1 Small Chipmaker Stock That Could Be Sitting on Massive Growth Prospects
A lot has changed since tiny semiconductor manufacturing upstart SkyWater Technology (NASDAQ: SKYT) had its initial public offering (IPO) in 2021. The company, fresh off of its reorganization under the guidance of private equity, was flying high amid the chip shortage that emerged as a result of pandemic supply chain disruptions.
Since then, the world has gone crazy over artificial intelligence (AI). But amid this new AI frenzy, the chip shortage has ended for industrial markets -- precisely the area of the massive semiconductor industry that SkyWater participates in.
Nevertheless, a wave of new demand is expected to hit in the next couple of years, and the U.S. CHIPS Act is aimed at bolstering companies like SkyWater. Is this small manufacturing stock worth paying attention to right now?
Investors are excited about SkyWater's potential
It's a unique business in the chip space, acting as a type of start-up for other tech start-ups. It cuts research and development (R&D) deals with customers, forming a co-development tech platform -- or advanced technology services (ATS) -- in which customers invest in both the manufacturing tools and the semiconductor manufacturing process itself along with SkyWater.
Once the R&D is complete, the ATS customers move on to become wafer customers and buy silicon wafers from SkyWater.
About 80% of revenue was from ATS last year. Over the long term, the real money will be made when some of its start-up customers move out of that R&D phase and start ordering silicon.
To date, the biggest customer is far and away the U.S. Department of Defense, which has been working with SkyWater's silicon fab on radiation-hardened manufacturing technology for years. Applications for the harsh environment in space and advanced radar are but two solutions emerging from this partnership.
The Defense Department just awarded SkyWater up to $190 million for its second facility in Florida, which will be paid out over a multiyear period, for packaging chips into computing systems. The company has also applied for CHIPS Act funding for its primary silicon wafer facility in Minnesota.
The company can use some of its joint R&D efforts later on with other prospective customers. But as of right now, this remains a very small company that is building out its capabilities, which it hopes will help capture new growth from industrial markets (aviation, aerospace, automotive, healthcare, and the like) in the coming years.
In the meantime, it has been able to shake off some of the weakness that its larger chipmaking peers have suffered. In the 2023 fourth quarter, SkyWater's revenue increased 22% year over year to $79 million. For the full year 2024, management expects modest growth, with first-quarter sales of about $80 million (up about 21% from the year prior).
Is it too late to buy SkyWater stock?
The stock has rebounded since I covered it last summer. I own a very small position and have no intention of changing that anytime soon.
You see, the company still isn't profitable. It is making progress toward breaking even and is getting some help from customers who are investing in the tools needed to eventually move from the ATS relationship and into the semiconductor manufacturing stage.
But as of the last year, SkyWater generated an operating margin of negative 5%. Expect this to continue in 2024, though management is expecting to cross into profitability within the next couple of years.
Again, the key will be moving a few of its customers to the wafer-manufacturing stage of the relationship. SkyWater is anticipating this will happen, especially given the current investment in manufacturing tools.
That said, the business model is still unproven, so my stance toward holding it remains unchanged. I have a small position and will continue nibbling here and there if the story continues to play out in positive fashion. It's way too soon to call this a top semiconductor stock, but SkyWater remains a promising small-cap business to keep tabs on.
Should you invest $1,000 in SkyWater Technology right now?
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Nicholas Rossolillo and his clients have positions in SkyWater Technology. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 Small Chipmaker Stock That Could Be Sitting on Massive Growth Prospects was originally published by The Motley Fool
