Infineon Fab 25 Acquisition Will Expand Wafer Opportunities

Key Takeaways

• Acquisitions, service expansion, and a key supply agreement are expected to boost SkyWater's revenue growth, particularly in Wafer Services and ATS segments.
  
• Strategic investments and the Fab 25 transition are set to enhance margins and support long-term profitability through modernized facilities and high-value services.
  
• High acquisition costs and reliance on Infineon pose financial risks, with potential revenue shortfalls in key segments affecting overall earnings and profitability.

Catalysts

Operates as a pure-play technology foundry that offers semiconductor development, manufacturing, and packaging services in the United States.

• The acquisition of Infineon's Fab 25 is expected to significantly boost SkyWater's Wafer Services revenue with a secured 4-year supply agreement, potentially adding around $300 million in annual revenue, enhancing future revenue growth.
  
• SkyWater's advanced packaging business is anticipated to drive ATS revenue growth in the latter half of 2025, supported by new tool installations and a $120 million contract for fan-out wafer level packaging. This is expected to improve earnings through increased revenue.
  
• The ThermaView Solutions launch in the rapidly expanding thermal imaging market strengthens SkyWater's position in defense, industrial, and medical markets, potentially increasing Wafer Services revenue as it becomes a key growth driver in 2025.
  
• With preliminary CHIPS Act funding and matching state investment, SkyWater plans to modernize its Minnesota fab, accelerating investment and enabling enhanced revenue growth and improved net margins over the long term.
  
• The company’s strategy to transition Fab 25 to a customer-driven foundry model, expected demand from reshoring semiconductor production in the U.S., and its focus on high-value foundry services are leading to anticipated improvements in gross margins and long-term profitability.

SkyWater Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SkyWater Technology's revenue will grow by 10.3% annually over the next 3 years.
• Analysts are not forecasting that SkyWater Technology will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SkyWater Technology's profit margin will increase from -2.0% to the average US Semiconductor industry of 14.6% in 3 years.
• If SkyWater Technology's profit margin were to converge on the industry average, you could expect earnings to reach $67.3 million (and earnings per share of $1.35) by about April 2028, up from $-6.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, up from -49.9x today. This future PE is lower than the current PE for the US Semiconductor industry at 22.9x.
• Analysts expect the number of shares outstanding to grow by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.6%, as per the Simply Wall St company report.

SkyWater Technology Future Earnings Per Share Growth

Risks

• The acquisition of Infineon's Fab 25 entails substantial upfront costs and increased debt, which could impact net margins and place pressure on SkyWater's financial health if anticipated revenue increases do not materialize.
  
• Weakness in the Wafer Services business, particularly in automotive and industrial segments, could lead to revenue shortfalls that may negate growth in other areas, affecting overall earnings.
  
• Dependence on Infineon as a major customer might expose SkyWater to revenue fluctuations if Infineon’s demand decreases, potentially impacting revenue predictability.
  
• The shift of ATS business to Wafer Services might not yield the expected profitability if the demand for new products fails to compensate for the decline in legacy product revenue, affecting net margins.
  
• Conservative ATS revenue growth expectations due to ongoing federal budget resolutions may hinder financial performance, resulting in lower revenue projections and earnings.

Valuation

• The analysts have a consensus price target of $12.6 for SkyWater Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $459.9 million, earnings will come to $67.3 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $7.06, the analyst price target of $12.6 is 44.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.