Tower flourishes after Intel deal cancellation

Nearly three years ago, in February 2022, US chip giant Intel announced that it would buy Israeli company Tower Semiconductor (TASE: TSEM, Nasdaq: TSEM) for $5.4 billion. The deal was eventually cancelled, in the summer of 2023, after the companies failed to obtain approvals from the Chinese regulatory body in time. The acquisition was scheduled to take place at a share price of $53 for Tower Semiconductor, representing a 60% premium to the market price on the day the deal was announced.

Within a few months of canceling the deal, Tower Semiconductor’s stock price fell to a low of just $22, but it has since recovered and is now close to the $53 at which the Intel takeover was supposed to occur. Tower Semiconductor’s current market capitalization is $5.7 billion, the highest level in more than twenty years, following a roughly 70% rise in the stock price in 2024 (following a 30% decline in 2023 in the wake of the deal with Intel being cancelled). Over the past three years, the stock price has risen by about 25%.

With the wisdom of hindsight, and given Intel’s troubles over the past few months, it appears that calling off the acquisition was ultimately in Tower’s favor, as it continues as an independent company under veteran CEO Russell Ellwanger. In an interview with Globes last March, Ellwanger recounted how he felt when the deal with Intel was cancelled. “I wouldn’t say it’s a good thing the deal didn’t happen, but it wasn’t a big slap in the face. We now have the capacity, although of course there are things to improve on, and overall, it’s been a positive experience,” he said.

Moreover, the analog chip producer from Migdal Haemek did not walk out of the loop empty-handed. The acquisition agreement stipulated that if the deal was cancelled, Intel would pay Tower $353 million. Tower acknowledged the payout in its third-quarter 2023 financial statements, boosting its net profit after tax by $290 million.

However, the intended buyer, Intel, found itself facing financial difficulties in 2024, and its CEO Pat Gelsinger recently resigned after four years in the position. Intel sought to buy Tower because it fit with its foundry strategy: making chips for third parties as well as itself, and Tower was intended to be a key part of that strategy. This strategy did not work, and Intel laid off thousands of employees around the world, including in Israel. In 2024, as Tower’s stock price rises, Intel shares fall by 60%.

Superior performance

The Philadelphia Semiconductor Index (SOX) rose 13% last year, so Tower Semiconductor easily outperformed the index. The sector’s global returns were affected by contradictory factors. On the one hand, chip giant Nvidia has continued to rise, thanks to the hype around artificial intelligence, and Broadcom and other semiconductor stocks have posted impressive returns in the past year. On the other hand, concerns have emerged about restrictions on exports to China, and inventories held by some companies.

Analysts covering the tower are positive on the stock. According to Yahoo! Finance, the average price target is $57.5, 13% above the current price on Nasdaq.

Oppenheimer has a $60 price target for the tower, which represents an 18% upside, and his rating is “Outperform.” Last month, Oppenheimer analysts Sergey Vaschenok and Avivit Manit-Kalil published an update after a meeting with Tower management, saying they expect accelerated growth in 2025, in light of demand for RF/SiPho (silicon photonics) chips for the optical communications market. In data centers, at the same time as there is a recovery in areas that showed cyclical weakness last year, and an increase in market share.

In recent years, Tower has worked to expand its production capacity, and after canceling the acquisition agreement with Intel, it signed an agreement to use Intel’s factory in New Mexico to manufacture 300 mm chips. Tower also has a new factory in Italy, about which Oppenheimer writes that starting production there will reduce gross margins in the short term, but will provide a new growth engine for the coming years, accelerating growth rates and enhancing the future. Profitability.

“The potential for production expansion is not yet priced into inventory.”

Oppenheimer analysts estimate that the plant will reach full capacity by the end of 2025. “The semiconductor sector average,” Vaschenok and Manit Kalil wrote. They add that Tower will record revenues similar to those for 2024 for 2023, representing an outperformance compared to the significant decline of one in the analog chip market, and a double-digit decline in some of its key competitors. This comes on the back of demand for chips RF/SiPho, whose sales have tripled and are expected to continue to grow in 2025.

Moreover, they say that Tower will benefit from a cyclical recovery in the market. “Other business segments are expected to rebound next year. Demand for power management chips for the industrial and automotive markets is expected to show a recovery next year from the lows, and at the same time Tower will expand its market share, “thanks to the launch of products for the low-power management segment.” , Oppenheimer analysts write.

According to analyst forecasts, Tower will generate revenues of $1.44 billion for 2024, slightly higher than the $1.42 billion in 2023. Growth is expected to accelerate in 2025. Analysts’ consensus estimates are for revenues of $1.57 billion, which represents growth By 9%.

Published by Globes, Israel Business News – en.globes.co.il – on January 13, 2025.

© Copyright Globes Publisher Itonut (1983) Ltd., 2025.