In honor of Google’s parent company, Alphabet NASDAQ: GOOGLEannounced a breakthrough in quantum computing with its Willow chip, quantum technology stocks soared. Righetti Computers NASDAQ: RGTI in just a month its value has increased several times. However, one company that is seeing less significant growth is Skywater Technology. NASDAQ: SHOOT. Shares are up about 61% over the past month through the Jan. 2 close.
The company’s business is more diversified than just quantum computing, so its value hasn’t experienced the same meteoric rise. However, the company generates much more revenue than Righetti. However, it trades for a fraction of its value. This begs the question: Is Skywater a more fairly valued quantum computing stock right now that could benefit in the long term?
Skywater: working on the creation of next-generation semiconductors
SkyWater technology today
SkyWater technology
As of 01/03/2025 17:45 Eastern
- 52 week range
- $5.63
▼
US$19.00
- Target price
- $12.75
Skywater is a semiconductor manufacturer, commonly referred to as a foundry. However, Skywater stands out because it focuses on developing future semiconductor technologies. The company achieves its goals by financing the development of these technologies in a unique way.
Skywater uses what it calls a customer-financed capital expenditure model. With this model, clients provide upfront capital. It funds the development of its own semiconductor solutions. This allows Skywater and its customers to share the risk of developing innovative technologies that may not have commercially viable applications for some time. The company’s Advanced Technology Services (ATS) segment generates revenue through this co-development process.
Once developed, Skywater’s goal is to move on to actually manufacturing and selling the product to its customers. Customers often help the company buy tools to produce these technologies. The company’s Tools segment generates revenue from this. Once Skywater sells its developed products, the revenue flows into the Wafer Services segment. In the third quarter, AST, Tools and Wafer Services revenue accounted for 60%, 33% and 7% of total revenue, respectively. The company’s total revenue was $94 million, up 31% from the previous year. However, Wafer Services revenue declined 54% due to continued weakness in the industrial segment end market.
Skywater: revenue growth and positive profit
Financially, Skywater is moving in the right direction. The company increased adjusted gross profit by 190 basis points compared to the third quarter of 2023. It also slightly increased its adjusted earnings before taxes, depreciation and amortization (EBITDA) margin to just under 12%. Adjusted EBITDA has remained positive for nine consecutive quarters. The company also had positive adjusted net income over the past two quarters. This is not expected to continue in the next quarter as it was supported by abnormally high instrument income. However, these are positive developments.
SkyWater Technology, Inc. Price Chart (SKYT) on Saturday, January 4, 2025
Quantum Computing and the Benefits of Skywater’s Business Model
The company’s annual report mentions its involvement in the field of quantum computing several times. He initially started working with D-Wave. New York Stock Exchange: QBTS back in 2013. Since then, the company has expanded its customer base in this market. It now includes many companies developing their own technologies for quantum and supercomputer computing. D-Wave specializes in the quantum annealing approach to quantum computing. He also states that he has worked on photon-based quantum computing.
This is where the partnership with PsiQuantum comes into play. PsiQuantum plans to develop its quantum computing chips at its Skywater facility in Bloomington, Minnesota. However, the photonic quantum computing approach is different from the gate-based approach used in Google’s Willow chip. This indicates that the technology has not yet advanced that far. However, this approach offers significant advantages over Google’s approach if it becomes viable. This includes the fact that the chips can operate at room temperature. Meanwhile, Google must keep its chips at absolute zero temperatures. This results in significant energy expenditure to maintain such extremely low temperatures. However, some components of PsiQuantum systems still require cryogenic temperatures.
Skywater has extensive experience developing quantum computing technologies using multiple approaches. This gives the company the opportunity to reap long-term benefits as technology advances. It also generates significant revenue and adjusted earnings. This could make it a more stable play than other quant stocks that are barely generating income.
In addition, the evolving nature of the company’s business may make its revenue streams less volatile than those of other foundries. For example, amid the downturn in the chip manufacturing industry, in addition to artificial intelligence, Global Foundries NASDAQ: GFS Since 2023, revenue has fallen significantly. Meanwhile, Skywater’s revenues are growing. The next-generation technology Skywater is developing could mean customers are willing to keep paying, even in a downturn. While Skywater is not a pure quantum play, it is an interesting business with quantum growth potential. Its forward price-to-sales ratio is just over 2x compared to Rigetti Computing’s 386x.
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