Almost three years ago, in February 2022, US chips giant Intel announced that it would buy Israel’s Tower Semiconductor (TASE: TSEM; Nasdaq: TSEM) at a valuation of $5.4 billion. The deal was eventually cancelled, in the summer of 2023, after the companies failed to obtain approvals from the Chinese regulator in time. The acquisition was due to take place at a share price of $53 for Tower Semiconductor, representing a premium of 60% on the market price on the day the deal was announced.
Within a few months of the cancellation of the deal, Tower Semiconductor’s share price fell to a low of just $22, but is has since recovered, and is now close to the $53 at which the acquisition by Intel was meant to happen. Tower Semiconductor’s current market cap is $5.7 billion, a more than twenty-year peak, after a rise of almost 70% in the share price in 2024 (following a fall of 30% in 2023 in the wake of the cancellation of the deal with Intel). Over the past three years, the share price has risen by about 25%.
With the wisdom of hindsight, and given Intel’s travails in the past few months, it would appear that the cancellation of the acquisition deal was ultimately to Tower’s benefit, as it continues as an independent company under the leadership of veteran CEO Russell Ellwanger. In an interview with "Globes" last March, Ellwanger related how he felt when the deal with Intel was cancelled. "I won’t say it’s good that the deal didn’t happen, but it wasn’t a big slap in the face. We now have capacity, although of course there are things to improve, and on the whole, it was a positive experience," he said.
Moreover, the analog chip producer from Migdal Ha’emek did not emerge from the episode empty handed. The acquisition agreement specified that, in the event of the deal being cancelled, Intel would pay Tower $353 million. Tower recognized the compensation payment in its third quarter 2023 financials, boosting its post-tax net profit by $290 million.
The intended buyer, Intel, however, found itself in financial difficulties in 2024, and its CEO Pat Gelsinger recently stepped down after four years in the position. Intel sought to buy Tower because it fitted in with its foundry strategy: manufacturing chips for third parties as well as for itself, and Tower was meant to be a fundamental part of that strategy. The strategy did not take off, and Intel laid of thousands of employees around the world, including in Israel. In 2024, as Tower’s share price soared, Intel’s sank 60%.
Outperformance
The Philadelphia Semiconductor Index (SOX) rose 13% last year, so Tower Semiconductor handily outperformed the index. Returns on the sector globally were impacted by contrasting factors. On the one hand, chips giant Nvidia continued to climb, thanks to the AI hype, and Broadcom and other semiconductor stocks gave impressive returns last year. On the other hand, fears arose over restrictions on exports to China, and stockpiles at some companies.
Analysts who cover Tower are positive about the stock. According to Yahoo! Finance, their average price target is $57.5, 13% above the current price on Nasdaq.
Oppenheimer has a price target of $60 for Tower, representing 18% upside, and its rating is "Outperform". Last month, Oppenheimer analysts Sergey Vastchenok and Avivit Mannet-Kalil published an update following a meeting with Tower’s management, and said they expected accelerated growth in 2025, in the light of demand for RF/SiPho (silicon photonics) chips for the optic communications market in data centers, at the same time as a recovery in areas that exhibited cyclical weakness last year, and an increase in market share.
In recent years, Tower has worked to expand its production capacity, and after the cancellation of the acquisition agreement with Intel, it signed an agreement for the use of Intel’s factory in New Mexico for manufacturing 300 mm chips. Tower also has a new factory in Italy, about which Oppenheimer writes that the start of production there will reduce gross profit margins in the short term, but that it will provide a new growth engine for the coming years, and accelerate growth rates and boost future profitability.
"Production expansion potential not yet priced into stock"
Oppenheimer’s analysts estimate that the factory will reach full capacity towards the end of 2025. "In our view, this potential has yet to receive full expression in investors’ expectations and in the pricing of Tower stock, which is still traded at a deep discount to the semiconductor sector average," Vastchenok and Mannet-Kalil write. They add that Tower will record similar revenue for 2024 to that for 2023, which represents outperformance in comparison with the high single digit decline in the analog chip market, and a double-digit decline at some of its major competitors. This is against the background of demand for RF/SiPho chips, sales of which have trebled and are expected to continue growing in 2025.
Moreover, they say that Tower will benefit from cyclical recovery in the market. "The other business segments are expected to recover in the coming year. Demand for power management chips for the industrial and vehicle markets are expected to demonstrate recovery in the coming year from its low, and at the same time Tower will expand its market share, thanks to the launch of products for the low power management segment," the Oppenheimer analysts write.
According to the analysts’ forecasts, Tower will report revenue of $1.44 billion for 2024, slightly above the $1.42 billion in 2023. Growth is expected to accelerate in 2025. The consensus analysts’ estimate is revenue of $1.57 billion, representing growth of 9%.
Published by Globes, Israel business news - en.globes.co.il - on January 13, 2025.
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