By Lisa Thompson
NASDAQ: TSEM
READ THE FULL TSEM RESEARCH REPORT
Tower (NASDAQ: TSEM) reported another stellar quarter, beating on revenues and earnings and guiding higher than street estimates for Q3, where they have good visibility. Management also raised its expectations for 2028 revenues due to the expansion of its Japanese operations. It is not only adding capacity to its current facilities but plans to build a new fab next to its current one with the financial and regulatory aid of the Japanese government. Japan’s excellent workforce is a legacy from the original Panasonic owners, and Tower seeks to build a hub of photonics excellence there. Strategically, it also helps that Japan is a geopolitically neutral country from which everyone will buy.
For Q2 2026, Tower guided to revenues of $520 million plus or minus 5%, another company record. This should result in accelerating year-over-year growth and even higher margins. In its July announcement of Japanese expansion, Tower updated its business model and is now targeting a $3.6 billion revenue run rate sometime in 2028 and $1.2 billion of net profit, which would result in approximate EPS of $10.25. Since right now the company can sell as much as it can produce of photonics products, it is doing all it can to increase capacity. Given the plans presented by AI companies for buildout, strong demand should continue for many years to come.
We are raising our 2026 estimates to reflect sales and earnings beat and the guidance. The revenue estimate for 2026 is now $2.0 billion, and for 2027 is $2.6 billion. Estimates for adjusted EPS have been increased to $3.80 for this year and $5.99 for 2027. As of last night’s closing price, the company trades at an enterprise value of $25.1 billion, or 9.7x EV to estimated 2027 sales. As a photonics/AI data center play, we see catalysts in: potential increased guidance and continued beat and raises, increased target model, and announcements of new large customers. Right now, the only gating factor is capacity, and the revenue risk is in future pricing. If investors assume $3.6 billion in revenues, with an 8.5x EV to Sales, and $500 million of the cash spent, the stock price would be $278 per share. Since its low at $28.54 on April 4, 2025, the stock is up 721%.
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