By Lisa Thompson
NASDAQ: TSEM
READ THE FULL TSEM RESEARCH REPORT
Tower Semiconductor (NASDAQ: TSEM) reported revenues as expected, but with much higher margins. Every margin was significantly higher than last year, and gross margin even beat that of higher-revenue Q4 2025. Incremental revenue is expected to ultimately contribute up to 59% in gross margin, being about 55% now. What is happening is that older products with lower margins are declining and being replaced with new higher margin product and that is happening more rapidly than we expected. As capacity continues to expand, depreciation will weigh on gross margins and offset some of the expansion. Operating income almost doubled, up 96%, while GAAP net income grew 62%, aided by a tax rate of 9% rather than the expected 18%. Non-GAAP net income was up 48%.
Investors were most impressed with the prepayments Tower received from customers to secure their share of photonics products in 2027. The ability to prepay to ensure products that are supply-constrained has always been an option at Tower, but never has it reached these levels. In Q1, the company received prepayments of $290 million from customers to ensure that they would receive at least $1.3 billion in products in 2027. This does not include demand from other customers, but is only a minimum guarantee from the prepayers. They may indeed order more. Tower is capacity-constrained, and demand will outstrip supply for certain products. The company expects to grow SiPho capacity five times from Q4 2025 wafer revenue shipments. While not the same thing, revenues from SiPho in Q4 were $95 million, including some NREs, by the end of 2026. The revenues from SiPho are not purely incremental, as the company is repurposing some capacity and thus eliminating sales of other products.
For Q2 2026, Tower guided to revenues of $455 million plus or minus 5%, a company record. This should result in accelerating year-over-year growth and even higher margins. We are raising our estimates to reflect both the margin expansion and capacity increases. The revenue estimate for 2026 is now $1.9 billion, and is $2.4 billion for 2027. Adjusted EPS has been increased to $3.37 for this year and $5.19 for 2027.
Tower has a target model that shows it reaching a $2.8 billion run rate sometime in 2027. At that level, net income is expected to be $750 million, which yields EPS of approximately $6.52. The company plans to revisit this model in the next quarter or two, and we believe it could be revised upward. It seems that, with the stock’s price movement, investors expect that. 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 more years into the future.
As of last night’s closing price, the company trades at an enterprise value of $29.1 billion, or 12.1x EV to estimated 2027 sales. While the company appears fully valued at current prices, it is now a momentum stock and a photonics/AI data center play, and 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. If investors assume $3 billion in revenues in 2028, with a 10x EV to Sales, with $500 million of the cash spent, the stock price would be $277 per share. Since its recent low at $28.54 on April 4, 2025, the stock has rocketed 848%.
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