Improved Revenues Required Before SkyWater Technology, Inc. (NASDAQ:SKYT) Stock's 35% Jump Looks Justified

SkyWater Technology, Inc. (NASDAQ:SKYT) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 7.5% isn't as impressive.

Even after such a large jump in price, SkyWater Technology may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1.3x, considering almost half of all companies in the Semiconductor industry in the United States have P/S ratios greater than 3.8x and even P/S higher than 10x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

We've discovered 3 warning signs about SkyWater Technology. View them for free.

View our latest analysis for SkyWater Technology

What Does SkyWater Technology's P/S Mean For Shareholders?

SkyWater Technology could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SkyWater Technology.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, SkyWater Technology would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.9% last year. The latest three year period has also seen an excellent 99% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue growth is heading into negative territory, declining 1.5% over the next year. With the industry predicted to deliver 35% growth, that's a disappointing outcome.

With this information, we are not surprised that SkyWater Technology is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On SkyWater Technology's P/S

Even after such a strong price move, SkyWater Technology's P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's clear to see that SkyWater Technology maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. As other companies in the industry are forecasting revenue growth, SkyWater Technology's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with SkyWater Technology, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on SkyWater Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.