Integrated circuits (ICs) manufacturer SkyWater Technology, Inc. (SKYT) in Bloomington, Minn., had an impressive stock market debut on April 21, 2021, with its shares opening 10.7% above their initial offer price of $14. On August 24, the company announced an expanded partnership with Rockley Photonics Holdings Limited (RKLY), broadening their collaboration to include wafer back-end-of-line processing for RKLY’s spectrophotometer-on-a-chip health monitoring solution.

SKYT’s shares have gained 7.7% in price over the past three months to close Friday’s trading session at $27.37.

However, the stock has lost 19.1% since hitting its all-time price high of $34.43 on June 18. One of SKYT’s advanced technology services (ATS) programs that generated significant revenue in 2020 is being restructured and is not expected to resume operations until 2022. Furthermore, the company’s revenue and EPS estimates were cut sharply as analysts factored in their latest outlook. In fact, Jeffries has downgraded the stock’s rating from Buy to Hold and lowered the price target to $23. So, SKYT’s prospects look bleak in the near term.

Here’s what we think could shape SKYT’s performance in the near term:

Ongoing Chip Shortage

While the demand for semiconductors soared with the growing need for consumer electronics and EVs, the ongoing chip shortage has forced several auto vehicle manufacturers to cut production. Furthermore, with lockdowns being reimposed in many parts of the world due to the resurgence of COVID-19 cases, supply chain issues have increased. According to Velocity Electronics, the global chip shortage could last until 2023. As a result, SKYT’s business could be negatively impacted.

Weak Financials

For its fiscal second quarter, ended July 4, 2021, SKYT’s wafer services sales increased 42.8% sequentially to $14.31 million, while its ATS sales declined 29.4% sequentially to $26.88 million. The company’s non-GAAP gross profit for the quarter decreased 47% year-over-year to $2.96 million, mainly due to the increased cost of goods. And its non-GAAP net loss increased 24.5% year-over-year to $5.09 million.

Poor Profitability

In terms of trailing-12-month gross profit margin, SKYT’s 13.44% is 72.6% lower than the 49.04% industry average. Likewise, its trailing-12-month net income margin is negative compared to the 6.01% industry average. Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA are negative compared to the  8.25%, 4.80%, and 3.59% respective industry averages.

POWR Ratings Reflect Bleak Prospects

SKYT has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. SKYT has a D grade for Growth and Sentiment, which is in sync with analysts’ expectation that its EPS will remain negative in the current year.

The stock has a D grade for Value also. This is consistent with SKYT’s 6.07x forward EV/S, which is 47.7% higher than the 4.11x industry average. Its 6.07x forward P/S  is also higher than the 4.17x industry average.

SKYT is ranked #92 of 99 stocks in the Semiconductor & Wireless Chip industry. Click here to see the additional POWR Ratings for SKYT (Stability, Momentum, and Quality).

Bottom Line

SKYT claims to be the pioneer of the Technology Foundry Model, and has partnered  with several fabless companies, IDMs, and OEMs to bring innovative solutions to the market. However, its losses widened significantly in the second quarter, and its EPS is expected to remain negative in the coming quarters. So, we think it could be wise to avoid the stock now.

How Does SkyWater Technology (SKYT) Stack Up Against its Peers?

While SKYT has an overall POWR Rating of D, one  might want to consider these other stocks within the Semiconductor & Wireless Chip industry with  A (Strong Buy) ratings: ChipMOS TECHNOLOGIES INC. (IMOS), STMicroelectronics N.V. (STM), and United Microelectronics Corporation (UMC).

Click here to checkout our Semiconductor Industry Report for 2021

SKYT shares rose $1.38 (+5.04%) in premarket trading Monday. Year-to-date, SKYT has gained 62.06%, versus a 21.36% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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