 3,815 | (19.49%) | 116.93% |
Net income (loss) attributable to SkyWater | (2,193) | (1,968) | (5,126) | - | - |
EPS | (0.05) | (0.04) | (0.13) | - | - |
Source: SkyWater Form 8-K
SKYT is projected to end FY2023 with a non-GAAP loss of $0.32 on revenue of $282M. In comparison, SKYT posted a loss of $0.74 on revenue of $212.9M in FY2022. SKYT grew, which is more than what other foundries can say. The foundry market is estimated to have shrunk by about 10% in 2023, so for SKYT to grow at a time when the market is contracting is a positive achievement.
While it was too early to give specifics on FY2024, management did have a few words to say as to what to expect.
“As we look ahead to fiscal 2024, as tim mentioned, we expected another year of strong revenue growth outperforming the overall industry driven by a significant increase in customer funded tool investments and continued solid growth in core ATS activities, which we expect will partially offset by a lower level of wafer services business… We also expect to turn the corner to positive non-GAAP EPS in 2024, and look forward to discussing our success on this key milestone in future calls.”
If we assume SKYT maintains its recent rate of improvement and extrapolate it to FY2024, then SKYT could get out of the red by earning a non-GAAP profit as soon as Q3 FY2024. SKYT is likely to update its FY2024 outlook with more details at the upcoming earnings call. This could give the stock another jolt like it has in previous reports, which could be on the way up, but also on the way down.
SKYT expects to outperform the industry in 2024. It’s therefore worth mentioning that there is some disagreement as to what 2024 will bring. The year 2024 is expected by most to be a year of growth for foundries. However, estimates are all over the place. TSMC (TSM), the leading foundry, called for the foundry market to expand by around 20% in 2024, but others are more conservative in their estimates by calling for slower growth. UMC (UMC), for instance, thinks something around half of what TSMC is calling for is more likely.
If we assume SKYT comes in somewhere between these estimates, then FY2024 revenue could grow by about 15% YoY, or less than half the 32.5% SKYT is projected to have grown in FY2023, which would result in FY2024 revenue of about $324M and a non-GAAP profit of $0.12 per share taking into account SKYT’s current guidelines for this year. This would give SKYT a forward non-GAAP P/E ratio of around 74x with the stock at $8.89.
SKYT provides a range of foundry services, but it is rather different from the better known foundries out there. SKYT focuses on niche areas, specifically those related to the defense sector. The fact that SKYT is a U.S. company, unlike most foundries, and the beneficiary of direct assistance from various U.S. government initiatives has given SKYT a leg-up on other foundries.
These attributes allowed for SKYT to grow much faster at 30+% than what other foundries were capable of in a foundry market that is estimated to have contracted by about 10% in 2023. The long-term outlook sees SKYT continuing to grow faster than the industry average in the coming years, which is possible in light of the favorable tailwinds SKYT can count on as mentioned above.
SKYT is likely to grow in the double digits in 2024 and it should set a milestone this year by getting out of the red with a non-GAAP profit. On the other hand, the same attributes could limit SKYT’s potential in the long run. Defense spending tends to be rather stable and something SKYT can count on in good or bad times, but defense or government spending in general does not have the same growth potential of other growth drivers like say high-performance computing.
SKYT is targeting specific niche markets, but these markets are not as large as the global markets other foundries are competing in. The niche markets are pretty much a captive market for SKYT, but they are limited in how big they can be. This puts a lid on how much SKYT can grow in the long term. SKYT’s current strengths could one day become SKYT’s weaknesses.
SKYT is scheduled to release its next report later this month. SKYT should have lots of positive developments to share, but this does not mean the stock is guaranteed to respond well. Expectations are high for a stock like SKYT, which is reflected in where multiples are, which leaves open the room for disappointment and a selloff. Keep in mind there are disagreements as to how fast the foundry market can grow in 2024.
Recall how the stock collapsed after the Q2 FY2023 report, which was not bad, just not as good as some apparently hoped for. SKYT has reported solid gains in each of the prior earnings reports, but one was followed by a huge selloff and the other by a huge rally in the stock. The last two earnings reports have been catalysts for major changes in the stock, something to keep in mind as the next report comes closer.
The charts also point to SKYT being close to a pivotal moment. The stock is close to a price region where bulls and bears have tended to gather in force, being close to a Fibonacci level. This has likely caused the stock to go sideways recently, which argues in favor of reducing exposure since it may take some time for the stock to change course.
It is tempting to be long SKYT with the growth SKYT is likely to experience in the next few years, but I am staying neutral at this time in light of the above. The stock price has doubled in the last 3-4 months and the stock may be due for a correction, if not something more serious. There is after all a reason why shorts have upped their bets on SKYT in recent months.
Bottom line, SKYT has good growth prospects in 2024 and the next couple of years at least. It is likely to keep outperforming most others in the foundry market. Yet that does not mean the stock is immune to a major selloff. One happened as recently as H2 2023. The catalyst for that one was an earnings report. There is another earnings report coming in a few weeks. Taking some or all chips off the table makes sense.