Investment Idea: SkyWater Technology, Inc. (SKYT)
# SkyWater Technology, Inc. (SKYT) - Investment Idea
**Date:** October 26, 2023
**Analyst:** [Your Name/Analyst Team]
## 1. Executive Summary
SkyWater Technology (SKYT) presents a compelling investment opportunity due to its differentiated pure-play foundry model focused on specialty technologies and government contracts. The company's strong position in critical industries like aerospace & defense, coupled with increasing onshoring trends, should drive revenue growth and margin expansion.
## 2. Investment Thesis
We believe SkyWater Technology is well-positioned for sustained growth driven by several factors:
* **Specialty Foundry Focus:** Unlike commodity-focused foundries, SkyWater specializes in silicon-based analog and mixed-signal, power discrete, microelectromechanical systems (MEMS), and rad-hard integrated circuits. This focus commands higher margins and fosters deeper customer relationships through co-creation of technologies, leading to higher switching costs.
* **Aerospace & Defense Exposure:** SKYT benefits from a substantial revenue stream tied to the aerospace and defense industry. This segment offers strong growth potential fueled by increased defense spending and the need for secure, domestically manufactured semiconductors, specifically "rad-hard" technologies where SKYT has a competitive advantage.
* **Onshoring Tailwind:** The growing emphasis on supply chain security and domestic semiconductor manufacturing, supported by government initiatives like the CHIPS Act, presents a significant tailwind for SKYT. As a US-based foundry, SkyWater is poised to capture a larger share of demand from companies seeking to diversify their supply chains and adhere to national security requirements.
* **Strong Customer Relationships:** SKYT's collaborative "co-creation" model for engineering and process development support creates strong relationships with customers in high-growth sectors like Bio-Health, Automotive, and Industrial/IoT. This results in greater revenue visibility and reduces dependence on a single customer or application.
## 3. Key Risks
* **Concentration of Revenue:** Although diversifying, SkyWater still faces a risk of customer concentration. A significant slowdown or loss of a major customer could negatively impact revenue and profitability.
* **Competition:** The semiconductor foundry industry is highly competitive. SKYT competes with larger, more established foundries like TSMC and GlobalFoundries, particularly in certain technology nodes.
* **Execution Risk:** SKYT needs to execute effectively on its growth strategy, including expanding production capacity and managing costs. Delays in capacity expansion or cost overruns could impact profitability and growth projections.
* **Macroeconomic Slowdown:** A broader economic downturn could reduce demand for semiconductors, impacting SKYT's revenue and profitability.
* **Government Funding Uncertainty:** While the CHIPS Act provides substantial support, the precise timing and allocation of funds are subject to government processes and potential changes.
## 4. Valuation Perspective
At a price of $25.16, with a market cap of $1.2B, SkyWater's valuation requires careful consideration. Due to its current growth phase and ongoing investments, traditional P/E ratios might not accurately reflect the company's potential. A discounted cash flow (DCF) analysis, considering projected revenue growth from the factors outlined in the Investment Thesis, is crucial. Alternatively, comparing SKYT's price-to-sales ratio to other specialty foundries and factoring in its growth prospects can provide a useful relative valuation benchmark. We believe that based on consensus estimates and potential for upside from onshoring and its specialized technologies, SKYT is attractively valued, with potential for significant appreciation as the company executes its strategic plan and benefits from favorable industry trends. Further due diligence including a deep dive on financials is needed before a recommendation can be made.