Left for dead, Tower Semiconductor is a phoenix rising

Key Points

• Tower Semiconductor stock is at a deep discount to its pre-Intel acquisition offer and set up for a rebound. 
• A new deal with Intel promises to accelerate the growth outlook for this company. 
• Analysts are perking up at the opportunity and see a double-digit shareholder gain. 

Tower Semiconductor Ltd. NASDAQ: TSEM is a well-positioned player in the global semiconductor market. Its analog-focused semiconductor manufacturing technology is in demand by industries across verticals, and it is a pure play on foundries at a time when the industry is trying to ramp up production capabilities. Those factors were part and parcel of Intel's decision to buy the company, a deal that is now dead, setting up today's opportunity. 

While Intel Corporation NASDAQ: INTC could not finalize the deal to acquire Tower Semiconductor, the benefits for both companies remain. The two inked a new deal soon after terminating the purchase agreement that aids Intel's push to expand its foundry business and Tower's outlook for growth. For one, it's guaranteed business for a budding foundry segment; for the other, it opens the door to expanded capacity, ramping production, new clients and margin leverage, and the analysts are noticing. 

Analysts warm to Tower Semiconductor’s growth outlook

The analysts' coverage of Tower Semiconductor evaporated over the last year due to the expectation for acquisition. However, Marketbeat.com has picked up two new coverages since Tower Semiconductor announced the new partnership with Intel, and they are bullish on the stock. 

Analysts at Craig Hallum and Benchmark rate the stock a "buy" and see it advancing to the $36.50 level at the mid-point of their range. That's a gain of nearly 40%, putting the market on track to regain price levels set in 2021 before Intel's original takeover bid. 

To paraphrase Benchmark analyst Cody Acree, Tower Semiconductors is a unique, undervalued, high-growth, high-cash flow and a lesser-known name that exposes the hottest trends in tech, including IoT, AI and computer vision. This Phoenix is rising from the dead and on track to deliver double-digit gains in the near term and triple over the long. 

Tower Semiconductor rises on mixed results, enhanced outlook 

Tower Semiconductor had a solid third quarter supported by steadying demand in core markets. The company reported $358 million in net revenue, a decline of 16% compared to last year but flat sequentially. The revenue missed the Marketbeat.com consensus estimate but by a slim enough margin that it doesn't matter given the improving outlook and margin strength. 

Margin news is affected by the merger termination but in a good way that investors should like. The company's GAAP earnings came in at $3.07, including a $290 million net impact from termination fees. It's nearly a dollar ahead of the consensus figures, and the adjusted results are also strong — the adjusted 54 cents beat by a nickel.

Guidance for the fourth quarter was weak but ultimately favorable to shareholders. The company forecasts revenue in a range that allows for a sequential decline but brackets the analysts' estimates nicely. Revenue and earnings should be steady and stable over the next year: growth should resume in late 2024 or early 2025 when expanded manufacturing capacity comes online. 

The technical outlook: Tower Semiconductor hits bottom, reversal imminent

The price action in Tower Semiconductors began to fall when the deal with Intel came into jeopardy and imploded when it was terminated. Now, the stock is trading at a significant discount to the pre-deal price and showing signs of a strong reversal. 

The market hit bottom in early October, began to rebound, and confirmed support and the bottom following the Q3 release. The market is poised to move higher with both MACD and stochastic in support. Assuming the market follows through on the signals shown, this stock could rise to $32 by the end of the year and extend the rally in the first half of 2024.