Quantum Opportunity: Skywater Technology's Long-Term Potential

Quantum Computing and Skywater's Position - Alphabet's breakthrough in quantum computing with the Willow chip has led to a surge in stocks linked to quantum tech, with Rigetti Computing's value rising several times over in a month, while Skywater Technology's shares increased by 61% in the past month [1] - Skywater's business is more diversified than just quantum computing, which explains its less substantial rise compared to Rigetti, yet it generates more revenue and trades at a fraction of Rigetti's valuation [2] - Skywater is a semiconductor manufacturer focusing on developing future semiconductor technology through a unique customer-funded CapEx model, where customers provide upfront capital to fund the development of custom semiconductor solutions [3][4] Revenue and Financial Performance - Skywater's revenue segments include Advanced Technology Services (ATS), Tools, and Wafer Services, accounting for 60%, 33%, and 7% of total revenue respectively in Q3, with total revenue reaching $94 million, a 31% increase from the previous year, though Wafer Services revenue declined by 54% due to weakness in the industrial segment [5] - The company has shown positive financial trends, with adjusted gross margin increasing by 190 basis points in Q3 2023 and adjusted EBITDA margin slightly rising to just under 12%, maintaining positive adjusted EBITDA for nine straight quarters and positive adjusted net income in the last two quarters [7] Quantum Computing Partnerships and Technology - Skywater has been involved in quantum computing since 2013, initially working with D-Wave and expanding its customer base to include firms developing proprietary tech for quantum and supercomputing, with a focus on quantum annealing and photon-based quantum computing [8] - The company's partnership with PsiQuantum involves developing photonic quantum computing chips at Skywater's plant, which operates at room temperature, offering potential benefits over Google's approach that requires maintaining chips at absolute zero, though some components still require cryogenic temperatures [9] Market Position and Valuation - Skywater's extensive experience in quantum computing and its ability to generate significant revenue and adjusted profits make it a more stable investment compared to other quantum stocks with minimal revenue [10] - The company's developmental nature and next-gen technology focus may make its revenue streams less volatile than other foundries, as evidenced by its rising revenues amid a slowdown in the chip industry, with a forward price-to-sales ratio of just over 2x compared to Rigetti Computing's 386x [11]