The application process for the $52 billion U.S. CHIPS Act ($39 billion for semiconductor manufacturing in the U.S., and $13 billion for research and development) is underway. Dozens of new fabs (a facility that makes chips) are under construction, with even more being expanded and retrofitted with new equipment. 

It's a new golden age for semiconductors, and investors are excited. One promising start-up, SkyWater Technology (SKYT 0.99%), is getting lots of attention because it's the only pure-play on U.S.-only chipmaking. Is it a buy?

What does SkyWater do?

SkyWater is a semiconductor foundry, a company that operates fabs for the manufacture of wafers (which get cut up into chips) and packaging facilities (where chips get assembled into computing devices). 

SkyWater is unique, though. As CEO Thomas Sonderman explained on the Q2 2023 earnings call:

We are a technology foundry and not a conventional or specialty foundry. This means our business is about developing next-generation technologies that are high value and relatively low volume. We are not chasing the high-volume, low-mix foundry business from large fabless chip companies.

What does that mean? SkyWater is a start-up. It doesn't try to compete against big-volume foundries like Taiwan Semiconductor Manufacturing, nor does it try to go toe-to-toe with specialty fabs like GlobalFoundries. Rather, think of SkyWater as a start-up catering to other start-ups with new and ambitious tech plans involving semiconductors. 

Interesting and notable point: Sonderman used to work at AMD in the late 2000s, and then at GlobalFoundries after AMD spun it off as an independent company.  

Two novel use cases to watch

SkyWater has gotten a huge boost in recent years with government contracts, including with the U.S. Department of Defense (DoD). The company's radiation-hardened (RadHard) silicon technology has uses in things like advanced radar research, the space economy, and aerospace and defense. 

But Sonderman highlighted two newer use cases that might (emphasis on the word "might") lead to big revenue gains in the future: biohealth and advanced computing.

As for biohealth, Sonderman said several small (and I'm assuming some of them fellow start-up) companies could kick in a few million bucks in revenue for SkyWater this year. Applications include rapid diagnostics, genetic sequencing, and health wearable devices. This makes me wonder if it's SkyWater that's handling some chipmaking work for Cathie Wood stock Quantum-Si, or at least someone similar also working on rapid diagnostics in the biotech space.

And in advanced computing, SkyWater has been highlighting its "lab-to-fab" research in support of quantum computing. Earlier in 2023, SkyWater highlighted its expanding relationship with start-up PsiQuantum in developing and supplying silicon photonic chips. Cloud-accessible quantum systems start-up D-Wave Quantum is also a customer, tapping SkyWater for wafers for its quantum chips.

A big post-earnings pullback

Besides government contracts, it's important for investors to remember SkyWater is a start-up. As such, this is a story that will be contingent on management successfully executing its tech co-development with customers, and then scaling its two fabs (a wafer fab in Minnesota, and a chip packaging facility in Florida).

The company recorded revenue in Q2 2023 (up 47% year over year to $69.8 million), but it still generated a loss (-$8.6 million, compared to -$13 million in Q2 2022).  

Free cash flow is negative so far in 2023 as well (-$21.2 million), though SkyWater helps bridge the cash burn by occasionally selling new stock on the market. This is another risk, as the balance sheet ended June 2023 with cash and short-term investments of just $16.2 million and total debt of $91 million.  

In other words, at the moment, it's the banks and debt holders making the most money off of SkyWater via interest payments. 

Given risks with this small but promising business, shares sold off hard after the Q2 update. The stock is up just a mid-single-digit percentage as of this writing in 2023 and down nearly 50% over the last year. 

However, risks appear to be priced in. SkyWater trades for just 1.3 times trailing-12-month revenue. Established foundries (read: profitable ones) tend to trade for far higher multiples than this. If the company continues to execute well and makes progress toward profitability, there could be upside here.  

The relative value of SkyWater Technology stock is tempting. However, if you decide to buy, tread lightly. A lot could still go wrong. Nibble here and there, or use a dollar-cost average plan if you like the company's long-term prospects.

Either way, keep any position very small and allow SkyWater to prove its merits as U.S.-based chip manufacturing gets a second wind.