SkyWater Technology (SKYT) piqued my interest when it became public in April last year. This semiconductor game was interestingly positioned as the industry was facing chip shortages while its “American” status brought some interesting advantages on that front as well.
Besides these great benefits, the shares are down 30% since the first day of trading, again trading at the public offer price. This decision is entirely justifiable as operating performance has been very poor, with few green shoots on the horizon.
The old thesis
SkyWater is an independent US semiconductor company with a manufacturing lab located in Minnesota and packaging facilities in Florida. The company claims to have a distinct approach with a focus on technology that is co-developed with customers resulting in disruptive concepts.
The American angle of the story is important, as the company was accredited by the Department of Defense, from which it was actually awarded a $170 million contract in 2019.
The company came into being in its current form after Cypress spun off those operations in 2017, which has now become SkyWater and went public in April 2021. Management and underwriters sold 7 million shares at $14 per action, at the upper end of the preliminary price. interval. At that level, the company was valued at $532 million, or about half a billion in enterprise value after taking into account a modest net cash position.
The company generated $137 million in revenue in 2019, of which an operating loss of $9 million was reported, although break-even results were shown if we adjust for a change in the value of contingent consideration. Revenue hit $140 million in 2020, but now comes with an operating loss of $6 million.
While the company claimed to be targeting high-end markets, its margins tell a different story with gross margins stuck around 15% of sales, so there was little reason to get truly optimistic. On the bright side, preliminary first-quarter sales were estimated at $46 million, for a run rate of $184 million. This seems reasonable and translates to reasonable selling multiples, but the question was whether any real profits on this revenue basis would be realized, as these (valuation) doubts have increased further as the shares have risen to 20 $ on the first day of trading.
Believing that even if sales exceeded $200 million in this boom year, and seeing operating margins likely limited to 5-10% in such a scenario, I pegged the profit potential at just 10 at $20 million. This would translate to a profit of $0.25 to $0.50 per share, which would make it too difficult for me to see a call at $20 per share.
After the public offering, the company’s shares traded in the $15-$35 range with some volatility seen in the meantime. On the corporate side, we’ve seen mostly quarterly results and smaller corporate updates in the meantime. Shortly after the public offering, the company released first quarter results with revenue of $48 million up 61% year over year, but EBITDA of $5.6 million. was largely in line with the prior year as the company still posted a small GAAP loss.
Shares were trading in their 20s after the earnings release, but fell to $15 in August as the company posted second-quarter sales of just $41 million, with year-on-year growth rates another slowing to 34%, while an EBITDA loss of $0.8 million was reported. A net loss of $7 million was pretty steep if you ask me.
Third quarter sales were just $35 million, up only 6% from a year earlier. Based on the sequential decline in sales, EBITDA losses increased to $2.7 million, with GAAP losses widening to $13.9 million. Although the company believes that growth is being held back by component shortages and funding delays for key projects, this is of serious concern as the loss rate continues to rise as the company has accumulated a net debt of 28 million dollars here.
The 34 million shares are now down to $14 per share, which amounts to a valuation of half a billion when taking into account the modest net debt. This translates to an annualized multiple of sales of 3 to 4 times, but given growth and margin trends, I’m being very cautious here because I just see little green shoot, and I actually think the current valuation looks still a little rich.
Given the fiery dynamics of the industry, the current revenue performance and reported losses are very disappointing. This further raises the question of what performance will look like if the overall industry situation was not as strong as it is today. Even though stocks have been repriced a bit here, I still don’t see any appeal here because the fundamental story has been too soft.