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SkyWater Shares Rise 22% in a Month: What Should Investors Do Now?

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SkyWater Technology (SKYT - Free Report) shares have appreciated 21.7% in the past month, outperforming the broader Zacks Computer & Technology sector’s return of 2.6%. 

SKYT shares have also outperformed the Zacks Electronics Semiconductors industry and its peers, including FormFactor (FORM - Free Report) , Impinj (PI - Free Report) and Broadcom (AVGO - Free Report) .

AVGO, FORM and PI shares have declined 0.3%, 4.2% and 5%, respectively, while the industry has declined 0.1% over the same timeframe.

SkyWater is benefiting from strong demand for its solutions in the Aerospace & Defense (A&D) end-market. It rides on several strategic A&D programs as well as improving capabilities and operational execution.

However, will these factors continue to push the shares higher? Let’s dig deep to find out.

One Month Performance

 

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Image Source: Zacks Investment Research

 

SkyWater Benefits From Strong ATS & Tool Revenues

SKYT is riding on strong Advanced Technology Services (ATS) revenues. In the second quarter of 2024, ATS development revenues increased 18% year over year and 1% sequentially to $62 million.

SkyWaters’ ATS development revenues are benefiting from continued strength in its aerospace and defense business. However, ATS revenues in the second half of 2024 are expected to suffer from low demand as SKYT saw some pull-ins in projects in the first half. 

SkyWater is benefiting from increasing customer-funded capital expenditure investments, which it records as Tool revenues. SKYT believes it is in the early stages of an anticipated multiyear period of elevated customer co-investment. These investments are helping SKYT add new capabilities to its fabs and additional scale to its business.

SkyWater remains on track to install more than $200 million of new customer-funded tooling between 2024 through 2026.

The company’s gross margin is expected to benefit from SKYT’s capital expenditure light and high operating leverage business model.

SKYT Offers Mixed Guidance

For 2024, SkyWater expects ATS development growth between 10% and 20% over 2023. It expects $80 million in customer-funded capital expenditure investments for the full year. However, Wafer Services revenues are expected to decline significantly (60-65% over 2023).

However, for 2025, Wafer Services revenues are expected to improve, driven by the thermal imaging and medical diagnostics segments.

SkyWater expects third-quarter 2024 ATS development revenues to be $16 million, plus or minus 3%. Wafer services revenues are expected in the $4-$5 million range.

SKYT expects wafer services to remain quite soft for at least another quarter or two, reflecting the continued weakness in the broader industrial market. Tool revenues are expected to be roughly $30 million.

The company expects gross margin to decline sequentially to the mid-to-high-teens (on both a GAAP and non-GAAP basis), driven by the negative impact of low-margin Tools revenues of roughly 700 basis points. A sequential decline in ATS and Wafer Services is expected to hurt the gross margin.

SKYT’s Estimates Shows Downward Trend

The Zacks Consensus Estimate for 2024 revenues is pegged at $349.35 million, indicating year-over-year growth of 21.86%. 

The consensus mark for loss is pegged at 10 cents per share, which has widened by a couple of cents over the past 30 days and is narrower than the loss of 17 cents reported in the year-ago quarter.

The Zacks Consensus Estimate for third-quarter 2024 revenues is pegged at $94.65 million, indicating year-over-year growth of 32.16%. 

The consensus mark for loss is pegged at 2 cents per share, down from earnings of 1 cent over the past 30 days. SKYT reported a loss of 5 cents per share in the year-ago quarter.
 

 

SkyWater’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, missing in the remaining one, the average surprise being 49.09%.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

SKYT Shares Trade at a Premium

We point out that SkyWater stock is not so cheap, as the Value Score of D suggests a stretched valuation.

In terms of the trailing 12-month EV/EBITDA ratio, SkyWater is trading at 26.46X, higher than its median of 22.32X and the sector’s 19.09X.

EV/EBITDA Ratio (TTM)

 

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Image Source: Zacks Investment Research

 

Conclusion

SkyWater is suffering from sluggish Wafer Services revenues and lower demand for ATS in the near term. Stretched valuation is a concern for investors.

SkyWater currently has a Zacks Rank #4 (Sell), which implies that investors should stay away from the stock in the near term.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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