SkyWater Tech's Operating Leverage Will Scale Up From CY24, Analyst Says While Boosting Price Target

Needham analyst Rajvindra Gill maintained SkyWater Technology Inc SKYT with a Buy and raised the price target from $20 to $25.

SkyWater reported a significant beat and gave a positive outlook for 1Q23 and beyond. CY22 marked a significant year of execution; the gross margin expanded from 1% in 1Q22 to 26% in 4Q22. 

The step-up came from ATS productivity gains, a more favorable mix, and the business matures. 

The analyst expects more customers to sign on and expand the ATS business while commercial customers should begin converting to Wafer Services towards YE23 and early '24.

The step-up in revenue had a positive gross margin impact; analyst's 1H23 estimates moved up about 150bps. However, the analyst thinks better gross margin performance will be front-half loaded. 

The additional spending for '24-related revenue and tool revenue shipments to occur in 2H23 would cause a slight headwind. CY23 revenue is tied to established programs (DoD) with secured funding, and the analyst expects additional fab efficiency gains. 

In CY24, the analyst expects to see operating leverage begin to scale. Commercial programs should convert to Wafer Services, and GM can exit in the high 20s-low 30s. By CY25, the model will be fully scaled. 

RadHard programs begin production, and multiple costs are absorbed; the analyst has a clear path to a 40% gross margin by YE25. The price target boost reflected new CY24 estimates.

SKYT is on the leading edge of semiconductor industry policy communications, the analyst noted. Notably, the company expects the first round of proposal submissions over the next few months and for CHIPS funding to roll out this year. 

The analyst saw SKYT as a pure play on the domestic semiconductor manufacturing theme uniquely positioned to benefit from all parts of the law.

Price Action: SKYT shares traded higher by 27.60% at $14.59 on the last check Tuesday.