Tower Semiconductor Adapts To Nvidia's Architectural Shift, Analyst Sees Growth In AI Optical Networks

Benchmark analyst Cody Acree reiterated Tower Semiconductor TSEM with a Buy and a $60 price target.

Tower Semiconductor reported fiscal fourth-quarter revenue growth of 10% to $387.19 million, marginally beating the analyst estimate of $387.13 million. The adjusted EPS of $0.59 beat the consensus estimate of $0.52.

Led by continued AI Data Center strength in its RF Infrastructure business, which grew 126% year over year, Tower Semiconductor turned in solid overall results that aligned with Street revenue expectations and were $0.04 above the consensus earnings estimates.

After starting the year at the company’s cyclical trough quarter, Tower Semiconductor delivered increasingly encouraging results as the year progressed. It ended on a high note, posting 5% sequential and 10% annual revenue growth.

The analyst commented that the company’s outlook was equally encouraging. Its March quarter guidance matched the Street consensus and projected that its fiscal 2025 revenue would grow both annually and sequentially through the year. Material momentum anticipated acceleration during the second half.

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Having covered Tower Semiconductor for many years, Acree has observed the company through many good and challenging times. With the benefit of that experience, he noted this call as calm and confident, with a level of momentum that left him enthusiastic.

The analyst noted Tower Semiconductor is well positioned to capitalize on the early days of the following industry upcycle and its rapidly increasing leverage to AI Data Center expansion.

While management’s tone was broadly encouraging, not everything was positive, per the analyst. The company is anticipating its Mobile business to decline at a high-teens pace through fiscal 2025 due to the weakness in the Chinese Android market. Margins were a little lighter than Acree initially anticipated due to the inclusion of incremental production costs against the ramp of their newest 300mm capacity.

Tower Semiconductor’s strong fourth-quarter Infrastructure results capped off a year that saw its segment revenue grow to $241 million, an annual growth of 69%, and its Silicon Photonics (SiPho) business during the quarter grew to $42 million, up 220% year over year.

Acree forecasts that the business will grow to $215 million in fiscal 2025 and $300 million in fiscal 2026, up 105% and 40%, respectively. Thus, SiPho will likely be Tower Semiconductor’s largest growth driver and most profitable division.

Consistent with what Acree just heard from both MACOM Technology Solutions Holdings, Inc and Semtech Corp, Tower Semiconductor has seen reduced orders for Active Copper Cable products from these customers as Nvidia Corp is planning an architectural shift with its next-generation GPU.

According to the analyst, Tower Semiconductor’s SiPho portfolio provides the building blocks for Pluggable Optical Modules, where Tower integrates photonic elements (such as equalizers, waveguides, modulators, and detectors) onto a silicon substrate.

Aside from SiPho, Tower’s Infrastructure business is led by its SiGe process technology, where the company offers transimpedance amplifiers and line drivers for optical transceivers (radios) for optical networks and linear equalizers for Active Copper Cables and clock and data recovery solutions for Active Electrical Cables.

In these specialty process technologies, Acree noted Tower Semiconductor holds the number one market share position, supplying about 2/3rds of the industry’s optical transceiver components and an even higher share in SiPho, where the company offers 100G & 200G per lane solutions with its capability reaching the first in volume production of 1.6T products.

The analyst noted that the company is in the process of a $350 million capacity expansion project specifically for its SiGe and SiPho capability. SiGe is expanding at the San Antonio and Migdal HaEmek factories, and incremental tools are being added at the Newport Beach factory.

In its RF Mobile business, predominantly RF-SOI used in switches for smartphones, this segment contributed $92 million, or 24% of revenue, in the fourth quarter, falling 19% annually.

Additionally, Tower Semiconductor’s 300mm Uozu, Japan facility supports multiple processes across its RF portfolio, Mobile, and Infrastructure. This fab is currently operating at 90% utilization, beyond its target maximum of 85%.

TSEM Price Action: TSEM stock is down 1.32% at $46.34 at the last check Tuesday.

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